Lords Sitting of 11 June 1980

Preamble
The House met at half-past two of the clock: The LORD CHANCELLOR on the Woolsack.
Prayers—Read by the Lord Bishop of Peterborough.

THE LORD BISHOP OF LINCOLN
Simon Wilton, Lord Bishop of Lincoln—Was (in the usual manner) introduced between the Lord Bishop of Southwark and the Lord Bishop of Worcester.

NORTHERN IRELAND AND EEC FEED GRAIN LEVY
2.42 p.m.
Viscount BROOKEBOROUGH: My Lords, I beg leave to ask the Question which stands in my name on the Order Paper.
The Question was as follows:
To ask Her Majesty's Government whether they will insist on the institution of a similar arrangement for Northern Ireland before agreeing to any extension of the levy reduction granted under EEC Regulation 811/80 on imports of feed grain into Italy.
Lord SANDYS: My Lords, as part of the 1980–81 agricultural prices package it was agreed that the reduction of levies on imports of feed grains by sea, which are granted to Italy under Regulation 811/80, would be phased out in three equal steps by 31st July 1983. In recognition of the special problems in Northern Ireland, the Council agreed to consider at an early meeting proposals which have been made by the Commission and which would benefit agriculture in Northern Ireland.
Viscount BROOKEBOROUGH: My Lords, I thank my noble friend for his reply. I should like to ask him whether the Government are aware that the industry has almost halved since we joined the Common Market; and, further, whether he is aware that a very small reduction in
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the levy on the imported grain would cost this country far less than paying unemployment and other benefits to those who will be thrown out of work. The number to be thrown out of work varies between 4,000 and 8,000. Further, are the Government aware that there is a danger that the industry may be extinct before the money paid under FEOGA grants reaches the processing industry after its application, as the time lag between application and receipt is very great?
Lord SANDYS: Yes, my Lords, the Government are aware of all the problems which my noble friend has stated. I think it would be more informative if I said to my noble friend that Mr. Gundelach was not able to come up with a scheme at the Agricultural Council on 28th to 30th May, but he presented orally proposals for specific aids to Northern Ireland to assist the agricultural structure and to support capital investment in the eggs, poultry meat and feeding stuffs sectors, with up to 50 per cent. of FEOGA funds, to which the noble Viscount has referred, contributing a total of 12 MEUAs over four years.
Lord BLEASE: My Lords, may I ask the Minister whether it is not a fact that the feed grain levy abatement which currently applies to Italy will not be phased out until the end of 1983? As Northern Ireland is recognised as one of the less favoured regions of the EEC, would the Minister not agree to use his influence, and indeed his good offices, to ensure that the Province is given the same assistance as Italy in respect of this feed grain, so as to enable the livestock producers in the Province to overcome this unfair competitive handicap?
Lord SANDYS: Yes, my Lords. As the noble Lord will see from my original Answer, the three equal steps by which the present levies will be reduced end on 31st July 1983. He is quite correct in that. So far as concerns bringing about the situation of a more equitable position between Italy and Northern Ireland, I think the noble Lord must await further result from the discussions of the Commission.
Lord MACKIE of BENSHIE: My Lords, is the Minister aware that agri-

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culture in Northern Ireland, particularly the production of pig meat and poultry meat, excites the admiration, or did excite the admiration, of a number of leading people in agriculture even in Scotland? In their development of housing, for example, and indeed in the facilities for the unloading of grain from North America, and its manufacture, they were well in the lead; and any help they are given through the EEC and through our own Government is bound to be well and efficiently used.
Lord SANDYS: Yes, my Lords, I would agree with all of that. It is extremely fortunate that today the Report of the Select Committee on European Communities, the feed grain imports paper, has been published and is in the Printed Paper Office.
Lord LEATHERLAND: My Lords, did I correctly hear the noble Lord say something about a kind of currency known as MEUAs? As I might want to lay in a stock of them for my old age, can he tell us what they are?
Lord SANDYS: Yes, my Lords, with pleasure. It is an acronym which means "million European units of account".

RENTS POLICY
2.48 p.m.
Lord HALE: My Lords, I beg leave to ask the Question which stands in my name on the Order Paper.
The Question was as follows:
To ask Her Majesty's Government whether it is their policy shortly to initiate a substantial increase in rents; and whether rent officers have been informed of this situation.
The PARLIAMENTARY UNDERSECRETARY of STATE, DEPARTMENT of the ENVIRONMENT (Lord Bellwin): My Lords, fair rents are fixed independently by individual rent officers on the statutory basis laid down by the Rent Act 1977. The Department of the Environment provides rent officers with statistical information about previous rent registrations, but issues no guidance to them on the fixing of rent levels.
Lord HALE: My Lords, is the noble Lord aware that the Question is based, as I tell him in the Question, on an article in the Guardian which goes into detail and which takes a different point of view; which specifically mentions Oldham as the next area to have its rents increased; which says that the distribution of advice to rent officers now consists of nothing but figures of increase; which gives, in the Guardian itself, figures of the prospective increases in rents in Oldham; and which suggests that practically the whole of the rest of England except the limited area it describes has now had rents increased from 30 to 40 to 50 to 70 per cent.? Is there not perhaps a little truth in these allegations, or can the noble Lord reassure my former constituents?
Lord BELLWIN: My Lords, not for the first time, I have to say that the article was thoroughly misleading and totally wrong. There are no such guidelines issued. I stand categorically on what I said in my original Answer. The statistics sent out for rent officers was information listing registered rents for the years 1978–79. What deductions may have been drawn from that information by the newspaper to which the noble Lord refers or by any other newspaper is up to the newspaper concerned.
Lord JANNER: My Lords, they were all increases.
Lord BELLWIN: My Lords, the information sent consisted of facts of what had gone before. What one deduces from that and what projections are made is up to the individual. One must understand that under the Rent Acts it is the duty of rent officers only to establish what fair rents should be. They will continue to do that under the statutory requirements which are laid down.
Baroness BIRK: My Lords, if the rent officers are to make their own individual decisions, what is the purpose of having statistical information relating to the levels of rents and property values for other areas? Why do they not have their own individual ones? May I ask the Minister whether he can make these notes which are sent out available in the Libraries of both Houses of Parliament, so that we ourselves can judge them?
Lord BELLWIN: My Lords, there is no secret about this. The procedure is the same as pertained under the previous Administration and as has pertained ever since the Rent Acts called for this procedure. The information to which the noble Baroness referred is readily available in all sorts of places. If she wishes to have copies, I can arrange for her or for anyone else to have them. There is nothing secret about this.
Lord JANNER: My Lords, may I ask this of the noble Lord? When it is a matter of assessing the amount of rent, what does he understand by the expression "scarcity value has to be taken into consideration"?—because nobody I have ever met believes that scarcity value means anything at all in view of the interpretations which are being given to it.
Lord BELLWIN: My Lords, I have said many times from this Box that the Act lays down that scarcity assets must not be taken into account in calculating what the fair rents will be. Each rent officer in his own district presumably comes to conclusions based on the procedures laid down in the Act. I am sorry that I cannot be more helpful to the noble Lord, Lord Janner, on this point. I try to be helpful if I can.
Lord JANNER: My Lords, what does "scarcity value" mean? How do you assess scarcity value? Is it because there are other places not available for renting? What is it?
Lord BELLWIN: My Lords, if at this moment I were to give a dissertation on the definition of "scarcity value", I should have to keep your Lordships longer than Question Time allows. Most noble Lords know what it is. It is that it does not take into account the market value based upon the amount of accommodation which is or which is not available. It is what it says. If there is undue scarcity, that cannot be taken into account in the calculation in establishing the figure. If the noble Lord wishes to go beyond that, why do we not make special arrangements and perhaps take an occasion for a debate or discussion when I shall be glad to discuss the matter?
Lord ROSS of MARNOCK: My Lords, when the Minister was asked yesterday about the firmness of Government policy about the sale of council houses he was firm and candid. Why is he so coy today? We have legislation before us in respect of council rents and private rents in Scotland, England and Wales. Is it not the case that there is more money laid aside there—or expected to be laid aside there—in respect of rent rebates? Surely, that implies increases of rents.
Lord BELLWIN: My Lords, with respect to the noble Lord, the question that he has raised is totally different from that on the Order Paper. May we not stick to that on the Order Paper? As far as being coy, I am not aware that I am particularly coy. If at any time the noble Lord wishes to discuss housing rents—and I am sure that there will be many occasions very shortly to do so—I shall be happy to discuss the matter with him.
Lord PARGITER: My Lords, can the Government say to what extent enhanced capital value due to property speculation is taken into account by rent officers in assessing rents?
Lord BELLWIN: No, my Lords; nor would I attempt now to do so. I think it has nothing to do with the Question, which is all to do with the individual calculations made by individual rent officers all over the country. To try to make generalisations would be wrong.
Lord LEATHERLAND: My Lords, can the noble Lord tell us by what percentage rents of houses have increased since last May when the Government came into office? Can he tell us whether it is more or less than the general 20 per cent. increase which has taken place in retail prices since the Government came into office?
Lord BELLWIN: My Lords, I can say in general terms that the increases have not been greater than the inflation rate. But, again, this is the kind of information, with respect, that if the noble Lord wishes to have in detail and will write to me, I will gladly send him.

EEC REPORT ON SOCIAL CONDITIONS ON INLAND WATERWAYS
2.56 p.m.
Lord PLANT: My Lords, I beg leave to ask the Question which stands in my name on the Order Paper.
The Question was as follows:
To ask Her Majesty's Government whether they agree with the conclusions of the Thirty-sixth Report of the European Communities Committee on Social Conditions on Inland Waterways [H.L. (1979–80) 167] that the amended draft regulation would be inappropriate to, and an example of an unnecessary harmonisation for, the United Kingdom, and what steps they are taking in the Council of Ministers to ensure that the United Kingdom is excluded.
Lord MOWBRAY and STOURTON: My Lords, Her Majesty's Government do agree with the conclusions of the Select Committee's report. The amended draft regulation is being considered by the Transport Working Group of the Council and it seems unlikely to go to the Council of Ministers without substantial amendment. We are seeking to exclude the United Kingdom from the provisions, or to have them changed to meet the needs of United Kingdom operations.
Lord PLANT: My Lords, I am sure that the users of the inland waterways will appreciate the noble Lord's reply. I am certain that it will be well received by the British Waterways Board and by the small traders using narrow boats on the canals. The EEC regulations, as the noble Lord has said, could not be applied economically to this country. May I press the noble Lord on another point? While no interest is payable on capital investment for the construction of roads, yet the British Waterways Board pays interest at the going rate on schemes that it undertakes, schemes such as the South Yorkshire canal improvement scheme. could the noble Lord say how satisfied the Government are that within the United Kingdom there is fair competition between road, rail and water transport?
Lord MOWBRAY and STOURTON: My Lords, Government expenditure on
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roads is not only for freight; it is also for passenger transport. It is very difficult for the Government to differentiate between the percentage of expenditure on one as against the other. We are aware that there are conflicting views on this matter. I am advised that my right honourable friend the Minister of Transport does not consider that he has yet received any really convincing evidence that unfair conditions of competition obtain in respect of inland waterways. He is always prepared to consider any fresh information which is put to him. There is already a certain element of subsidy in the maintenance of the inland waterways. My right honourable friend is willing to look at any fresh information and we are always taking in such information as points are made to us.

TEACHERS' SALARIES: THE CLEGG REPORT ERROR
2.58 p.m.
Lord BOYD-CARPENTER: My Lords, I beg leave to ask the Question which stands in my name on the Order Paper.
The Question was as follows:
To ask Her Majesty's Government what action they are taking to prevent a substantial increase in public expenditure resulting from the gross miscalculation contained in the recent Clegg Commission's report on teachers' salaries.
The MINISTER of STATE, DEPARTMENT of EDUCATION and SCIENCE (Baroness Young): My Lords, it is for the negotiating bodies concerned to take note, as they have done, of the error in the Standing Commission's original recommendations. The miscalculation was reported in Professor Clegg's letter of 15th May to the Prime Minister and copies of this letter have been conveyed to the parties involved. The negotiating bodies have confirmed that formal agreements were reached following the Standing Commission's original recommendations but the management sides are taking account of the error in the current negotiations over the 1st April settlements. In England and Wales, the Management Panels of the Burnham Committees have reduced their offers for

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further increases from 1st April 1980 from 13 per cent. to 9·2 per cent. in order to rectify the situation. The teachers have not accepted these offers and the differences between the two sides have been referred to arbitration.
Lord BOYD-CARPENTER: My Lords, may I thank the noble Baroness for that interesting reply? May I ask her for an assurance that Her Majesty's Government, with their concern for the interests of the taxpayer and the ratepayer, will take whatever steps are necessary to prevent those people from being mulcted to the extent of £130 million simply because under the system bequeathed to the Government an eminent academic was not very strong in mathematics?
Baroness YOUNG: My Lords, as If have indicated, the figure on which the two sides in the Burnham negotiating body are going to arbitration has been reduced by the amount of the Clegg error.
Lord ALEXANDER of POTTER-HILL: My Lords, does the Minister agree that if in the future a commission is set up to examine teachers' salaries, it might be desirable that one of the officers advising the commission should know the Burnham Report?
Baroness YOUNG: My Lords, I am quite sure that in any future negotiations the points that the noble Lord has made will be taken into account.
Lord PARRY: My Lords, will the noble Baroness not agree that, of the many dangers threatening democracy, probably the worst would be a disillusioned teaching profession? Does she accept that, even with the incidental increments that teachers might receive, and after arbitration, the salaries in general will be modest enough? In comparison with salaries paid elsewhere, they would probably be less than a just reward for the work that is done by the best of our teachers.
Baroness YOUNG: My Lords, as the noble Lord will know, in their report the Standing Commission have indicated that they took into account such items as pensions, company cars, hours of work and holidays, but they considered that
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no adjustment was warranted on account of hours of work and the holidays. They have stated that, in assessing the work of teachers, they have also taken into account the wide range of extra-curricula activities which they consider are part of the obligation of teachers to pupils, teachers, parents and schools.
Lord BOYD-CARPENTER: My Lords, arising from the question of the noble Lord opposite, will my noble friend bear in mind that it would be very depressing if a profession responsible for the education of our children appeared willing to take advantage of a technical error in an assessment procedure and to seek to rely on that simply because an error had been made?
Baroness YOUNG: Yes, my Lords, I take the point. Settlement on the basis of the Standing Commission's original recommendations was arrived at by normal and open negotiation. On learning subsequently of the error, the management side in England and Wales invited the teachers to agree to reopen the negotiations. This the teachers declined to do, and the management side in England and Wales therefore announced that they would take the error into account in re-expressing their offer for a 1980–81 settlement.

BUSINESS
Lord DENHAM: My Lords, it may be for the convenience of your Lordships if I announce that it will now be necessary for the House to sit on Friday, 13th June, at 11 a.m., to conclude the Committee stage of the Employment Bill.
With the leave of the House, at a convenient moment after 3.30 my noble friend the Foreign Secretary will make a Statement on the New Hebrides.
In this connection, I have sensed recently that it has been the feeling of the House that possibly questioning after Statements has been inclined to get a little bit out of hand. I wonder whether I might draw the attention of your Lordships to the Companion to Standing Orders which says that,
"Ministerial statements are made for the information of the House, and, although brief comments and questions for clarification are

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allowed, such statements should not be made the occasion for an immediate debate, unless the House so order".
In effect, this has always been interpreted as the two noble Lords on the Official Opposition and the Liberal Front Benches being able to make brief comments and others of your Lordships being able to ask questions for clarification only.
Baroness LLEWELYN-DAVIES of HASTOE: My Lords, may I say that we are most grateful to the noble Lord the Chief Whip for making the position clear again. I expect he will have to do it again and again. We heartily agree with his entirely correct description of what our practices are.

EASTBOURNE HARBOUR BILL [H.L.]
Read 3a, and passed, and sent to the Commons.
SALVATION ARMY BILL [H.L.]
Read 3a, and passed, and sent to the Commons.

MONETARY POLICIES
3.6 p.m.
Lord LEVER of MANCHESTER Lord LEVER of MANCHESTER rose to call attention to Her Majesty's Government's monetary policies and their damaging effect on trade, investment and employment; and to move for Papers. The noble Lord said: My Lords, I beg to move the Motion standing in my name on the Order Paper. I do not, I hope, in moving this Motion lay myself open to any charge of attempting to bring monetary and economic problems of a complex and often academic kind into the ambit of adversary politics in which claptrap vies with claptrap in order to win popular support.
I start with a frank admission that I do not have any complete answer to the problems which face the nation economically. I do not believe that anybody has. I believe that a great deal of the damage from which we are now suffering is the Government's monetary policies derive from the unjustified belief that there are
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permanent mechanical solutions for the problems such as inflation. I wish to focus my comments today on two aspects of the Government's monetary policy: namely, interest rates and the level of the parity of the pound. The manifest evils and injuries that have resulted from the Government's pursuit of high interest rates and the Government's permitting of an unsustainable and undesirable level of parity for the pound need no elaboration from me. Indeed, my Party's complaints have been drowned by the overwhelming chorus of disapproval and anguish from all sides of industry: from bankers, like the chairman of Barclays; grave warnings, on the level almost of panic, about the parity rate from the vice-chairman of ICI. It is perfectly plain without detailed elaboration that on the face of it these policies are resulting in grave economic injury, probably injury which will have a long-lasting consequence.
I am not alleging that the Government have deliberately inflicted these injuries on the nation. I do not doubt their good intentions, nor should they doubt the anguish which their good intentions are causing to most of the industry of this country. I daresay that the torturers of the Spanish Inquisition were motivated by a sense of the ultimate and enduring advantages that would accrue to their victims when they were burned alive! Something on a lesser scale of confident torment is resulting from the Government's policies.
Why did the Government get into this position? There is a central error at the heart of all Government thinking. They have focused on one problem and on one remedy. One problem: inflation. One remedy: the monetary means for controlling it. They have adopted in some sort of blurred way the thinking of the monetary school of economics to combat inflation and thereby put us on the high road to prosperity! Monetarists, in fairness, when they address themselves to inflation, do not claim that they are judging any other problems or solving any other problems. They are not addressing themselves to the political consequences of their remedy; they are acting in a seminar and presenting a perfectly logical if, to me, unconvincing case for the inevitable uprooting of inflation in an economy.
But, of course, Governments cannot take this academic view. They cannot restrict themselves to one problem, namely, inflation, and ignore all others—employment, export competitiveness, the industrial competitiveness of our nation and so on—all those other great problems of economics and politics which face the Government. Any Government that focuses so centrally on one problem and one solution is bound to get into the kind of trouble and cause the kind of damage that we now observe. Governments should not regard themselves as professors of experimental monetary economics. The more any Minister sees himself in that role the more he disables his capacity to discharge the rounder obligations of policy judgment which fall upon Ministers. I have seen great ability in Ministers seriously damaged by this mistaken assumption of a semi-professorial monetarist role.
It must be against common sense to allow employment, investment and even solvency in our industries to be imperilled without at least a clear and well-documented strategy being offered to us; and we have not had this. All we have had are some vague monetarist allusions, mainly concentrated on one or two specific statistics and their supposed association with inflation.
Take the figures of M3: the very way in which the targets are set—and I have to confess that the target-setting habit did not begin with this Government on the monetary aggregates (I am not making a party point) and neither did the high interest rates, I am sorry to have to say. But this setting of targets, at least under my Government, although I cannot say I approve of target-setting under any government, was restrained by some continuing sense of practicality. It was not altogether let loose in an obsessive contemplation in a semi-theological way of the monetary aggregates. But under his Government it seems to be untrammelled. The Government fix a target in monetary terms and not in real terms.
I wonder whether the Government, when they fixed their target on M3, really intended an outturn such as we have had: namely, in real terms over the year there has been a minus growth in
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M3 of 11 per cent. In the past six months there has been a minus growth—that is to say, it has retracted by 14 per cent.; and in the past three months it has been retracting at the annual rise rate of 18 per cent. That is another way of describing a savage monetary over-kill resulting from the Government fixing and adhering with religious precision to monetary targets expressed in cash in a world in which the real impact of that is not known to those fixing the targets. Still less is it within their control, because of course the real impact of a monetary target depends on the actual outturn of events. This Government have committed themselves to be on continously bad terms with reality. They intend to ignore the outturn of events. These are the central criticisms that I make of the Government's policy.
The Chancellor of the Exchequer claims that he is sowing the seeds of future prosperity. I know the answer and I have no doubt there will be some talented speakers in the debate who will elaborate it. It is a very simple one—almost a simpliste one: inflation is the great danger. We must either cure it or pretend to be able to cure or to know how to cure it, or believe that we know how to, whether or not we can. We must cure it as a pre-condition for prosperity. How long that will take or when the prosperity is going to emerge is left rather cloudily unindicated in the future. That is the theme but it really will not do as an answer to the kind of difficulties of the interest rates and on the parity with which our country is labouring at the present time. We are really entitled to have some substantial adumbration of the Government's strategy and policy.
I turn as briefly as I can more specifically to industry. The Government's reasons for maintaining the present extraordinary level of interest rates are that they are required in order to sell gilts, to curb bank landing and in general to advantage us with a sober money supply. I have to declare that the present rates were not required at anything like these levels in the past; and let me add for the comfort of those who think I am being excessively partisan that I do not believe they were justified under my own Government. Far from sowing the seeds of prosperity, these interest rates are not a cure for inflation but rather the engine of it.
This is fairly simply demonstrated. First of all, the Government issue long stock at high interest rates for 20 or more years ahead. Why, if they believe that this policy guarantees, or even makes extremely probable, a reduction in inflation, do they commit the Government to pay interest rates which are only explicable on the basis of continued high inflation and indeed only tolerable on the basis that they will not have to be maintained in real terms? No Government can pay in real terms over 20 odd years a real interest rate remotely resembling 14, 15, and 16 per cent. to the kind of rates that have been offered. The Government are thereby certifying, quite rightly in my view, an inner lack of confidence in their own likely achievement in the light of these misguided policies.
Secondly, these high rates of interest ruin investment prospects and hence damage seriously the future competitiveness of our industry. I need not elaborate on that, because every day a different industrialist repeats this warning to the Government. The Government, immersed in a semi-religious blanket of self-approval, are deaf to all these protests. High interest rates, far from being anti-inflationary, if sustained add to inflation by increasing the cost of production, because interest forms an ingredient of the cost of production, especially in exports which are even more prejudiced than our domestic production. They are inflationary because they add to the rent, or what is in effect the rent, namely, the mortgage interest of the owner-occupier houses in this country. That is hardly a blow in favour of restraint, discipline and the reduction of inflation. These high interest rates wreck the prospects in many cases to the point of ruin of business, and especially of small business, throughout the economy. They bear particularly hardly upon small businesses.
Finally, what staggers me is that, after this semi-theological devotion to keeping the PSBR within balance, an absurd and almost obsessive attachment to the outturn of these figures, nobody seems to have noticed that the high interest rates are themselves a major contributor to inflating the public sector borrowing requirement.
In money terms, as recently as 1974/75 interest payments by the Government
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reflected a negligible part of the public sector borrowing requirement. Not so now, when it amounts currently to something approaching £3½ billion per year, and is rising. That is a fine contribution to reducing the public sector borrowing requirement. If we add to that the cost of the unemployed, directly caused by pricing our products out of the export and home markets and pricing out investment by the high interest rates, you find that a great segment of the public sector borrowing requirement derives from the Government's own policies. So in the supposed sacred interest of fighting inflation and keeping down the public sector borrowing requirement, we have inflated it greatly.
On interest rates alone—I make no mention of the figures of unemployment, which are horrific in their cost to the public sector borrowing requirement and to the economy—in real terms, the cost has trebled in five years. Inflation used to be defined as too much money chasing too few goods. The Government seem to have assaulted the amount of money that is around, but simultaneously they have assaulted the amount of goods that are going to be around, so we have rather less money chasing rather fewer goods—not a promising prospect.
I shall ask two specific questions of the Minister and I hope that he will give specific and clear answers. First, do half the population have to have their rents, their mortgage interest, yo-yoed up and down, because we must curb bank lending? Is there not a better and more direct way of doing this? Is it seriously to be defended that every owner-occupier has to have his mortgage interest sharply "upped", because somebody is thought to be borrowing too much from the bank? Secondly, I hope that the Minister will explain to me why a Government which believes it is en route for bringing down inflation with a sure-fire monetarist remedy, pays 14, 15 and 16 per cent. on long term?
On the interest rate, I finally say this. True monetarists do not manipulate interest rates. This Government denies that it manipulates interest rates, but of course it clearly does. There are three positions on interest rates; there is the monetarist position in which interest rate finds its own level—it is called the

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residual—in the other activities of the Government and of the economy. My own position, which is largely the position of most middle-of-the-road economists who have not been intoxicated with particular monetary aggregates, is that monetary aggregates ought to be watched. Monetary instruments are a useful adjunct to other policies in helping to curb inflation, but interest rate should be managed by the Government within the limits which are feasible because of international and other pressures.
The Government's position is to pretend that they are not managing the interest rates, but actually to manage them. This pretence is so transparent that it hardly needs more than a minute to expound it. The Government have, in fact, declared explicitly that they are not going to get interest rates down until bank lending comes down. How do they know, unless they are controlling it, and who controls the minimum lending rate if not the Government? Or perhaps it is not the Government but merely the Bank of England; but I must treat that as an arm of Government. So I find it very difficult to justify the intellectual position which the Government have taken up on the matter of interest rates.
Finally, I want very briefly to say a word on the exchange rate. The Government here—with, alas! more credibility—claim that they are leaving the exchange rate to market forces. But it happens that market forces here are very damaging in their consequences to our parity, from the point of view of our exports and protecting us against an excessive in-rush of imports. I have no time to elaborate on this subject—I might find an occasion at some future date, when I may elaborate on this area—but at the present time we are living in a period when there is no satisfactory international money system and when a greater degree of anarchy prevails in the movement of large sums of money.
So far as the currencies of the OPEC nations are concerned, a minor percentage change in the portfolio holding can completely disrupt the parity of a currency such as sterling. To give a quick word, the official estimate of OPEC's current account surplus is something in the region of £120 billion. I think that it is running at about £150 or £160 billion. It is quite
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obvious that if even 10 per cent. of that is thrown on to the market in search of sterling, then sterling will go up and it will go into the hands of people who are indifferent either to the consequences to us of the change of rate, or even to the consequences, marginally, to themselves. They are not concerned about whether the pound goes up or down. They are buying the pound for political reasons, as part of the diversification of their portfolio, to protect themselves against every political contingency.
We are a country which can least afford to allow our currency to be jerked up out of a realistic range, because we are a country which has fallen behind in the technological race in recent years. We cannot afford to let our currency go bouncing up and down in this manner. Moreover, it is fraught with very serious danger, which I have no time to elaborate. What we are witnessing is a pretty vast outflow of funds for permanent investment from this country, and it is more than matched by an inflow of funds, nearly all of which are very temporarily anchored in this country. It is fairly obvious that a disturbing situation will arise, when the temporary attractions of interest rates and political factors lead to that temporary money being dragged out at a time when very large sums, which are not returnable to this country, have gone out.
I therefore urge upon the Government to intervene in the parity. I cannot, within my available time-space, explain that it is possible for the Government to mop up this inflow of money without causing inflation in the country. The most successful market economy Governments, Germany, Switzerland and Japan—and I do not want any lectures on the market economy and its Governments from people who, for the most part, have never taken any part in the market economy—have intervened to prevent their currencies from going up too fast or going down too fast. They have done so copiously and, as the noble Lord, Lord Kaldor, has pointed out, they have been very indifferent to their money supply when they have done so. We must do something of the kind.
In short, I am asking the Government to abandon the Utopian fantasies of monetarist correction of our evils which seem to be motivating them. They have

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so far resulted in savage overkill of a deflationary kind. I do not believe that the Government intend deflation; I do not believe at all that the Government intend to create unemployment. But that is what is happening, and it will get worse unless the Government start to take into account the realities of our economic and political situation on a broader basis than monetarist professors might think it right to do.
I feel that one of the most worrying parts of this situation is that, in their obsession with inflation, this Government have forgotten all the lessons of pre-war, when we did not have inflation but, Heaven knows! we had enough disastrous troubles caused by deflation and unemployment. It was deflation and unemployment that led to the miseries and the villainies of Nazi Germany and the Second World War, not—however uncomfortable—inflation. I have a feeling—and I have to say this without wishing to be unduly hostile—that there is a kind of spiritual arrogance that will have to be corrected if this Government are to come off this dangerous, destructive monetarist path on which they have set their feet, because implied in it is not merely the rejection of the Utopian fantasies of the Left or the Right but the rejection of all the more thoughtful, subtle, reflective people in their own ranks.
This Government must learn that they cannot sail forward, propelled only by little gusts of self-approval from a minority in the Cabinet. They have to learn that they have to carry the country with them. They have certainly got to carry with them the hearts and minds of their own people, and they have not done that. I dare not think what the old and the more sophisticated hands in the Tory Party are thinking when they watch the repudiation of everything that was created and which took into account the lessons of the evils of pre-war. What would the Harold Macmillans, the Ian Macleods and the Rab Butlers have said to a policy so monomanically concentrated on an academic monetary thesis such as this? I beg the Government to retract before it is too late from the doctrinal obsessions which alone can justify their persistence in a monetarist role as savage and as damaging as the one they are now taking. My Lords, I beg to move for Papers.

THE NEW HEBRIDES
3.31 p.m.
The SECRETARY of STATE for FOREIGN and COMMONWEALTH AFFAIRS (Lord Carrington): My Lords, with your Lordships' permission, I should like to make a Statement on the New Hebrides.
As your Lordships are aware, my noble friend Lord Trefgarne made a Statement to the House on 3rd June on current problems in the New Hebrides. He informed your Lordships that if no progress was made towards reconciliation then Britain and France would decide jointly on what further action to take. My honourable friend the Minister of State and I met M. Dijoud, the French Minister responsible for Overseas Territories, on 9th June as part of our continuing consultations on the situation in the Condominium.
Your Lordships will be aware that within the last 24 hours the security situation in the New Hebrides has deteriorated. I regret that last night on the island of Tanna, Alexis Yolou, an opposition political leader on the island, was killed. The exact circumstances of his death are not yet clear.
In order to maintain the joint commitments of the British and French Governments to preserve law and order and the territorial integrity of the New Hebrides, the French Government today sent a contingent of gendarmes from Noumea in New Caledonia to the New Hebrides. Her Majesty's Government are despatching to Vila one company of Royal Marines with a headquarters element and logistic support. This action by both Governments does not reflect any change in our determination to work jointly for a peaceful solution to the present problems.
3.34 p.m.
Lord GORONWY-ROBERTS: My Lords, we are grateful to the noble Lord, Lord Carrington, for that Statement. It is perfectly clear now that the situation in the New Hebrides has seriously worsened since we raised the matter last week. There has been loss of life and extensive damage to property, and now another island, as some of us predicted last week—Tanna—has been added to

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Espiritu Santo, which has been taken over by Jimmy Stevens with the aid of this sinister American gambling syndicate which is backing him. The Government have now decided, with our French partners in the Condominium, to take action. It is police action and nothing like gunboat action, as was said last week, and in our view it should have been taken a bit earlier than before things got to this situation. However, we welcome the decision to send out gendarmes from the French contingent in New Caledonia. I imagine they will be on site in the New Hebrides by now. I should like to ask when the noble Lord expects the company of Royal Marines to arrive in the New Hebrides. We take it for granted, of course, that there will be the closest collaboration between the two contingents in doing what is necessary to restore law and order in the prospective new state.
May I ask the noble Lord for these assurances: that the date of independence —30th July—which has been agreed through the proper procedures will not be postponed because of the action of the insurgents, and that as the New Hebrides moves into independence on that date the two partners in the Condominium will ensure that Father Lini and the duly democratically elected Government of the new state—the present Government—will have sufficient forces to maintain law and order? They have none now on their own, of course. Secondly, will he give an assurance that the blockade, which I gather is effective on Santo, will not be raised at the continued pleas of Jimmy Stevens and his backers? There are signs that this blockade is having a certain effect, and backed by the police action which the noble Lord has announced today it may prove effective.
3.36 p.m.
Lord McNAIR: My Lords, we, too, are very grateful to the noble Lord for giving us this Statement. We have great sympathy for him in the appalling situation which he has inherited from a number of Governments, even going back to the last Liberal Government. We appreciate the complexities of the situation. May I ask him whether he can tell us when the company of Royal Marines will reach Vila? Can he assure us that the gendarmes and marines who will be on Vila,
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which is not where the trouble is occurring, could, if necessary, be moved to where the trouble is occurring and that this would not be prevented by any Condominium disagreement? My last question is in a slightly different form from the one which the noble Lord, Lord Goronwy-Roberts, asked. I should like an assurance that independence will not be granted until we can hand over to Father Walter Lini an archipelago in which every island fully recognises the authority of the central Government.
3.37 p.m.
Lord CARRINGTON: My Lords, both the noble Lord, Lord Goronwy-Roberts, and the noble Lord, Lord McNair, asked me when the Royal Marine Commando company would arrive. I think they will arrive on Saturday. The French gendarmerie will arrive today on Vila. Both noble Lords also asked me about the date of independence. It is the intention of Her Majesty's Government and of the French Government to adhere to the date of 30th July, but obviously this must depend upon the circumstances; that goes without saying. But I very much hope that the circumstances will enable us to go ahead, and that by that time the situation in the Condominium will be such that we can stick to the original intentions.
The noble Lord, Lord McNair, asked me whether the commando could be moved to the place where it is needed. We shall of course make sure that there is transport for the company to be moved to wherever is necessary. We will very much bear in mind the other point about law and order which the noble Lord, Lord Goronwy-Roberts, raised.
Lord GORONWY-ROBERTS: My Lords, I have no desire to add in any way to the difficulties which this situation presents, but I would have hoped that the noble Lord and the Government would consider very carefully indeed the implications of postponing the announced date of independence. In particular, if there is any question of postponing they could consider whether this will not add encouragement to the action of Jimmy Stevens and the people acting with him—indeed, some of the elements in the New Hebrides itself; and also whether such action might not conduce to a similar disturbance in other archipelagian states

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already independent but not yet assured of consistent integrity in the area. I leave the thought with the noble Lord. I know that he has considered this and will continue to consider it. I believe that adhering to the date of independence is of great importance. Perhaps the noble Lord will look at the point I made about maintaining the blockade. There is evidence that the insurgents are desperately anxious for this to be raised and that is a reason why it should be kept going.
Lord CARRINGTON: My Lords, I must beg the pardon of the noble Lord for not having answered that question. I hope that negotiations will shortly take place between the head of the New Hebrides Government, Father Lini, ourselves and Mr. Stevens. I hope it may be possible, as a result of those negotiations, to get further talks going. The precondition of that, naturally, would be the return to legality of the island of Santo, in which case the blockade obviously would be removed. I do not think that in other circumstances it is very likely to happen.
I agree entirely with the noble Lord about the date of independence. I do not want him to misunderstand me. What I was saying was that we would stick to it, and we hope that it will he all right, but I do not think that it would be proper for either the French Government or the British Government, if the situation were not all right, to hand over to independence islands in a state of insurrection.
Lord KENNET: My Lords, if the gendarmes are coming from Noumea can the Secretary of State tell us where the Royal Marines are coming from?
Lord CARRINGTON: My Lords, I think that they are coming from this country.
Lord CAMPBELL of CROY: My Lords is my noble friend aware that some of us, who over the years have been dealing with the problems of the old Hebrides, which sometimes have appeared to be never ending, wish him all success in dealing with this complex and difficult situation which has arisen in the New Hebrides?

MONETARY POLICIES
3.41 p.m.
Debate resumed.
Lord BANKS: My Lords, the House will be grateful to the noble Lord, Lord Lever of Manchester, for giving us a further opportunity to discuss the Government's economic policies and their consequences. The noble Lord is an expert in these matters and the House listened to him with great attention and with much interest. I make no claim to his expertise, nor indeed to the expertise of other speakers who are to follow. I am not a trained economist, nor a financial pundit, but perhaps it is right that the layman's point of view should be heard. We cannot leave it all to the experts, particularly when the experts disagree among themselves.
I have always been struck by the extent to which economics is such an inexact science. New factors are always arising to upset calculations. Noble Lords will recall the arithmetical problems with which we were faced at school: a bath being filled from taps at one speed and emptied by a plughole at another speed. But economics is even worse than that, for new taps and new plugholes are constantly appearing unexpectedly. I think it is a realisation of this uncertainty which causes me to remain an unrepentant Keynesian.
Keynesianism, if I may call it that, has been identified, rightly or wrongly, with state intervention to make good the deficiencies of the market economy—what Walter Lippmann used to call "compensatory economics". Like the noble Lord, Lord Lever of Manchester, I find it difficult to believe that there is a perfect natural system which, if adhered to in a rigid, doctrinaire way, will solve all our problems, as some monetarists seem to suggest.
There are two questions in particular being asked at the present time about monetarism. Is the theory basically sound? Is the relation between the growth of money supply and inflation what monetarists claim that it is? The noble Lord, Lord Lever of Manchester, casts some doubt on that. It has been pointed out that monetary targets have been observed, overall, for some four

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years. They have got out of joint from time to time, but overall they have been observed for four years, not just for a few months, and a restriction in the growth of money supply has not led to a reduction of inflation. That scepticism, or downright disbelief, is widely felt on this side of the House. Monetary policy is seen, as the noble Lord, Lord Lever, said, as one of several different instruments which the Government may manipulate.
The second question is asked by those who accept the basic theory of monetarism as well as by the sceptics, and it is this: Even if monetary theory is basically sound, is the Government's version of it too severe? Is the Government's policy too tight? Those who ask this question have been arguing that, with the growth in the monetary supply being on target—or more or less on target, for we gathered this morning that there has been some deviation in the last month—there should be some reduction in interest rates, or some relaxation in the curb on the public sector borrowing requirement, or both. That view, I suspect, has far from negligible support on the Benches opposite.
Those who are troubled by the first question, and those who are troubled by the second, share an alarm about the present economic state of the country and a desire to sec Government policy relaxed to some degree in order to ameliorate that situation. And we have every reason to be alarmed at the present state of the economy, as the noble Lord, Lord Lever of Manchester, made clear. The London Evening Standard, a paper which is not unsympathetic to the Government, had this to say in a leading article on 27th May:
"The most Conservative monitors of the Government's economic policies are now striking a note of gloom. The latest quarterly report of the National Institute of Economic and Social Research reinforces the widespread view that the monetarist approach of Mrs. Thatcher and her Treasury Ministers is not going to achieve the results they expect of it".
Incidentally, the National Institute's report argues that Britain has entered a two-year recession which will push up unemployment to over 2 million and squeeze company profits without bringing down inflation below 15 per cent.
The Evening Standard went on to say that the Chancellor of the Exchequer had made two fundamental mistakes. The first was
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"to believe that the threat of unemployment would have a deterrent effect on wage settlements".
The second was
"to underestimate the crippling effect on British companies of a combination of severely restrained monetary growth … and the cost of borrowed money running at 20 per cent., at a time when an increasingly strong pound, coupled with a weak dollar … is giving United Kingdom exporters an almost impossible task to maintain their share of foreign markets".
I think that that leading article puts the position very well.
The Confederation of British Industry recently reported "a sharp decline in the prospects for manufacturing companies", in a survey which showed that fewer orders are being booked at home and abroad and that output is falling sharply. Figures published by the Central Statistical Office showed that, overall, output fell in the first quarter of this year as a result of lower industrial production. Mr. Reg Parkes, who is chairman of Brockhouse and of the regional CBI in the Midlands, is reported in the Financial Times as saying:
"I doubt whether the Government yet appreciate the plight of manufacturing industry and the speed at which it is being destroyed".
Output is falling; profits are being squeezed; companies are in dire straits; stocks are being depleted; earnings are rising by some 20 per cent.; inflation is at 22 per cent.; the balance of payments is in deficit; interest rates are sky high; investment is low; unemployment at 2 million is prophesied; social security benefits are suffering a cut in real value, or are to suffer a cut in real value. No wonder that non-monetarists and monetarists alike are questioning the way in which the monetary policy is being applied. No wonder they seek some relaxation of that policy before we destroy ourselves.
The position of the Government at the present moment reminds me very much of the doctor in an old song which I remember from my childhood. In the song the doctor treated a patient and the patient, instead of showing signs of recovery, began to display all sorts of alarming symptoms, and his friends went round to tell the doctor what had happened and to point out to him the distressing symptoms that had now appeared. Every verse ends with the phrase:
"That's right, said the doctor,
I meant it for that.
There's no doubt about it,
He meant it for that!"

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It seems to me that the Government are rather in that position. They tell us that all this is meant and that in the long run it will come out right, but the warning to the Government is that eventually the patient's friends went round to the doctor and they told him that the patient had died:
"But that's right, said the doctor,
I meant it for that.
He meant it for that.
There's no doubt about it,
He meant it for that!"
How then should we relax—or urge the Government to relax—the current policy? In conclusion I should like to make three suggestions. First, in time of recession, recession which is not merely national but worldwide, it is surely sensible to allow the public sector borrowing requirement to rise by a limited amount, and I suggest that that might possibly be done by reducing the national insurance surcharge and by abandoning those public expenditure cuts which will affect social security and welfare benefits.
Secondly, it seems we are nearly all agreed that there should be a reduction in high interest rates. I do not myself believe that this would prevent the Government from borrowing the money that is required and, as we had a clear indication last week, it would reduce the value of the pound to some extent and would help exporters. With raw material prices possibly going down—it is anticipated that they may now go down because of world recession—the inflationary effect of a fall in the value of the pound might be contained, to some extent at any rate, in that way. In fact I should be prepared to consider a 10 per cent. devaluation coupled with joining the European Monetary System. A recent survey by the CBI shows that 65 per cent. of companies say that they would export more if the pound were 10 per cent. lower, and I believe that this policy, which is not perfect—no policy is perfect—would be better than a resort to import controls because I consider that it is vitally important to maintain the multilateral free trading system and it would certainly please our partners in the European Economic Community at a time when the more we can work together in co-operation, the better.
Finally, I am convinced that an incomes policy is essential. I note that this week
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the annual report of the Bank for International Settlements, while expressing monetarist sympathies, significantly recognises the need for incomes policies in some countries. After all, 50 per cent. of the increase in prices over the past year is due to higher labour costs. Mr. Andy Kerr, the chief conciliation officer of ACAS—the Advisory, Conciliation and Arbitration Service—recently argued that the movement away from pay policy restraints has contributed to both the incidence and the length of recent disputes.
"Without some sort of guidelines", he said, "there were more opportunities for things to go wrong". I am sure that we need a permanent structure of consultation between the Government, the CBI and the TUC as to what the country can afford each year.
I think, too, that we need an incomes board to look at special cases. I am clear that profit-sharing should play a big part in an incomes policy and that an incomes policy would stand a better chance if in the background there were a kind of industrial democracy on the German pattern. Limited expansion, lower interest rates, incomes policy—it is changes in the Government's policy along those lines that I believe to be necessary if the cure is not to kill the patient.
3.55 p.m.
Lord THORNEYCROFT: My Lords, the House listened with interest and I think deep appreciation to the speech of the noble Lord, Lord Lever of Manchester. He spoke with that modesty which we have learned to expect from him and with a fascinating account of a subject of which he is indeed largely a master and I myself was much indebted to him for the privilege. The noble Lord might perhaps be described as a reluctant monetarist. He is a monetarist in a way, I suppose, in the school of Keith Joseph. I do not know whether he would acknowledge his master but he, like Keith Joseph, believes that monetarism is not enough, and he is right. But, my Lords, nothing is enough. As the noble Lord said, if there were some solution to our problems, by now some clever man would have stumbled on it and we should not be sitting round debating these topics. So I accept from him that monetarism is by the way.
If I may put it modestly in non-economic language, a monetarist is someone who

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thinks that money has something to do with what happens in the economy. After all, there are some who do not. Governments in office tend to think that money matters. To be absolutely honest, Chancellors of the Exchequer rather feel this way and sometimes they never get it completely out of their system. Mr. Healey ran out of it, if you remember, at London Airport. This was a disastrous situation. He had to turn the car round and come back to raise money from the international hankers. He cut £4 billion off his spending plans. Nobody said that he was a ruthless monetarist; they just took it, and it worked, and I pay full tribute—I am making a most non-partisan speech! It worked supremely well: all the things that we said would happen, happened. Interest rates kept on, inflation lowered—it was admirable as long as the International Monetary Fund stayed. Unfortunately, as the last of them climbed on to the aircraft, Mr. Healey reached for the bottle, and there he was, back at it again launching out into another spending spree.
If I may say this to the noble Lord, Lord Lever of Manchester, one of the reasons why we are in such difficulties about being as flexible as he would wish is that we were left with practically no room to manoeuvre. It is frightfully easy to say, "Go easy on the interest rates", if you are not borrowing absolutely to the hilt. It is awfully easy to say, "Don't cut too much", if you have not got commitments to spend something like £8 billion which you have not got. It is when we are in that kind of a corner that Governments find it so difficult to adopt flexibility.
The noble Lord concentrated on interest rates and on the value of the pound, and these are indeed important subjects. I shall read his speech because I think one sometimes does not get the full import of a speech just by listening to it, but, listening to him, I think he almost reached the point of saying that interest rates were irrelevant to the amount of money that was borrowed and that somehow one could detach the value of the pound from the great assets possessed by the country or even the good sense of the policies which it pursued. One cannot do these things. If I may say so, he tended rather to overstate the case.
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In any event I do not want to look at the detail. I am not concerned to argue whether interest rates could come down a bit. Like the noble Lord, I wish they could; the whole House would agree with him on that. But this is rather like criticising the performance of the second violin when you ought to be looking at the total performance of the orchestra. The important thing is to see whether the totality of the policies pursued are really going to work.
I listened to the Labour Party Conference. I do not think the noble Lord spoke there. I actually missed his rich baritone in the rendering of the Red Flag. I do not think he was there at the time. It was still a good conference. There was an immense consensus of opinion. They were agreed on disarming the country, on dismantling the deterrent, on spending a lot more money, on borrowing more money, on strengthening the unions, and abolishing the House of Lords. On all that, the noble Lord must have felt that there was a good spirit. Certainly those were all well-trodden paths. But on the great issues, the issues which the noble Lord was addressing us about this afternoon, they were a little uncertain. They did not absolutely dismiss monetarism, any more than the noble Lord did today. They said it must not be overdone; it must not be ruthlessly applied. I do not know whether the noble Lord knows Calabna, but in that lovely part of Italy as you wander among the hills you will occasionally find a pagan shrine in which people have left an offering of a few grapes or figs, just in case—you know, just in case. The Labour Party and the noble Lord are rather like that: they still think it is just possible there might be something in all this but they do not want to press too far. They were indeed extremely cautious.
I must tell the noble Lord that I do not think that even in his limited devotion to monetarism he would really carry Mr. Callaghan or Mr. Benn very far. I do not think he would. They are for spending; they are for spending very large sums of money. What they were debating was not whether they should spend money but how on earth they were to deal with the consequences. In that, Mr. Callaghan believed, like Lord Banks, in an incomes policy. He said we ought to control wages. Mr. Benn believed in

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controlling everything except wages. That is the basic division in the Labour Party today.
One may agree or disagree with what they said, but I am bound to tell the House this. I thought that they were discussing the great central issues which really face this country at the present time: the central issues of what you spend and borrow; and what on earth you do about the attitude to incomes. I notice the noble Lord omitted incomes, but I do not blame him because you cannot cover everything. Lord Banks more relevantly in part of his speech paid attention to the question of the effect of all this on incomes, and produced his own solution to it. These are the central issues.
May I suggest to the noble Lord that the real questions to be addressed to Her Majesty's Government are not the ones which the noble Lord was addressing to them. I think they ought to ask the Government about the details of monetarism. They ought to ask the Government whether they propose to see it through, becasue that is the big question. Mr. Healey does not believe that they will see it through. There was a very good article in the Daily Telegraph by someone called Edward Pearce. I do not know whether the noble Lord read it. It was brilliantly done. It said that Mr. Healey looks at monetarism rather as you might look at an old and familiar film; you seen it all before. You know when the cavalry are going to come on. You know when Joan Crawford is going to reach for her handkerchief and burst into tears for the great reconciliation scene. Mr. Healey is still waiting for it all to happen. I do want to say to Mr. Healey and to the noble Lord that it is just possible it will not happen; it is just possible that on this occasion the Government will go through, they will not do a U-turn, and they will see this through.
The reasons for that are many. One of them is in the personality of the Prime Minister. I do not think she intends to reverse her policies. But there is more than personalities in it. I did not quite follow this part of the noble Lord's argument, but I think he admitted that what the Government have done—indeed,
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I think this is part of his criticism of the Government—is to spell out in considerable detail their monetary plans for a term ahead. This is immensely important. Contrary to what he said, they have actually spelt out in real terms that the Government are going to spend four years ahead, and it is going to be less than they spent last year.
Lord LEVER of MANCHESTER: Just so that the noble Lord is not misled, my criticism was not that they had not spelled out their expenditure plans in real terms but that their monetary supply targets were expressed purely in monetary terms, not in real terms.
Lord THORNEYCROFT: I fully accept that; I misunderstood. In any event, my point remains the same. They have spelled out in real terms what it is that they are going to spend. As a result, investors, borrowers, unions and managers know the background against which they are bargaining, negotiating, and making their various decisions.
There is another reason why I do not think we will go back; it is that we have nowhere else to go to. It is very simple. Where could we go? We could only go either to Mr. Benn and his policies of overall control, imports, inflation, an isolated island community; or to the sort of compromise that we have been enduring for the past 20 years, which is now being argued by Mr. Callaghan and, to some extent, by Mr. Roy Jenkins from an eminent position out in Europe. Neither of these alternatives seems to me in any way attractive, so we shall go through with it. And why not? We are, in fact, riding much higher than people sometimes imagine. As a country, we have great assets. We have just conducted the best negotiations in the EEC that have ever been conducted. Lord George-Brown pointed this out the other day. It has given us a basis. It has not solved all the problems, but at least it has given us a basis from which future negotiation can take place.
The pound sterling is strong. I know that some industrialists, even I myself, sometimes bewail the fact, but it is strong not only because of the assets we possess but possibly because investors from overseas and people who want to put their money here see a country following a

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consistent policy. They actually believe we may be right, that these policies may reduce the levels of inflation. We are in a world recession. That recession will end. Even those old manic-depressives in the Cambridge economic group are talking about consumer demand going up in 1981. So why should we turn back? This is a success story that we have to tell. Despite all our difficulties, we have every intention of seeing it through.
What about wages then? I not am going to make a speech about wages; I am going to make a few propositions. My first proposition is that if we move into a round of wage increases of between 15 and 20 per cent. this autumn it will be a very bad thing for this country. I think it is rather wrong to criticise people for what they are reported in a newspaper to have said, but if Mr. Terry Burn from the Treasury, said anything resembling what he is reported in the newspapers to have said, that income negotiators should match the forthcoming inflation as they saw it developing, that would be a very dangerous approach. If we are going to get anywhere we have to accept something less than the forthcoming rate of inflation in the next 12 months.
My second proposition is this. If you go to the private sector they will say to you, "How can we hold wages? Look what those dreadful people in the public sector are doing". If you go to the public sector they say, "All we do is to match what happens in the private sector". They are like a couple of monkeys climbing up a stick, photographing each other from time to time, and using one monkey's position as the platform for the next monkey's advance. That is the situation in wage negotiation at the present time, and I think something ought to be done to end it.
That brings me to my third proposition. I think Clegg is a disaster. I know my noble friend, Lord Boyd-Carpenter, is going to have a debate on this subject in your Lordships' House in a few weeks time. I am not criticising Professor Clegg on the basis of a weakness in mathematics; I am sure my noble friend Lord Cockfield could arrange a crash course in A-level economics and something could be done. My criticism is that he has been put to work at the wrong job. Comparability is not basically some-
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thing for professors; it is something for individuals, men and women who choose which job they ought to go into according to the wages paid and their own particular capacity. This habit of having people trying to compare everything with everybody else is a hopeless situation. If I started to compare my income with Lord Lever's and I could get Professor Clegg to come and give a comparability report I should be happy. But I do not ask for these things, and no one else should do so. That brings me to my fourth proposition, which is these options. I am bound to say that wage negotiation in this country in both the private and public sectors needs close examination. I do not support the noble Lord, Lord Banks, in his demand for an incomes policy. If we are to have a permanent incomes policy in this country it is the end of the trade union movement; they have no role whatever apart from negotiation. The whole concept of the trade union movement was built on negotiation on wages with employers. The idea that the House of Commons, the House of Lords, Whitehall or anybody else can fix a structure of wages which meets the infinite complexity of the industrial and commercial scene in this country is beyond all human belief. It will not happen. So I do not accept it.
But I am bound to say I do not believe the private sector negotiates wages very well. The joint industrial councils, the centralised negotiations, do far too much of the negotiation before anybody gets down to production and those matters on the factory floor. It is not a sensible arrangement. The CBI have much to look at to put their own house in order before they start talking to anybody else. And in the public sector—pay review, Clegg, the photographing of comparability—I think we want to look at reforms there. If we are going to keep pay review we must alter it very substantially from what it is at the moment. At the present time it is very largely damaging, both to the public sector and to the body politic as a whole.
In June 1979 Professor Meade wrote an admirable paper, Money Wages in Negotiation. He had some admirable suggestions there which are certainly worth considering. He looked at the proposition that an arbitrator should be forced to choose between the last offer of the unions or the last offer of the employer, a

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sobering thought to both sides, and on the arbitration being awarded all immunities would end. I do not say this is not perhaps too large a step to take at the present time, but I believe, and I share this view with Lord Banks, that if we are to have monetary or any other policies that work some sense in wage negotiations is undoubtedly a very necessary thing.
The last proposition I wish to make is this. Many things that happen in life depend on theory, economic ideas and all that. But much hangs upon example. We are going into some months which will be crucial and decisive for our policies. If we have an enormous round of wage increases they will not smash the policies of Her Majesty's Government but they will make them very much more painful. Much can be done by example. Lord Boyle in this House is, I believe, examining the increases to compensate for inflation that ought to be given to the Members of the House of Commons. They should be minimal. Leadership still counts in this country and if Members of the House of Commons are to contract out of every increase in inflation what on earth is the example going to be? I would say to Lord Boyle that I hope his figure is very low. It should be very low indeed, certainly in single figures. May I say that this applies to your Lordships' House too, to the allowances that flow from these things. Everybody criticises and talks about inflation, but everybody demands all the time to be indexed, hedged against it, adjusted: Lords of Appeal, judges of the High Court, Bishops no doubt—well, perhaps the Bishops, poor chaps, do not have it quite the same. But certainly so far as legislators generally are concerned, let us set an example in these matters. We have a great country, we have a great policy. Do not let us spoil it on the way.
4.18 p.m.
Lord KALDOR: My Lords, I am very glad to be able to follow the noble Lord, Lord Thorneycroft, and to say how much I agreed with him in what he said at the beginning about the speech of my noble friend Lord Lever of Manchester. It was an admirable speech, and one that we do not hear very often. I hope the noble Lord will forgive me if I do not follow the rest of his speech, but I think on reflection
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he will agree with me that it is the kindest and wisest thing I could do.
I am very grateful to my noble friend Lord Lever for several reasons. One reason is that he has given me and other noble Lords an opportunity to learn what he really thinks about monetarism. When he was a member of the Labour Cabinet, naturally, his lips were sealed. Since then his public pronouncements—I think of his maiden speech in this House about exchange control—left his position somewhat unclear. But nevertheless I expected him to come out as an opponent of monetarism, and his speech today fully justified my expectations.
I am also grateful to him for giving us the opportunity of listening again to one of his delightful speeches, and I can assure him that my pleasure was by no means diminished by the fact that I could find nothing to disagree with. The noble Lord and I have differed greatly on numerous issues of policy ever since this country first applied to join the Common Market, but this has not diminished my personal affection for him, which indeed would be a very difficult thing to do with someone as likeable as the noble Lord. He has the unique distinction among public figures of being almost as much liked by his political friends as by his political opponents. But until now I had no idea where he stood in the debates in the Cabinet that must have preceded the adoption of monetarism, or apparent monetarism, in 1977.
I mention all this because it is a mistake to think that this great monetarist, anti-Keynesian counter-revolution in policy dates from the formation of the present Government. In fact, it dates from the conversion, or the apparent conversion, of my former chief, Mr. Denis Healey, a man of exceptional intellect and one who possesses sincerity, seriousness and a basic consistency of purpose. If he embraced monetarism, or at least some shade of it, then he must have done so for very good and respectable reasons.
Perhaps I should make it clear that I have no inside knowledge or information. If I reveal any secrets today, they are secrets of my brain and not anybody else's secrets. My cogitation tells me that the true reason for Mr. Healey taking this course had its origin in the perilous position

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in which he found himself, or rather the country, and our extreme dependence on what is euphemistically called the confidence of international financial circles. The events of 1976, when that confidence was temporarily shaken, must have left a deep impression or indeed a scar, and some incidents in that connection have been referred to already.
Why is that so? With the enormous rise of cosmopolitan banking, or let me call it, extra-territorial banking, since the war, there was a vast increase in mobile funds of incredible dimensions, which were the result of uncontrolled international credit creation in the world market which is of this planet but which is not really under any country's rules or jurisdictions. Those vast funds could be quickly switched from one currency to another, and that made every country in the world—not excluding the United States, not excluding even countries behind the Iron Curtain, but only excluding in recent years the OPEC oil producers—highly dependent on the goodwill, or rather the good opinion, of bankers. Bankers—and I mean not just central bankers but private bankers—like the kind of policies that monetarism brings in its train, quite irrespective of whether they believe in the claptrap of monetarism or not. They like it because it makes for retrenchment and deflation; for policies which appear financially sound, particularly when they carry the seal of approval of the IMF. And as the IMF aspires to the role of super Central Bank, it is a veritable citadel of monetarism. So it certainly pays a country with vast external debts to behave as if they were sound monetarists.
The only question is where to strike the right balance between the gains from increased international confidence, the bankers' confidence, and the costs of that in terms of increased economic weakness. That issue came to a crunch in October/November 1977 when there was a veritable invasion of money as a result of world speculation in favour of sterling which in turn was a reflection of the revealed prospect of our rising oil revenues. It confronted the Chancellor with the choice of one of three things: simply to let the money flow in without worrying about it; or to repel it by lowering the interest rate to whatever extent necessary to
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offset the bullishness of speculators by a negative interest differential; or, in the last resort, to give way to speculators and allow sterling to rise.
The first course is what would have happened automatically under the gold standard or, after the Second World War, under the Bretton Woods system. There was no question of not letting money come in—you simply had to let it come in because the rates were pegged and to let it come in was part and parcel of the rules of the game.
The second course was the traditional response of the Bank of England in the 19th century to an inflow of gold—that is, to drop interest rates and thereby (as happened so often in the 19th century) encourage foreign borrowers in the London market. Well, the Chancellor and the Bank certainly tried that orthodox, well-trodden method. They kept on reducing interest rates in the course of 1977 until the MLR, as it then came to be called, was no more than 5 per cent. by the middle of October, having started out at 14 per cent. in January. It was reduced about 10 or 13 times. However, when it came down to 5 per cent, and the money was still coming in, they took fright, and would not allow the MLR to be reduced any further. Why not? Traditionally throughout the 19th century—and throughout this century—2 per cent. was regarded as the minimum bank rate. There is even a famous saying, "John Bull cannot stand less than 2 per cent.".
However—here is where the international monetarist atmosphere came in—to reduce it below 5 per cent. was considered bad for international bankers' confidence. What would Greenwalls, the stockbrokers, say, what would Gordon Pepper say, what would international opinion say, if MLR were reduced to 3 per cent? They might think that we were madly expansionist, and so they might take fright. Would it not give hostages to them and foment internal inflation?
The answer is that it would certainly not have done any of those things. If a low rate causes an undue credit expansion—one that creates excessive pressure of demand —a most unlikely prospect in 1977, when we had 1·4 million unemployed, it could have been easily prevented by the well-tried methods used for 20 or 30 years of advising the banks to limit their advances

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to customers. That is the way in which credit expansion has been controlled ever since the war, until that disastrous reform Competition and Credit Control was introduced in 1971. However, the IMF and the international fraternity—so I imagine the argument ran—might have thought that this was unsound.
So the decision was taken—and in my view it was a fatal decision, and I think that history will come to regard it as quite as fatal as, if not more fatal than, the return to the gold standard at pre-war parity in 1925—to "de-cap" the pound (as this move was then called) and allow it to float freely, upwards. With slight ups and downs, and slight interruptions, that has happened ever since. But it implied that the exchange rate and the interest rate moved in tandem, as it were, to make our economic prospects bleaker and bleaker. Every rise in the MLR served to raise the exchange rate; every rise in the exchange rate called for higher interest rates, lest a change in sentiment brought about a dreaded exchange crisis. Only last week our Prime Minister uttered a few innocent remarks on how she might spend the money which she saved on the EEC contribution. What happened? Lo! within a few minutes the pound dropped like a stone by five cents in the market and within a few minutes a flood of denials was issued from every side—from the Bank, the City, the Treasury and everywhere, disclaiming any intention to do any such thing as lowering the MLR now or at any foreseeable time in the future.
I am sure that at that moment many people wished that we could have been in the enviable position we were in before we decapped the pound, of having to hold down the pound, instead of being in the perilous position of having to prop it up. In the good old days—or should we say the bad old days? of full employment—no one ever worried about having an excess of reserves or about gaining too many reserves. We were only worried when we lost reserves, not when we gained them. In fact, at this terrible time when we gained so much—when we decapped the pound—our reserves were no greater in relation to our sight liabilities to foreigners than they were in the days of the 1960s when they were considered so highly inadequate as to create a national
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peril. I looked up the figures, and the ratio of reserves to liabilities was in both cases one to three; that is to say, the foreigners had liquid claims in one form or another which exceeded our reserves threefold. No sane person would have regarded the danger of "importing inflation", as a result of having to buy too much foreign money, as anything but a joke.
I know that the Germans were worried about such matters in the 1960s or even earlier, but then the German problem was completely different from ours. They had a chronic, large export surplus—it was too large and far greater than they bargained for—resulting in a state of over-full employment which could be alleviated only by the large-scale importation of guest workers into Germany. In Britain in October 1977 we had 1·4 million unemployed, only a little fewer than we have today, and up to the middle of that year we were seriously in the red in the current account of the balance of payments.
There was no way in which the inflow of foreign money could have created inflation through excess demand. The argument was not concerned with what it could do; the argument was simply concerned about the effects on bankers' confidence if the monetary target was exceeded, and this, again, was an unnecessary worry. It would not have happened because the money that came in went straight into Government securities—whether bills or bonds—and was automatically offset by the sterling requirements of the Exchange Equalisation Account for its foreign currency purchases.
One important aspect of this policy which so far has not been mentioned and which has escaped notice is that as a result there has developed a negative yield gap between gilts and bills, which became larger, more persistent and more widespread than any that the City of London has witnessed, as far as I know, in any previous period of history. The yield of irredeemable consols at present is down to 12 per cent., which is 5 per cent. less than the MLR. It has never been that before. Even the yield of stock of two to three years' maturity is 2½ to 3 per cent. below the Treasury bill rate—2½ per cent. below the MLR. That has never happened before. All this occurred

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in the face of an unprecedented flood of new issues which in the last financial year, 1979–80, became a veritable torrent and amounted to £11½ billion net of repayments—net cash receipts from new issues—which is £2 billion more than the whole of the ex post PSBR. In other words, the whole of the Budget deficit last year was over-funded by 20 per cent. That followed two previous years in which it was already fully-funded.
How is this to be reconciled with the economic theories of the Treasury Ministers? I should like particularly to know how the Financial Secretary will comment on it in the light of his oft-quoted remarks in January, when he said:
"A high PSBR requires either that the Government borrows heavily from the banks, which adds directly to the money supply, or failing this, that it borrows from individuals and institutions at ever-increasing rates of interest".
If the Financial Secretary's economics were true, these unprecedented events could only have happened with a large and steadily increasing yield gap, but a positive yield gap. You have to induce people to switch from bank deposits to gilts. It could not possibly happen with a negative yield gap, and certainly not with an increasing negative yield gap associated with an increasing flow of funding. I hope that the noble Lord who replies for the Government will enlighten us whether they deny these facts which I have just mentioned, or, if not, how they reconcile them with their philosophy, particularly with their assumption of inflationary expectations, their effects on interest rates and the difficulty of funding Government debt.
However that may be, when Sir Geoffrey Howe became Chancellor of the Exchequer he found the institutional trappings of monetarism in reasonable working order. All he had to do was take a bold step and reduce the monetary target from Mr. Healey's range of 8 to 12 per cent. to an unprecedented range of 7 to 11 per cent. by a reduction of 1 per cent. at each end. He need not have done more. But he also raised the MLR by 2 per cent., why I do not know, as the effects of that on the accepted measure of the money supply—sterling M3—are more likely to he positive in the wrong direction.
People tend to hold more money in the bank if they receive higher interest rates.
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Any benefit of a higher exchange rate associated with a higher interest rate in terms of import prices would he swamped by the disastrous consequences on competitiveness, of which so much was heard from all previous speakers, and by the greater risk of a sudden crisis, as happened in 1976. Let us not forget that however over-valued the pound is, it is always dangerous to let it go down. The effect can always snowball, and it can snowball all the more now because it is not only the foreigners who can speculate against sterling; all noble Lords can do so perfectly legally. There is no exchange control to stop it. Therefore any downward move of sterling, from wherever one starts, is always extremely dangerous. That is why the Government reacted so hastily last week to the events that I mentioned.
There was a more subtle difference between the previous Government and the present one. Mr. Healey's monetarism, such as it was, remained a bastard kind of monetarism, like the bastard Christianity of the American Indians who worship pagan gods, along with the true God. Mr. Healey's adoption of monetary targets and a floating rate did not stop him from believing in the inflationary effects of wage increases. He remained firmly attached to incomes policies—as firmly as ever.
As against that, the monetarism of Mrs. Thatcher, Sir Geoffrey and their friends at the start was as pure as a lily, or at least as pure as Milton Friedman. Any mention of wages emitted a hollow laugh. Given a firm stand on the money supply, Professor Friedman assured his viewers in his evangelical programme on BBC 2 some weeks ago that trade unions are "a toothless lion"; they could do absolutely nothing; they could, if they wished, price themselves out of the market, but they could not, repeat could not, cause the price level to rise, because the price level was firmly tied to the money supply.
That was the original philosophy. But, as we know, as a result of bitter experience of the first 12 months of the new Government, this part of the new creed had to be abandoned and the Government are now in full retreat. They urge the trade unions to be reasonable; they emphasise the need to be careful, moderate, and modest in pay settlements.

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They have passed the first stage down this slippery slope—the stage of exhortation—and they are now groping towards the next stage without having any clear idea of what this next stage should be.
In the meantime, as at last everyone seems to recognise, our economy outside the oil sector is rapidly going downhill. This reflects the threatened collapse of the core of our economy, manufacturing industry. I certainly do not share the belief of the Chief Secretary to the Treasury who told the other place the other day that an overvalued currency helps the economy by concentrating on "high value-added activities" and cutting out all "low value-added activities". If the Chief Secretary's philosophy is right, then all we need to do is to put the rate of interest higher and higher and make the pound go higher and higher, and then in the end we shall be all right: we shall have all the highest value-added industries and the highest productivity.
As it is, we are in danger of converting what should be an open blessing into a terrible curse in disguise; I mean North Sea oil. If North Sea oil causes the pound to become a petro-currency and makes us abandon our normal productive activities and just live on oil, then, even supposing we were Saudi Arabia and produced so much oil that we did not need to produce anything else, this would have a most terrible effect on the national character. The country would be reduced to a desert. The noble Lord, Lord Thorneycroft, assured us that this may be very sad but there is no alternative; there is no other course open to us. It also exposes us to the most ghastly fate if and when the flow of oil is exhausted.
If the Government really think that they cannot reduce the exchange rates without great danger—and I agree with them—without causing an uncontrollable run on sterling, then we must adopt a Schachtian solution of having a separate exchange rate for the export and import of manufactures, at least if they want British industry to survive. I am not sure that they do, but if they do and they think that such a system, a dual exchange rate, would also be inflationary, I can only reply that Dr. Schacht had a very good track record on inflation—a much better track record than Sir Geoffrey Howe, or the present
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Government. He was much in favour of multiple exchange rates and practised this widely.
I must apologise to noble Lords for this rather incomplete speech. I cannot, within the compass of a short speech of 27 minutes, really demonstrate the complete phoneyness of the basic tenets of monetarism. However, I am working on it. I shall present more detailed evidence on the subject to Mr. Edward Du Cann's Committee in the other place, and when it is appropriate I shall place copies of it in the Library for such noble Lords who might be interested.
4.46 p.m.
Lord ROLL of IPSDEN: My Lords, we must all be grateful to the noble Lord, Lord Lever of Manchester, for having initiated this debate. It is right that your Lordships' House should devote some time to a subject which is at once vitally important and extremely difficult. We could not have a better guide than the noble Lord for, as has already been said, he combines a deep understanding of the subject with a rare experience of the practical workings of markets, particularly of financial markets. Moreover, I think I may say that despite his presence on the Opposition Benches, he brings to this subject a balanced and essentially nonpartisan view. This approach, it seems to me, is particularly welcome at this time when, for reasons which I find it difficult to understand, the subject tends all too often to arouse extreme fervour and to be discussed in public in terms which are more appropriate to mediaeval religious disputations.
I propose to make a few general remarks on this subject in this debate. Before doing so, I should say that I am a merchant banker, though my interest in monetary problems dates from at least two previous incarnations. But I do not think that my interest in this subject is any different from that of any other noble Lord. We are all concerned to see this country enjoy a sustained and non-inflationary high level of economic activity. On two points I believe all reasonable people are agreed: first, that to reduce the present rate of inflation and to subdue inflationary forces is an important objective of policy; and secondly, that economic policy, and perhaps more particularly anti-inflationary

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policy, must contain an element of monetary policy. That is to say, it must contain measures that affect the supply and cost of money. Where legitimate differences arise are, first, on the place which monetary policy should occupy in the total mixture of economic policy; secondly, on the techniques which are to be employed—perhaps particularly on the role which interest rates are to play—and thirdly on the timing and, shall I say, the "dosage" of the application of monetary policy.
There is no reason, in my view, why these matters should not be discussed dispassionately and without differences of view necessarily attracting the labels of vice and virtue. Economics is not an exact science and economic policy is inevitably based on a certain degree of guesswork about the responses to be expected from different stimuli. These responses vary from one society to another, and for the same society from one time to another.
Today the problem most under public discussion centres very largely on the role of interest rates. I hope that no one will any longer regard the determination of interest rates by the authorities as somehow an entirely neutral act; somehow neutral in its effects as between different sectors of the economy, and therefore peculiarly suited to an economic policy which is generally based on a non-interventionist policy. I believe such a view to be a complete illusion. Interest rate policy is highly interventionist and very unequal in its incidence. We are all familiar with the problems of wages differentials, their erosion or their expansion as a result of different incomes policies. Interest rates equally affect different sectors differently. They affect financial assets in different ways. That might not be particularly important in the first instance when it applies essentially to the financial sector, which could be thought to be perfectly capable of coping with these changes. But much more than that is involved. Interest rates do affect the relationship between financial and other assets and between assets and obligations, current and future. They thus affect the whole of the corporate sector.
It is quite clear that if monetary policy, and perhaps more particularly interest rate policy, is being used as far and away
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the predominant instrument of economic policy, the whole burden of whatever adjustments are being sought will fall on the corporate sector. It is industry and commerce that have to take the brunt. It is, I am afraid, a fact of experience that it is much too facile to suppose that the impulse administered by, say, high interest rates to industry and commerce, and especially to manufacturing industry, will quickly and smoothly be transmitted, for example to wage settlements or to relative prices so that the anti-inflationary effect that is being desired will quickly and relatively painlessly be achieved. There is enough accumulated esperience to show that that is rarely, if ever, the case. The process takes time and, while it goes on, very big changes take place in the relationship between different firms and between different sectors of industry; and very often management decisions based on sound principles of prudence and efficiency are suddenly seen to be wrong. In short, the changes which are caused by high interest rates do not necessarily correspond to what in the longer term should be sound economic relationships. Anyway, quite apart from those factors, the overriding question is what the ultimate outcome will be even if in the end the anti-inflationary goal is reached.
As we know only too well, productivity is one of the major problems of British industry. Only the other day your Lordships' House debated this question on a Motion of the noble Lord, Lord Schon, as it did nearly two years ago on a similar Motion of the noble Viscount, Lord Amory, which gave me the opportunity of making my maiden speech. Historical evidence unfortunately shows that productivity rarely, if ever, improves in times of declining economic activity and large-scale unemployment. Furthermore, can we be quite confident that when at last we have gone through this difficult period and are able to take measures of a more expansionary character, whatever they may be, we shall not once again be faced with the notorious propensity of this country to indulge in heavy imports?
Another problem which heavy reliance on monetary policy raises is whether and, if so, in what circumstances, a high interest rate can quickly reverse inflationary expectations. It is at least possible that beyond a certain point, a high rate of interest, so far from discouraging infla-

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tionary expectations, in fact encourages them. The issue by the Government of obligations of 15 or 20-year maturity at current, unprecedentedly high, yields may not lead the investor to think in terms of a quick and sharp reduction in the rate of inflation; quite apart from the fact that—as the noble Lord, Lord Lever of Manchester, pointed out—it creates a very heavy burden of future debt service (indeed, already present debt service) and may make it more difficult for the investing institutions to fund the longer-term investment which industry needs.
There is still a third problem in this connection, and that is the effect which big differences in interest rates between countries have on the international movement of funds and therefore on exchange rates. I am well aware of the hazards associated with attempts to intervene directly in the movement of foreign exchanges and the difficulty of doing so effectively, even if it were possible to predetermine what is the right and what is the wrong rate of exchange. But, to take only one factor, are not very high interest rates here compared with other countries themselves the cause of a substantial inward movement of funds and therefore of rises in the rate of the exchange of sterling?
I do not wish to dilate on the effect which a high exchange rate may have on our exports, nor would I advocate a deliberate undervaluation of our currency as a means of stimulating exports or restraining imports. But I have just recently been in Australia where I had described to me in no uncertain terms by a distributor of British-made motor cars the effects on his market of the over 40 per cent. turnaround in the rates of exchange of the yen and of sterling.
May I, in this connection, detain your Lordships for a few moments with the troubles of the book industry? I should declare that I am honorary chairman of the Book Development Council, the export arm of the Publishers' Association, and chairman of the National Book Committee, which brings together all the associations interested in books including authors, libraries, booksellers and so on. On top of high costs caused by inflation, of high interest rates, which are a special burden in a trade in which stockholding
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is essential, of loss of domestic markets caused by cuts in library and school book expenditure, that industry is now faced with an absolutely catastophic fall in its exports due to the high rate of exchange of sterling. The damage to what was one of our very important export industries could be irrecoverable; and I do not need to stress in this House that where British books are concerned, more than economic considerations are at stake.
More generally, the influx of foreign money in search of high-yielding Government securities encourages just that volatility of the movement of funds in and out of the country which has for so long been regarded as highly undesirable. At present, the money is coming in in search of these high yields. When interest rates are showing signs of falling, as they will, this money will go out, securing in the process handsome capital gains in exchange for the current high yields. And so the vulnerability of our exchange rate as well as of our domestic monetary policy to international financial movements, from which we had so painfully freed ourselves—and which, of course, is even greater when there is no exchange control, though, let me say at once, I think that in itself is very desirable—may well be back with us.
I mentioned earlier the question of balance between different elements of economic policy, and I meant particularly fiscal and monetary policy. This is not the main subject of today's debate, so I would merely observe that it may well be that if last year there had been more balanced action as between the expenditure side and the taxation side of the budget excessive reliance on monetary policy might not have been necessary. It is inevitable, in this context, that one should also need to reflect on policy bearing directly on incomes, and this has already been mentioned. I know that incomes policy is in many quarters a highly unwelcome concept, and it is certainly very difficult, as I know from my own experience, to maintain its long-term efficacy. It remains, nevertheless, an extremely important established fact that the countries which have been best able to adapt themselves to the severe shocks of the oil price revolutions in the last few years have been those which have had one means or another of adapting their real income quickly to these shocks.

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I am thinking, for example, of Austria, Germany and Japan. I know that the institutional, social, indeed cultural, circumstances in those countries are very different from ours, but their experience does have an important lesson for us.
I hope therefore that the Government will examine with an open mind all the various suggestions currently being made, some in regard to the techniques of monetary policy itself, some of them put forward by people with the most impecable monetarist credentials; and, of course, some of those made in this debate. I would include among the subjects for review the question of our membership of the European Monetary System. While many of the doubts which have been held in this regard have been justified in the past, there is now said to be some evidence that the members of the EMS have derived some benefit from their memberships. With the budgetary question happily out of the way, at least for a time, I believe it would now be appropriate to re-examine the question whether we should join the EMS as full members.
I hope that, despite all these factors, the Government will not be deterred from an open-minded examination of these issues by the fear of misguided criticism for inconsistency. Consistency in objective is entirely compatible with changes in policy to suit changing circumstances. That great thinker who served this country so well at critical moments, Maynard Keynes—and I hope that, despite the current fashion, this name may still be mentioned with the respect due to it—was at times accused of inconsistency. This led his most eminent American disciple, Alvin Hansen, to remark that a man may wear an overcoat in winter and a straw hat in summer without being charged with inconsistency.
5 p.m.
Lord RITCHIE-CALDER: My Lords, I wish to thank my noble friend Lord Lever of Manchester for giving us the opportunity for this debate. I propose to be very brief, and I apologise if it is necessary for me to leave before the end of the debate. No one has ever accused me of being interested in money; it is one of my great failings, one of my greatest weaknesses. I do not pretend to understand about finance, but I do pretend to be
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an observer of events and circumstances on a larger, wider scale than the kind of rather narrow discussion that we have here. It is quite clear from our debate here that the present policy is not working. It will be grotesquely distorted by external events. In the meantime I am watching, as most of us are watching, those things which concern us most falling into a worse and worse state.
My concern has always been, and will be here, with our position abroad, with our contribution to the greater world outside and the effects on us of the development of the Third World. However, the biggest factor is that in the course of this manipulation, this obsession with something that we are calling monetarism, which is absolutely myopic, we are destroying our ultimate destiny as a country, and in the process destroying also both the responsibilities and the opinion credits which we have acquired in our time. I cannot conceive anything more ridiculous than the fact that when we are talking of the figure manipulations that we are hearing about today we should be throwing away what is to me the most important asset that we have, which has been, and I maintain still is, Britain's example to the world in the areas of development and of sound principles.
I was glad that the noble Lord, Lord Roll of Ipsden, gave examples of the book industry. As he said, in terms of the book industry we once led the world. It was much more than merely the traffic in books: it was the traffic in ideas. It was the basis of a great deal of influence which we exerted for good purposes, and not just in an educational sense, but in an inspirational sense, too. As has been shown so often in debates in this House, the same thing is happening in the throwing away of our exemplar role, in terms of the restriction of our overseas broadcasting services as well as in the sacrificing of our cultural activities through the British Council.
Furthermore, as I still maintain, against all arguments in this House or anywhere else, there is the throwing away of one of the most important forms of investment in the future that we can make, monetarism or no monetarism; namely, the provision of education and the extension of that education to students from abroad. To see the position otherwise is simply mad-

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ness, because this is infinitely and manifestly the cheapest form of development. There is here the sacrifice of the opportunities which we would derive from the educating of people from abroad, and there are also going to be serious repercussions on our educational system, as has so often been said in this House.
This brings me to the main point that I want to make, which is concerned with this obsession with monetarism, this blind and, I believe, fanatical attitude towards the circumstances in which we find ourselves, this failure to recognise not only that we are throwing away the opportunities that North Sea oil has now given us, but that we are now squandering, on the paradoxical excuse of our financial predicament, the goodwill which could assure our markets in the future. Above all, we have in this situation this myopia which prevents us from seeing where our best interests lie; and without question they lie in maintaining our position in the world as a creative, productive, industrial nation, and not just as a manipulator of something that we call "money"—the commodity in which bankers trade, but which they do not themselves create.
5.5 p.m.
Lord PLANT: My Lords, what is monetarism? I went to a library to have a look at the Penguin Dictionary of Economics, and the definition is that it is that part of economic policy which regulates the level of money or liquidity in the economy in order to achieve some desired policy objective, such as the control of inflation or improvement in the balance of payments, a certain level of employment, or growth in the gross national product. After 12 months of the monetary policy of the Government we have not achieved any of those objectives.
The man in the street has heard a great deal recently of the hard policy of the Government. He believes that it simply means balancing the books—borrowing less and contraction of services supplied by the state. He takes this view against the background of last year's Budget which greatly increased the take-home pay of the better off section of the community and fuelled inflation by increased indirect taxation.
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All Governments have said that greater productivity is the key to the control of inflation. The question of how that is to be achieved has bedevilled successive Governments. Is the Government's monetary policy conducive to creating the right atmosphere? Unions and managements wonder how up-to-date machinery for new technology and extra investment can be pushed ahead when to borrow the money needed puts a millstone around the neck of industry. Prices are pushed up and the round of wage claims expedited.
The workers will make sacrifices in the short term if they recognise that the end product will be to their advantage and to the country's advantage, but some members of the Government have been saying that we are in for belt tightening for the next three years. Of course, the cynics will suggest that there will be a bonanza in election year. The man, or woman, in the street looks at the full expense-account restaurants. He, or she, sees the great amount of money changing hands over a very wide field. What effect is monetarism having on these things?
The Government are reversing the trends of previous Governments in restricting borrowing and so slowing down the increase in the national debt, the yearly interest charges on which are now seven times those of 10 years ago. I do not know whether future generations will rebel at the debts that they inherit, but I do know that a rigid monetary policy, with reduction in public expenditure, will not increase productivity, nor reduce inflation, nor bring about lower wage settlements. It will mean that we have less real wealth to pass on. I believe that the present policy is simply deflationary and that it will not promote industrial growth on which the wealth of the country depends.
The producers of wealth are not jumping for joy. They are not feeling infused with new life and expectancy as a result of monetarism. They see that the policy means cuts. Education will suffer. The policy will deprive thousands of under-fives of education. There will be fewer teachers and less for adult education. I would here enter a plea for the Workers' Educational Association and the adult residential colleges. Housing is suffering. Only 218,000 houses

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were started in the year ending March of this year, whereas in the previous year the figure was 245,500. The number of unemployed increased in the last 12 months by 210,000 to 1,509,000 at the middle of May. The balance of payments deficit increased by £1,329 million in the year. This has been expedited as a result of the over-valued pound and cuts in aid to the British Overseas Trade Board and Overseas Project Fund to the value of £1·8 million.
The Government are turning the financial screw on nationalised industries by setting rigid cash limits and planning a turnround in financing resulting in a present borrowing requirement of £2·3 million becoming a net repayment of £0·4 million by 1983–84. The Government are increasing the rate of return expected by some nationalised industries. Gas and electricity are prime examples. Prices are being savagely increased, not to meet costs but to take money out of pockets to reduce purchasing power. What a slippery slope we are on, cutting investment and jobs and pushing up the cost of living! The Government policy is supposed to control the money supply, but we are told that last month the money supply increased by £518 million. Therefore, money swilling around the system has risen by 2 per cent.—well over the Government's target.
Part of the monetary policy is to reduce the public sector borrowing requirement by reducing the size of the Civil Service and local authority staffs. This not only adds to unemployment but reduces the services that the country has a right to expect. No wonder the morale of the Civil Service is now so low; and I think it is a matter that we should perhaps debate at some time. The closing of skill centres, looked after by civil servants—and the skill centres are for the young people—is a mad policy. Some more Civil Service work is being transferred to outside contractors—a ruse to reduce the size of the Civil Service but, of course, to get the work done by other people. Let me give your Lordships just one example. The Welsh Office in Cardiff has put out security work in a new building to a private contractor called the Royal British Legion Attendants Company Limited. The Royal British Legion, to whom the Civil Service Union protested,
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has assured that union that the contractor is a private company for which the Legion itself is not responsible.
We shall find some short cuts being taken by the Civil Service and substantial real cuts in the services provided by central Government. In the income tax field, we are of course reducing the number of staff. Inevitably, there will have to be some cutting of corners. I understand that one means of reducing staff concerns bank interest, and that amounts of over £25 which at the moment are notified to the inspector of taxes need not be notified until the interest has risen to £150. There may be other short cuts in the pipeline; but this does not inspire confidence.
What is the alternative now that the Prime Minister has said today that the Government do not intend to do a U-turn? I believe that the TUC wants an agreement with the Government. It wants to talk over a wide field. Never since before the war has the TUC been so distanced from the Government. Clem Attlee, Winston Churchill, Harold Macmillan, Harold Wilson, Edward Heath and Jim Callaghan all recognised that in the country's interest they should talk and take counsel with the TUC as partners. The problem of world economy makes co-operation at home more essential. The growth of world trade, industrial restructuring, new technology and help to the Third World, where there will be 600 million new jobs needed over the next 10 years—all these demand joint initiatives. We cannot solve our problems by abolishing trade union structure.
There is now a devastating squeeze on jobs; there is an international race for competitiveness; there is an urgent need for a national recovery plan. We need a tripartite look at investment, exchange rates, collective bargaining and many other issues. We must not hesitate in moving into the unknown. The Government must change course soon. They must talk to the TUC, because it is too late for a U-turn when you have gone over the cliff's edge.
5.16 p.m.
Lord HARRIS of HIGH CROSS: My Lords, we are all grateful to the noble Lord, Lord Lever of Manchester, for his impressive, thoughtful and good-natured

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speech to us at the beginning of this debate. I thought it was particularly noticeable how he delicately managed to avoid identifying himself too closely with what might be called the imperfect fulfilment of the policies of those Governments with which he in the past was so closely associated. But I should like to agree with him on one central issue which he raised about the future cost of servicing the national debt, and I would again invite Lord Cockfield to give us his thoughts on the possibility of indexed bonds which would have the advantage of bringing down the cost of future interest rates as the rate of inflation declined.
It is easier to thank Lord Lever for his speech than to be enthusiastic about the way he brought it forward at this particular moment because for the reasons which the noble Lord, Lord Plant, listed—the grievances—it is perfectly clear that this timing is distinctly inconvenient to debate the Government's monetary policies, particularly for the Government and for those like myself who would wish to support their broad approach.
I would start by saying to the noble Lord, Lord Banks, that you do not have to be a theological monetarist to understand the well established fact from long history that when monetary policy is expansionary the good effects on employment and output come first. The bad effects on price level and inflation come later. But when you tighten monetary policy it is the other way around. As soon as you withdraw easy money the bad effects come first—the effects of declining output and on employment—and the good effects will only come later, typically around two years later.
In the past it has always been that the resolution of successive Governments has failed. Having endured the beginnings of the cure, the bad effects caused them to go off course and they followed the siren voices which we hear in this debate, including those from the noble Lord, Lord Banks, to relapse into what is nothing really more than the old fine tuning and resumed inflation. It seems to me that it is precisely this past record of weakness and vacillation which makes it all the more necessary for the Government to display a maximum of resolution.
I think it cannot be doubted that the Government's policies are in something of
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a muddle, despite the spirited defence to which we look forward from the noble Lord, Lord Cockfield. But I believe, for all the selective statistics and criticism which may be thrown against the Government, the chief elements of our present debility were visible in 1977, 1978 and for many years earlier. Our troubles did not start in May (or whatever month it was) last year when there was a change of Government.
The most pressing troubles we have now sprouted from the seeds sown by this Government's predecessors and, especially, I would urge on the noble Lord, Lord Kaldor, the expansion in the money supply after 1977, the inevitable collapse of the incomes policy following that weakness and, not least, the Clegg time-bomb which is blowing up the public sector and which has been commented upon already by the noble Lord, Lord Thorneycroft.
May I try to commend to the noble Lord, Lord Lever, and his Labour colleagues, support for the Government policy on two simple grounds? First, the Labour Party always affirms its belief in forward planning. Well, let us cheer up! The present Government have a plan. It is called the medium-term monetary strategy to bring down inflation. That provides a stable background against which all their other policies should be judged. The second reason is that the Labour Party, in office at any rate, believed in the use of cash limits as a way of keeping the public sector within the bounds of what we could afford. The present Government with their monetary policy are, in effect, applying cash limits to the whole economy.
It is no good the noble Lord, Lord Plant, and others assailing the Government for cutting public spending when we know that the plain truth is that the Government have actually failed dismally to do anything more than to arrest the projected increase in the last Government's programme of spending. The result of this failure has been to throw the strain of monetary policy on to the narrower private sector of this economy. It seems to me that in the situation that the present Government inherited, their monetary policy is simply the ruthless application of common sense. By announcing that they are refusing to finance increasing inflation, we can look forward

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to prices beginning to rise more slowly after the customary time-lag of about two years. Prices will rise more slowly towards 15 per cent. in 1980–81 and towards 10 per cent. in 1981–82 so long as they maintain their present intentions. This descent in the rate of inflation will be less bumpy if people generally fasten their safety belts and then act in conformity with the signals indicated in the Government's monetary plan. The more that wage negotiators, in their own self-interest, anticipate the projected fall of inflation, the less will be the cost in avoidable unemployment. There are already encouraging signs of a very wide range of settlements in wages in the private sector; although, alas! that cannot be said of the too large public sector.
In an earlier debate the noble Lord, Lord Kaldor, in his colourful way, dramatised the objectives of the Government's monetary policy as "breaking real wage resistance" or, alternatively, of "bringing the working classes to their knees". Yet what is the purpose of the Labour Party's currently-disputed alternative to monetary policy? It is to resurrect the consensus on terms acceptable to a handful of trade union leaders and to try for the umpteenth time to wave a paper incomes policy at advancing inflation. But what would be the objective of a Labour Party with its incomes policy (or for that matter of the noble Lord, Lord Banks), what would be the objective of such an alternative to monetary policy? It would be to break real wage resistance. Incomes policy, equally with the monetary policy, would try to bring the working classes to their knees, in Lord Kaldor's phrase—to bring them to their knees, presumably, in prayer for the success of policies which have never, hitherto, succeeded in their objectives.
I yield to none, not excluding the noble Baroness, Lady Gaitskell, in my detestation of involuntary unemployment. But we can best keep it down by understanding causes. The link, it seems to me, between unemployment and wage costs should be especially clear to noble Lords on the Labour Benches who share my own vehement opposition to the Common Agricultural Policy. Even the less bucolic defenders of the CAP would acknowledge that if you pitch the price of foreign products above the market clearing
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levels, you will create an artificial surplus, whether of butter, meat or wine. Likewise, if you pitch wages above market levels in differing employments, you will create an artificial surplus of labour. In place of a wine lake you will have an increased pool of unemployed.
I want to conclude by saying that noble Lords on the Opposition Benches, noble Lords scattered round the Government Benches and scattered around the Cross-Benches do no service to the unemployed by trying to undermine the Government's monetary plan. If Mr Healey, as Chancellor, had stuck to his IMF guns in 1977, we should not now be struggling again to get monetary inflation down. If Her Majesty's Government will persevere, then we know that the tide of inflation and of interest rates will surely in due course turn decisively, and our passing pains will yield to a lasting cure.
5.26 p.m.
Lord BALOGH: My Lords, I was delighted to hear the speech of the noble Lord, Lord Thorneycroft. After all, he was the first victim of monetarism—the little local difficulty which developed under Mr. Macmillan stayed strictly segregated in the Government and did not overlap on to the country's policy. I was also delighted with his saying—and I hope he is right and my friend Lord Kaldor is wrong—that there will be no U-turns. Economics is not a real science, but Mrs. Thatcher has given, and is giving at this moment, a good imitation of a controlled experiment as in a physics laboratory. I want to see it go through to the bitter end.
The noble Lord, Lord Thorneycroft, said that monetarism is a view which believes in money. It depends upon how much one believes in money. For myself, I have never met any intelligent economist, Communist, Socialist, or laissez-faire, who did not "believe" in money. We are living in an economy which is a money economy; prices are expressed in terms of money. How, then, can one be a non-monetarist in that sense of the word? Monetarism, in my opinion (what we call "monetarism", at any rate), is the belief that there is a stable and very close connection between money (and especially the money supply) and,

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generally speaking, the whole economy. That I do not believe. The three excellent speeches—if I may say so with great modesty—of the noble Lords, Lord Lever, Lord Roll of Ipsden and my noble friend Lord Kaldor, have dealt with a great many aspects. In my speech, I shall try to concentrate on the problem of why monetarism, in the narrow sense of the word, cannot work in a modern economy. On all, even conventional, criteria the period of Keynesian ascendency after the the war was a brilliant one. It brought about an unparalleled success. Reconstruction after a most devastating and debilitating war was extremely rapid, and by 1946 we were back at the pre-war level. A more equable, a more compassionate, society and international order seemed to emerge.
There was, unfortunately, a snag in this vindication of the economic policy designed on the basis of Keynes's book. For more than a generation the whole world—communist, non-communist and uncommitted—have been subject to inflation and statesmen have come to think that their individual political position in the country would be more menaced by tolerating further inflation rather than unemployment. They failed. Their failure is due to the fact that the fight against rising prices caused unemployment beyond what was politically tolerable, all the measures mitigating unemployment accompanied by such cost explosion as to lift prices intolerably.
The liberal Keynesians—and among them Tony Crosland was the most eminent—dismissed the threat of inflation. Together with the orthodox, they refused to consider the probable emergence of new problems from the conjunction of full employment with the increasing concentration of economic power on both sides of industry. Oligopoly, the market power of the steadily decreasing number of giants and no longer the impersonal signals of market forces—about which the previous speaker held forth—emanating myriads of units, dominates. The combination of oligopoly in the goods market and bilateral monopoly in labour relations destroyed the basis of conventional economic analysis and rendered the results indeterminate.
The failure in this respect of Keynesian policies did not provoke a drastic
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revision of their theory. It brought about a revivification of the long exploded "monetarist" school based on a particularly primitive version of the old quantity equation. The monetarist view was that "fine budgetary tuning" of demand is in practice destabilising and attributed balance-of-payments crises to an over-blown public sector resulting in an intolerable rise in the borrowing requirement. More especially, an undue increase in money supply was the one cause of instability in an otherwise stable system. Indeed, the necessary and sufficient condition of stability was the steady increase in the money supply a little faster than the expansion of the economic increase of the productivity.
None of these assertions has ever been documented reasonably. There have been efforts at proving it, but they were always shown up to be artificial taking of the data of certain periods where the trend itself caused a seeming correlation. The "new" doctrine did not give any rational explanation of how the changes in the volume of money would be translated into expenditure. The fact that "money" can "act" through expenditure only. The monetarists totally disregarded the inescapable lessons of the pre-Second World War cycles (and post-1972 boom and bust) that is that all indirect policy measures, whether moneatry or fiscal, can operate only through their psychological impact. But this necessitates "over-kill"; that is, measures are required to be more savage than is indicated by the objective needs of full employment once the boom has broken, or vice versa. The mechanism chases and even random shocks could cause self-perpetuating fluctuations.
This could not be admitted by economists striving to be scientists. Their case is therefore conducted almost always implicitly not in terms of the real world, with its massive concentration of economic power, but in terms of the economic system of fine and smooth adjustments through price mechanism which existed only in the minds of academie.
The choice of the supply of money as the main criterion, and at the same time the one weapon for economic policy, is needed because it implicitly supports the claim that the economic markets are still in the perfectly competitive and self-

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adjusting stage. That is to say, if disturbed it is impelled to restore its original position. It is a world-wide neo-classical dream economy unmarred by the existence of giants and dwarfs, or by domination and dominated, both nationally and internationally. In other words, it is a model totally unfit to analyse the economy of the modern world and its constituent states and its problems.
The concept of the money supply looks straightforward and seems well documented. It is not. Money has a number of functions. Among them that of means of exchange and standard of deferred payment move on the same orbit as the total volume of transactions—the accent, as we shall see, is on total. But this does not exhaust the uses of money; and it rules out one of the most important of its functions as a store of value. In consequence of this difference in the functions and therefore in the velocity or efficiency of money, the assumption that V (velocity) is stable and governed by long-term institutional or traditional factors is untrue. The magnitude can be manipulated and mistakes like the one in the United States of America can however, because of the psychological ambience created by the whole psychological situation, create panic.
To choose such an uncertain and manipulable concept as the main, if not the sole, criterion for monetary policy is folly. Yet that is exactly what has happened. The difficulties do not end there. The main "indicator", M3, does not differentiate between the deposits of individuals and those of business deposits, both of which themselves include convenience and precautionary deposits, and deposits held as liquid (speculative) assets. That is a shift towards financial institutions other than banks and assets other than deposits—for example, building societies or the issue of bank bonds. The identical signals might be offered by our different causes on the central indicator. Nor can one generalise about the relationship between M3 and the borrowing requirement or inflation. A statistical mistake affecting deposits can unleash panic. The results would be comic if they were not so terribly serious.
One of the consequences of this elemental ignorance of the functions of money was catastrophic, which has
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already been mentioned by the noble Lord, Lord Roll of Ipsden. The bank, dominated by the growing fear that the increased volume of money would ipso facto result in inflation, refused to play the classical gold standard game. Ignoring the fact that the rate of exchange is dominated by hot money movements and not by commercial transactions, they refused to buy foreign currency which was offered to them and the pound has shot up to the detriment of our exports and imports. When Mrs. Thatcher appeals to all and sundry to increase productivity (a task of years) she forgets that it would take years and years to offset the consequences for our exports of the rise of the pound from 1·56 dollars to 2·33 dollars. Thus can mistaken faith—which she obviously sincerely holds—ruin the country.
I should like to make one more point which I believe to be supremely important. The present economic policy of Britain, as was explained by the noble Lord, Lord Cockfield, is based on the supposition that no expansion would be possible before the dear money policy has put an end to inflation. This tactic seems to me to be horrific and self-defeating. If stability can only be achieved by stagnation and unemployment, then the reversal of the policy would entail a recrudescence of inflation and would necessitate the re-imposition of dear money with all its consequences. This means that mass unemployment will persist indefinitely, and explains why structural unemployment—that concept which disappeared during and after the war—has come back to plague us in the West ever since Friedman's policies have been adopted—a strange quarter to confirm Marx's theory of the need for an industrial reserve army in a capitalist system.
In my opinion—and I think this is not shared by many—the basic cause of the malaise originates in the distribution of income, the heirarchy of remuneration which does not reflect this altogether revolutionary change in crude bargaining strength, as brought about by full employment and oligopoly. There is here both a legitimate desire for equalisation faced with the economic impossibility of achieving this aim in the short run. The excessive wage claims are a reflection of the highly increased expectations and the inflation of prices is the direct result of

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failure to accommodate this drive as much as possible on the basis of the widest consensus. A new social contract embraces much more than wages restraint. I was delighted to hear the noble Lord, Lord Roll, quote the experience of Austria, Germany and Japan. There the correlation between incomes policies and economic success is so close that it cannot be ignored in the long run.
5.42 p.m.
Lord NUGENT of GUILDFORD: My Lords, I have listened with interest, as I am sure we all have, to the noble Lord, Lord Balogh. I feel that his is a speech which will repay reading afterwards. I am always interested to hear him speaking about the influence he sees the formation of oligopolies has had on the general distortion of the market. I think he has a very valid point.
I should like to congratulate the noble Lord, Lord Lever, on his Motion and on opening the debate so interestingly and authoritatively for us. I have also unqualified thanks to offer him for his remarkable role in settling the steel industry dispute, for which we are all very grateful. I have some slight qualifications on some of the advice that he has given this afternoon—he will not be altogether surprised to hear me say so—on the monetary and economic policy of the Government. Despite the charming and elegant way in which he spoke, I felt it was just a little one-sided for a leading Treasury Minister who had been responsible during the last five years for a large part of our monetary and economic policies.
In particular, I picked up his point of criticism of the present Government for a preoccupation with controlling the public sector borrowing requirement as a "semi-theological" belief, which was one of his more charming expressions, because he thinks in fact that it increases inflation rather than the reverse, with high interest rates. But really, my Lords, in the light of his own Government's record of controlling or not controlling the PSBR which, during his term as a Treasury Minister, doubled the national debt in five years and left us a heritage of annual interest costs running between £9 billion and £10 billion a year, it really seemed to me that this was like Satan rebuking sin.
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We have had only a short run of 12 months. I agree with him that the interest rates are much too high and I hope and pray that they will come down very much lower; but I do not think he is on very sound ground in hitting us over the head with that at this point. The fact is that the Conservative Government are pursuing a policy of monetary control, reduced public spending and reduced taxation—which has not been mentioned at all, though it is a very important aspect of it and I hope it will go very much further—because our people voted for that last May. They had seen the failure of the noble Lord's policies over five years of high taxation, high public spending and high borrowing; and they wanted a change. They thought it was really getting the country nowhere.
My noble friend Lord Thornycroft has already made a humorous comment on the Labour Party conference ten days ago. That gave no alternative to what the present Government are doing. On the one hand we have Mr. Callaghan who is in favour of controlling incomes, and, on the other hand, we have Mr. Benn, who is in favour of controlling everything except incomes. Nor could anybody say at the end of that conference who is going to be the future Leader of the Labour Party. This is a political debate as well as an economic one, and I think I fairly make the point to the noble Lord, Lord Lever, that there is really no alternative valid policy before the country today.
Naturally, the high MLR has been especially attacked, and of course it does great damage in the short run. I entirely agree with a comment made during the most interesting and authoritative speech by the noble Lord, Lord Roll, that had our 1979 budget been rather more severe it might well have saved the emphasis that is now being placed on pure monetary policy. But it is not easy for a Government, when they take over, to get the whole picture right in a few weeks; and they did not make a bad shot at it. The fact is that the high rate of MLR now is only justified in the short run if it helps to check inflation by limiting the growth of monetary supply and—very important, especially for the coming winter—stiffening the private employers' sector in their resolution to resist excessive pay claims.

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The May figures, as the noble Lord from the Liberal Benches rightly said, indicate that restraint is still needed. But I believe there are signs of success and I was very happy to hear the noble Lord, Lord Harris, in his very helpful and valuable supporting speech for the Government, observing this point too.
The fact is that our Government have been in office for only a year. It really is too early, although it is always very stimulating to have comments from experts, to pass judgment on the success or otherwise of the Government's policies. However, I do firmly stand with my noble friend Lord Thorneycroft—and I do not doubt that my noble friend Lord Cock-field will do the same—in saying that this Government are not going to make a U-turn, if for no other reason than that it is about time that a Government did try a new policy. Everything else has been tried, and everything else has failed. So let us, for Heaven's sake! having put our hands to the wheel on this one, see it through and try to get the benefits of it as well as suffering the difficulties.
In the meantime, yes, inflation is very high now (over 20 per cent.) but I was encouraged to see the Financial Times, I think, yesterday forecasting that there was a prospect, with the help of VAT impact running out in the summer, that inflation could be down to 18 per cent. by the turn of the year. I hope that may be so and that it will continue on a downward trend. But the Government are to be sympathised with, in having to accommodate these gigantic increases in oil prices which continue, and which have an influence right throughout the economies of the whole world. Oil prices have already risen two and a half times in the last 18 months. God bless my soul! What a terrible thing to have to accommodate for everybody.
However, there are a few bright spots about in spite of the gloom. Last year, we, as a nation, had a 5 per cent. increase in real incomes. Maybe we could not afford it but we certainly spent it; so that our people as a whole are certainly not suffering all that much at present. Very well, I will not take any credit for it, but I would just say there is not too much suffering yet, and I am glad of that. Regarding the North Sea oil picture, we can rejoice as a nation. It is not a
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product of this Government but at least, as a nation, we can rejoice that this year we became self-sufficient in oil supplies. What a magnificent achievement! Also, the development of the technology there, now largely in British hands, is an enormous credit to our engineers and to the men who work there in conditions of great physical hazard, getting this enormously valuable product. That is something to be proud of.
On sterling strength, naturally every exporter complains about it all the time, but there must be a great many importers who are very thankful that their raw materials are a great deal cheaper. After all, we have to import almost all our raw materials in this country. So there is a bit of a spin-off there, In days gone by, we used to talk about the benefit of the terms of trade, so there is that factor to be set against the exporting difficulty.
Of course, rising unemployment is something that lies with sorrow at the hearts of all of us, but the comments of my noble friend Lord Harris—I regard him as such because we seem to be on the same side—were very much common sense. We must be realistic. We are all trying to do the same thing. We are trying to reduce inflation and to increase productivity, so that we can increase the competitive power of our industry and thus get expansion going, and begin to absorb some of the men and women who are now out of a job. This is a prospect which I believe is possible.
Pay settlements in the private sector this autumn are certainly crucial and they must be made at realistic levels. Some firms are making good profits. We do not hear too much about them, but they are. They will want to reward their workforce by making increased pay awards and, in my judgment, they should. But most firms are struggling with fading profits margins, and excessive pay claims there can put in danger the very existence of the firms and, therefore, the jobs of the work force. It is because of the wide diversity of conditions in the private sector, and the immense number of firms that we are talking about, that, in my judgment, fixed pay policies, however they are worked out, are unworkable. Therefore, it is best for Government to tackle it in that field with a monetary policy or whatever.

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The public sector presents a different problem. There are over 2⅓ million employed directly by central Government. Obviously, at the end of the day, only the Government can decide what their pay increase is to be, so they are solely responsible. Secondly, there are some 2 million people employed in the public corporations. They have their own managements and so on, but, at the end of the day, the Government are standing behind and providing the capital and so on, and they are held ultimately responsible. There is no doubt at all that they are held responsible by the general public. Thirdly, there is local government with another 3 million people and the Government provide the greater part of the money there as well, so that they have a large measure of responsibility.
The record of settlements in the public sector over the past 12 months—and I agree with other noble Lords who have made this comment—has not been a very happy one. It is too high and it is not helping to get inflation to come down. Of course, my noble friend Lord Cockfield can rightly say that there have been some inherited problems. There have been awards which were given by the previous Government, where there were phases to come through and so on, and these have had to be added to the current award. We just have to live with these things. But the Government took on the comparability concept by choice, and I agree with my noble friend Lord Thorneycroft that this is an attempt at the impossible. I really believe that the Government must square their shoulders and bring it to an end.
In sum, in the public sector, for a variety of reasons, the Government's monetary policy has not been fully effective and it is therefore not only had in itself, but is handicapping the private sector at the same time. So I suggest to my noble friend that the time has come to support a monetary policy in the public sector—it is perfectly right and proper to fix monetary limits—by defining guidelines for pay settlements. The broad objective should be to get settlements a few points below the going inflation rate. That is the only way of getting inflation down.
In the public sector, as all of us who have ever taken part in it know, there is a kind of unofficial going rate, whether or
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not you have any fixed incomes policy. Thus the workforce in one service or nationalised industry expects a similar award to that in a comparable service or nationalised industry, not necessarily identical but somehow comparable.
The trade union officials who negotiate on behalf of the various work forces are often negotiating in more than one field at the same time; perhaps they are negotiating with two or three different lots of employers. In any event, they all meet regularly within the TUC to co-ordinate their negotiating strategies against the various employers, whether nationalised industries or national services, and behind all those various employers, eventually, stand the Government.
Seen in this perspective, it is obvious that the employers in the public sector need some common guidelines and a co-ordinating machinery, if they are to avoid making settlements individually which can then be used by skilful negotiators to jack up successive negotiations; and the trade union officials are very skilful negotiators. I do not say that this is happening, but it looks very much as if it is.
In applying these guidelines, I suggest a refinement that the Government—if they accept my advice, which they probably will not—should differentiate between nationalised industries in general and national utilities, such as electricity, gas and water, which are virtual monopolies on which life itself depends. I recommend marginally higher awards in these national utilities, first, to recognise their basic importance to life, and, secondly, to encourage the implication that the nation expects the workforce to keep them going, even at times of industrial disputes.
My experience in the water industry, where I set up the industrial relations structure and operated it as spokesman for the employers' side, showed me that the workforce and the trade union spokesmen were moved by a very strong sense of public service in providing the water services for our people. Of course, we have some militants about, especially in the North-West, and some problems on the dirty water side, but they are not typical. The majority put the public interest first. The record of industrial relations in electricity and gas is also pretty good.

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It seems to me possible—this is perhaps going a little wide of the noble Lord's Motion today, but I make the point because it is worth making—to begin to work towards a convention of special stability in these national utilities. It is certainly highly desirable in the interests of the nation, and this opening gesture would be one of good faith which all constructive work has to start with. The remaining public services and nationalised industries would come within the guidelines, and no doubt one would have to make some special arrangements for coal—one always does.
Even the establishment of Government guidelines in the public sector would not be a prescription for perpetual harmony and happiness. Inevitably, there will be challenges and conflicts, but I believe that they would strengthen the Government's monetary policy and give greater certainty in reducing inflation, on which our future so completely depends.
Lord ROCHESTER: My Lords, before the noble Lord sits down, may I say that I was most interested in his comments about pay settlements in the public sector —more particularly in the public services—and we must all hope that if guidelines such as those he has outlined are introduced they will indeed work. But has he any ideas which he would like to put before us as to how they might be enforced, should that regrettably become necessary in the face of union opposition in, for example, the utilities to which he referred?
Lord NUGENT of GUILDFORD: My Lords, of course we have all had experience of industrial relations troubles and strikes. The employers concerned have to do the best they can to deal with the challenge and the Government behind them have to do the same. You may have an awkward, uncomfortable and even dangerous situation. But my own advice is that once the Government have made up their mind they have to stand there. After all, these are the major problems that we live with. But I believe that guidelines would be a help in this picture, rather than what we have had over the last 12 months, where there has been a kind of haze with not very happy results. We have to try my suggestion and I hope that my noble friend will consider it.
6 p.m.
Lord HATCH of LUSBY: My Lords, the noble Lord, Lord Nugent, will forgive me if I do not follow the point he has been making in his speech, except in one respect. He said at one stage that everything had been tried except monetarism. This I would challenge, and the burden of my remarks is to suggest an alternative which has not been tried by Governments of either political party but which seems to me, and I believe increasingly seems to many, particularly of the younger generation in the world, to be an obvious impartial solution to our economic problems.
I was tempted to start my speech by asserting categorically that future historians will recognise this age in which we are living as a watershed in human history. That I do not so assert is because I was trained as an historian, and, as with my noble friend Lord Lever, historians, like economists, are taught a certain degree of humility. I do not know whether this is a watershed. I do believe, however, that there are sufficient indicators in every sphere of world activity today to suggest to the Government of this country that they should at least take into consideration the possibility that we are entering a new age, sometimes called the post-industrial age, which is making an even deeper impression upon human beings than did the industrial revolution in the last century.
If the Government are not prepared to recognise the changing dimensions within which they are working I should like the Minister who is replying to enlighten the House as to how the Government see this present age and the position of Britain within it, because this is something we have not been told and are not being told. For example, is it the objective of the Government to restore the status quo of the past generation, of the past 100 years, with Britain at the centre of Western Europe, dominating the trade of the world and the industrial production of the world? Is the objective of the Government to restore our past glories in this way, or do they see some new role for this country? If so, what is that new role and how is it going to be created, so far as the subject of the debate this afternoon is concerned, in economic terms?
When the Government and their supporters, like the noble Lord, Lord

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Thorneycroft, say that the Government are going to keep straight on, that there will be no U-turn and that the Government are going to continue with their present policies, that seems to me in historical terms to be an attempt to walk backwards out of that watershed, and history never allows either a person or a country to perform that feat.
Let me illustrate to the House the catastrophic change which has taken place in the position of this country over the past century. At the end of the last century, in 1899, this country accounted for 33 per cent. of the manufactured exports of the world. The latest figure, in 1978, was 9 per cent. That is some measure of the change which has taken place.
The question I should like to ask is: Where do we go from here? I do not believe that we can restore the past. I do not believe we should try to restore the past, but even if we did I am certain that we should fail. But we cannot be content with the present. The Motion which my noble friend Lord Lever has put down this afternoon is designed to explore the policies and intentions of the Government from the present on, and that is what I wish to do in the suggestions I would like to put before noble Lords.
First of all, I think it is necessary to get rid of some myths. I fully admit that these myths are shared by many members of the Labour movement, particularly in the trade union movement, as well as by most members of the Conservative Party. Indeed, they are myths which are very widespread in this country. Some of us were trying to destroy them when we were stopped by the dissolution or the absorption of the Ministry of Overseas Development 12 months ago. The first is that it is the people, the countries and the industries of the Third World that are threatening British industry and its prosperity. Although the Government have wound up the Development Education Committee and Government support for development education in this country, I hope they will still recognise their responsibility to inform the country—a responsibility which I fully agree that we on these Benches share—of the true facts and undermine the mythology which has spread so widely.
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It is not the Third World or Third World industries which are threatening the industry of this country. Half the manufactured imports into this country come from the EEC—a very large increase in percentage since we entered the Community. Let us go into even greater detail, because there are certain sectors of our industrial life where many people believe jobs are threatened and are being lost as a result of the imports coming from the Third World countries. In particular, let us take the example of textiles, which I think is fairly generally assumed to be the most endangered industry. In 1966, 66 per cent. of our imported textiles came from the developed world and 33 per cent. from the developing world. In 1975, 81 per cent. came from the developed world. Over that period of less than 10 years the volume of imported textiles from the developing world had almost halved as a percentage of our textile imports.
Let me go further. It is often believed that our trade with the Third World is based upon charity and the warmheartedness of the British people, but £10 billion-worth of exports to the developing world, to the less developed countries, which is round about the present annual figure, provide over 1 million jobs for British people in this country. Moreover Moreover, whereas the British nation is importing only 10 per cent. of manufactured imports from the Third World, 28 per cent. of our exports go to the Third World. As a consequence, our trade with Third World countries, with the developing countries, with the poor peoples of the world, brings in for us an annual surplus of over £6 billion.
I deliberately set this picture in order to try to destroy these myths—and again I express the hope that the Government will support us in doing so—because it is my contention that it is human folly of the most extreme kind to be satisfied with a world in which at least one half of humankind is at starvation level whereas in the industrialised world there are, in Western Europe alone, 18 million unemployed and empty factories. I believe that there will be complete unanimity in the House when I say that this is the extreme of human folly.
My suggestion is that at least one of the principal factors in British economic

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policy from now on, and into the future, should be to devise and discover the means of bridging this gap so that our workers, our industrial capacity and our technological expertise can be used to undermine that massive poverty in the Third World, for our mutual benefit. By raising the standard of living and the purchasing power of a market which, in the Government's terms, consists of one half of mankind, there is the opportunity to restore not our past imperial glories but the ordinary, decent prosperity of the British people.
But, when we look at the Government's policy, what do we find? We find financial cuts, high interest rates and sterling at such a figure that it is quite clearly undermining the power of our exporters to compete in overseas markets, as the noble Lord, Lord Roll of Ipsden, pointed out in the case of books. And one could extend that example to many other products.
What is needed in this situation, if we are to change the desperately dangerous prospects for the world in which we live and step across this watershed, is, first, a reconstruction of our international institutions so that the heavy burden of debt which is crippling the purchasing power of so many of the developing countries is managed and organised in such a way that the developing countries have a much greater voice in the determination of the economic affairs of the world. What is needed, secondly, is a reconstruction of our national industrial life, which I know faces many, many difficulties and which every trade unionist will agree produces prejudices, fears, bias and often resistance.
I said earlier that neither party had really addressed itself to this issue. I believe that the last Labour Government were beginning to do so. In the last year of the Labour Government, the aid programme was pledged to increase by 6 per cent. per year—the fastest increase in public expenditure of any sector under the control of the Government.
What have this Government done? According to the inevitable consequences of their monetarist policy, they immediately cut £50 million off the aid budget and then, in their public expenditure projections, reduced that budget
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by 14 per cent. I believe that this is destroying our own self-interest. It is contradictory to the stated objectives of the Government. I am told by the Overseas Development Administration—I have not had an opportunity to check this and it seems to me to be a somewhat inflated figure—that, in 1978, orders by British industry, as a result of overseas aid from the Labour Government, reached the figure of £415 million. Certainly our aid budget has been designed for some years now to be associated with the health and development of British industry. Whatever the figure may be, there is no doubt that that aid budget has encouraged British industry and provided many jobs for British people, the latest figure which I have being 50,000 jobs a year.
I know that it is difficult for any Government to look at what is, very largely, a new era in our economic policy in terms of our economic status in the world and our economic direction in the world, but I suggest that there are three things which the Government can do. The first is to look again at that aid budget in the light of our industrial needs. I would suggest, concretely, that there should be a joint examination by the Overseas Development Administration and the Department of Industry to find out how these two departments of state can intermesh their policies in such a way as to achieve the aims that I have been outlining: the mutual benefit of this country and of that half of the world which is at starvation level.
Secondly, I would suggest that the Government must pay serious attention to and must employ some of its best economic brains in looking at the chaos in the commodity markets of the world which damages us and damages the commodity producers. One only has to think of, for example, copper in Zambia, and if one looks at the graph of the price of copper one finds that it is like a Blackpool helter-skelter. Just a couple of months ago it was standing at over £1,200 a tonne but now it is in the region of £800.
Thirdly, I believe that the Government should both guide and give resources to the research and development sector of our industry in a way in which at the moment they are refusing to do, again on the excuse of the necessity to cut public expenditure. We are the only major industrial nation in the world that has a

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declining budget for research and development. That research and development should be turned into the immediate but long-term prospect of providing in this country the kind of goods that can be sold to the people of what is today's closed market. I was sad to see that only on 9th May the Minister of State at the Department of Industry, the noble Viscount, Lord Trenchard, publicly refused to provide additional state aid when asked to do so for research and development in our industrial sector.
I hope that when the Minister answers this debate I can help him in this way, by suggesting to him that he forswears the bromides which I have been given previously when I have spoken on this kind of subject. It is no answer to the case I have made to say that we cannot afford it, because the case I have made is a case for increasing our wealth, not for expenditure as such. It is no answer to the case I have made to say that we are hoping to do these things when our economic prospects improve, because the point of my case is that this is one of the ways of improving our economic prospects. Nor must the Minister tell me, as he has done before, that I am suggesting a panacea for all our ills. I am not. I am simply saying that here is one crucial factor in our generation of human history which no Government have seriously tackled yet and which I believe we were just beginning to tackle at the end of the last Labour Government.
I should like the Minister to look at this subject not on behalf of any political ideology but as a matter of common sense and—if he can show it—of moral sense, too. Here I believe our moral responsibility and our self-interest coincide. I am not suggesting that this is the answer to all our problems. I am suggesting and urging, on this Government and indeed on my own party, and on people of no party, that the relation of British industry and British industrial recovery to the mass of human beings who at present cannot afford our goods should become a central factor in the economic policy of Britain, whoever may be looking for the road to recovery.
I should like to conclude by pointing out to noble Lords opposite that I am not alone in making this suggestion. I
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do not know whether noble Lords opposite still consider that Mr. Edward Heath is one of their colleagues, but only last night Mr. Heath was making a public appeal for a worldwide effort to promote the production and purchasing power of the developing countries. That is the basis of the proposal that I have put before the House as an alternative to the hurried monetarist policies that at the moment appear to dominate the thinking of the Government. I hope that Members, from whatever party they may come, will at least consider that here is a chance, a prospect, of combining the moral responsibility that we have for the health of the future of the world with the self-interest of the British people, in opening a new industrial chapter in the history of this country.
6.27 p.m.
Lord BRUCE of DONINGTON: My Lords, my noble friend Lord Hatch of Lusby will perhaps forgive me if I do not follow the very broad canvas relating to our policies towards the underdeveloped countries which he has put before us this evening. They are undoubtedly of significant effect on the whole future of our country and I hope that your Lordships are very largely in agreement with the general sentiments and policies that he put forward. My purpose in your Lordships' House today is to speak to the Motion so ably moved by my noble friend Lord Lever of Manchester. I think your Lordships will agree that he approached the whole matter in a very constructive spirit, in a non-partisan spirit, as indeed befits the very serious situation that he was discussing, namely, the damaging effect of Her Majesty's Government's present monetary policies on trade, investment and employment.
We on this side of the House I feel should wish to associate ourselves almost entirely with the broad thesis that he himself put forward, and all I can do, if your Lordships will permit me, is to add some factual justification for the contentions that were advanced by him. I thought at one time that the noble Lord, Lord Thorneycroft, was so enthusiastic about the speech of my noble friend that he could hardly contain his political affection, but, as is customary with the noble Lord, he very speedily avoided the ground that was chosen by my noble friend and de-

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parted on a ground totally different from the item on the Order Paper and perhaps more suitable to the Conservative Party's annual conference.
I want to discuss first the conditions that have been created by the present rate of exchange, which were dealt with very scientifically by my noble friend Lord Lever and upon which my noble friends Lord Kaldor and Lord Balogh also passed their own constructive and informed views. There can be no doubt—and here I do not speak in any narrow party political sense at all; in fact, I think I speak for very wide sections of British industry, British professions, for quite a significant section of the Conservative Party itself, both in this House and in another place, as well as very wide sections in the Liberal Party and my own party—that the present exchange rate problem is facing British industry with very grave difficulties indeed and that there is no point in minimising them. They exist.
One firm of stockbrokers, Sheppards and Chase, hold the view that the pound is at the moment over-valued by some 44 per cent. I would not wish to subscribe to that view, and I certainly would not seek to obtain from Her Majesty's Government any expression of their view as to the validity of that figure. But quite clearly it is over-valued. The number of difficulties and the number of liquidations that are taking place at the present time in manufacturing industry in this country bear eloquent testimony to the fact. I have all the quotations from the speeches of chairmen, extracts from the accounts, and everything else which illustrates that they are having great difficulties indeed because of the very high, and unjustifiably high, value of the pound on the foreign exchanges at the present time. Of that there can be no doubt. Indeed, the noble Lord, Lord Roll, in what I thought was a most interesting and instructive speech, gave a further example of that. I could add another one. Royal Stafford china is just going out of business, not only because of the outrageously high exchange rates, from its point of view, but because it cannot meet competition from Taiwan and South Korea, in which there have been substantial investments of British capital and United States capital over the last two or three years due entirely to the very low labour rates that are paid in those
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countries. I trust that when the noble Lord comes to reply he will not challenge the views expressed by the Confederation of British Industry, as well as by other leading captains of industry, leading industrialists or industrialists, whatever their grade, throughout the country on this matter.
It is sometimes thought that, although the high exchange rate makes it very difficult for our exports, there are certainly countervailing effects so far as imports are concerned. Indeed, the noble Lord, Lord Nugent, seemed to think that these were of some significance. It is, of course, quite true on the face of it that, although we have an exchange rate that inhibits our export competitiveness, we would expect to get a corresponding advantage from imports. It is not so, because only 13 per cent. of our manufactured imports are raw materials. That is the proportion. The total raw materials we import into this country represent a figure which amounts to 13 per cent. only of our manufacturing imports.
What is happening, of course, since the rate of exchange affects the whole rate of our imports into this country, is that we are getting flooded by manufactured imports not only from Europe but from other manufacturing countries in the world on terms with which it is becoming progressively more difficult for even the most efficient of British manufacturers to compete. Once again Sheppards and Chase, the stockbrokers, say this. The noble Lord may challenge them if he wishes when he replies, but this at any rate is one view by quite a reputable firm of stockbrokers, that compared with 1978 the pound will buy 17 per cent. more French goods, 31 per cent. more German goods, and 44 per cent. more Japanese goods. This means that the already considerable degree of import penetration which was in existence a long time before then, before 1978, has been further accentuated.
If there is any doubt about the degree of extra import penetration following the monetary policies of the present Government, they ought to refer to the Answer to the Question that was put in another place on 23rd May of this year where the degree of extra import penetration covering the year 1979 is set out. Chemicals are another 36 per cent.; electrical engineering

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another 37 per cent.; clothing and footwear another 67 per cent.; bricks, pottery and glass 43 per cent.; and I could go on. These are the effects of an exchange rate which is not realistically fixed. As the noble Lord, Lord Lever, has said, it is one of the matters within the competence of the Government to be able to fix the exchange rate.
What is holding the exchange rate up? It was at one time thought, and indeed the Government until recently thought and professed, that it was due undoubtedly to our oil resources here: that the main reason was the underlying strength which the possession of vast oil resources or potential oil resources gave to this country; and, that therefore there was something quite natural about the present rate of exchange running at some 2·33 dollars to the pound. But this has now proved not to be so because, as one noble Lord pointed out, when the Prime Minister hinted—and only had to hint—that the recovery of some of our net contributions in the EEC was likely to be applied towards the proposals which could lead to the easing of interest rates (and there was the merest hint of that), as has been pointed out the rate of exchange dropped by five points from 3.30 on the afternoon of 3rd June.
This was made very clear in the observations by the Deputy Director-General of the CBI in his letter to The Times of 5th June. He says this:
"Yesterday's behaviour of the exchange rate in response to the slightest of hints from the Prime Minister that interest rates may be cut illustrates just how much the pound is being propped up by the present very high level of interest rates, a level which is increasingly intolerable for British manufacturing industry".
He continued by saying:
"If the Government would accept that it is time interest rates were reduced it would be helping the sector which has borne the brunt of the necessary adjusting process".
This was reinforced by leaders in The Times that appeared at seven day intervals. The first one delicately hinted that it was time the Government touched the tiller, and when eight days later there had been no result from The Times editorial, it then came out for a direct cut in interest rates. Indeed, the case for a cut in interest rates is quite unanswerable and the Government should take steps to do something about it, as the noble Lord, Lord
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Lever, has said, and other noble Lords have reinforced it.
The high interest rates have meant much lower investment; according to the Financial Times of 30th May it was likely to be 10 per cent. lower during the current year and The Times of the same day put it at 12 per cent. As long as interest rates are so high there cannot possibly be the increased investment which is so urgently required in manufacturing industry in this country at the present time and which we on this side of the House always understood was the whole purpose of the reduction of the public sector borrowing requirement—to provide the funds in order to enable it to be done.
The other thing that has happened has been a decrease in liquidity. These are not notions that are in my head; they came out of the Financial Times as recently as 30th May. That paper said that the volume of capital investment is expected to fall by about 10 per cent. this year. Then, on 6th June, referring to company liquidity, it says:
"The liquidity position of companies deteriorated further in the first three months of this year to a level only slightly better than the worst position during the intense squeeze of 1974–5".
So these are no imaginings on the part of those of us who sit on this side of the House.
The next consequences of high interest rates are these. There must be, particularly in the small and medium sized businesses, but with the large firms not excepted, less manufacturing for stock, and this is already reflected in the figures. Less manufacturing for stock means a number of things. It first of all means that there is going to be more unemployment. The second thing is that there is going to be less productivity. There will be less productivity because the production chain, the continuity of production, begins to beocme progressively ruptured, not only inside firms themselves, where there is a breakup of production teams that habitually work together and achieve a rhythm of production, but also in the whole production chain of industry, bearing in mind that the outputs of one firm are very often the inputs of another and so on all the way up to the final consumer. So there are bound to be higher manufacturing costs. This is hardly consistent with the Government's aim to produce a reduction in inflation.

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Therefore it is my considered view, and it will be reinforced by many others, some of whom sit on that side of the House and on that side of the House in another place, that there ought to be an immediate cut in the minimum lending rate of some two per cent.; and that ought to be done not next week, not the week after, not the month after, but tomorrow, so that we can see some really decisive action to unscramble the damage that has already been done to this country.
The Government's answer will be the same, of course, and we very often hear it. Indeed, Lord Thorneycroft in part of his speech I thought expressed a little dismay. He said, "Well, what are the alternatives?"; and these sentiments seem to be often echoed by Sir Keith Joseph in another place. The noble Lord, Lord Cockfield, fortunately is so completely certain of himself that he has no doubt. So far as he is concerned the whole matter is extremely simple: the monetary theory is absolutely correct, it has to be persisted with and that is the end of the matter. Other people who have had some experience of industry itself, as distinct from experience within the Price Commission and as a special adviser to the former Chancellor of the Exchequer and later as a Member of this House, may have other views on the subject. But I thought Lord Thorneycroft did express some dismay.
It should be borne in mind—and the point was made by the noble Lord, Lord Lever—that the interest rate is at the moment, aside from the exchange rate control itself, the only other monetary policy instrument the Government have in their hands. That point, if I may say so, was brought out by the remarks that fell from the lips of the noble Lord, Lord Roll of Ipsden. The noble Lord, Lord Cockfield, will of course say that such a step of reducing interest rates would increase inflation. Well, when he came in it was 10·3 per cent. and it is now 23 per cent. How long do we have to wait for the promised land? Minimum lending rate has been 14 per cent. for over six months and 17 per cent, for over three months. We are told by Sir Geoffrey Howe, in a speech to the Press Association on 28th May:
"Inflation will start to move down after July".
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Well, when is "after July"? Does that mean August, September, October, or does it mean 1981, 1982, 1983? Any time after July next would be very welcome.
I know in advance that the noble Lord, Lord Cockfield, in common with his noble friend Lord Nugent, will proceed to say, as usual, that of course it was all the fault of the previous Government, the legacy the present Government had and so on. This is now beginning to become a little thin. He will have to adduce something rather better in defence of his policies than blaming it on the previous Administration, because all the factors were known before they took office. They, together with other political parties, were given £665,000 out of State funds for research. The Prime Minister of the day, Mr. Callaghan, offered to lay open the whole books to Mrs. Thatcher prior to the election, which offer she declined.
Lord SANDYS: My Lords, I think the noble Lord, Lord Bruce of Donington, should refer in parliamentary language to those Members of another place.
Lord BRUCE of DONINGTON: My Lords, I must apologise to the House if I in any way infringed the usual rules, on which I know the noble Lord is extremely expert and which I can assure him I will seek to follow. I am greatly obliged for his correction.
The Government are following these policies, and Lord Cockfield when he comes to reply will doubtless seek to re-enunciate their purity. May I suggest that he takes other advice? In particular, would he pay attention to his former chief, Lord Barber—who, as your Lordships know, is chairman of the Standard Chartered Bank—who said recently in a statement:
"The danger, in a severely competitive world environment, of the erosion of productive capacity in an open economy such as Britain's is one for which the theory of monetarism has still to suggest wholly convincing remedies or palliatives".
I sincerely hope that the noble Lord will take that view into account.
All, however, is not gloom, because, of course, there are a number of sections of the community here in the United Kingdom that have benefited from the policies of the present Government, and I feel that they ought to be given some credit for that. In the first place, the property

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people have benefited, as will be illustrated—and I hope noted by Members of your Lordships' House—by the recent issue of shares of the Land Securities Investment Trust which took place on 5th June. They asked shareholders for £108 million and the Guardian commented the next day:
"It is also the largest call for cash through the stock market by any property company since the property crash of 1973–74, and reflects the increasingly confident mood of property developers since the Conservatives returned to power … In effect, the company is asking its shareholders to gamble on the assumption that interest rates are about to fall and its own shares will climb steadily in value in a buoyant equities market".
But they are not the only people to benefit. The banks have, of course, benefited considerably as indeed their windfall profits undoubtedly testify, and the right honourable Lady the Prime Minister said somewhat whimsically in another place that the banks always seemed to prosper when industry was going through a had time. The oil companies have benefited. The multinationals have benefited because they arc always able to make alternative financial arrangements. The farmers have benefited from the policies of the party opposite because although the party opposite is so fervently committed to free enterprise and free competition it is most careful, in so far as the farmers are concerned, to protect them completely from the rigours of free competition. It is a complete interventionist policy.
Lord SANDYS: My Lords, I think that that is a very offensive remark to Members on this side of your Lordships' House.
I beg to move that Standing Order No. 29 be read aloud.
Moved, That Standing Order No. 29 be read aloud.—(Lord Sandys.)
On Question, Motion agreed to.
Thereupon, the Clerk at the Table read the Standing Order, as follows:
"To prevent misunderstanding, and for avoiding of offensive speeches, when matters are debating, either in the House or at Committees, it is for honour sake thought fit, and so ordered, That all personal, sharp, or taxing speeches be forborn, and whosoever answereth another man's speech shall apply his answer to the matter without wrong to the person: and as nothing offensive is to be spoken, so nothing is to be ill
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taken, if the party that speaks it shall presently make a fair exposition or clear denial of the words that might bear any ill construction; and if any offence be given in that kind, as the House itself will be very sensible thereof, so it will sharply censure the offender, and give the party offended a fit reparation and a full satisfaction".
Lord DONALDSON of KINGS-BRIDGE: My Lords, with the leave of the House I have a very strong objection to this having been read in relation to a forceful speech, but I do not think anyone could say that it was offensive in any way. I wish to reject the suggestion absolutely on behalf of everybody on this side of the House.
Lord SANDYS: My Lords, I think that much of the speech was delivered in a very offensive manner and I think that there was full justification in seeking for Standing Orders to be read aloud.
Baroness GAITSKELL: My Lords, may I support my noble friend Lord Donaldson of Kingsbridge on this matter? I truly believe that there was absolutely no offensive attitude on the part of my noble friend. He happens to have a very loud voice and sometimes that is misinterpreted—I myself find it a bit hard to take sometimes. He really ought to lower his voice a little, but he said nothing which was offensive—nothing at all—and I am shocked that noble Lords opposite should make this suggestion. I am deeply shocked.
Lord DONALDSON of KINGS-BRIDGE: May I suggest that the debate be resumed?
Lord BRUCE of DONINGTON: My Lords, I am sorry that I should have got some noble Lords opposite—certainly not all noble Lords—slightly on the raw. Sitting where we sit on this side of the House I can assure the noble Lord who moved the Motion that we have on many occasions been addressed by the Front Bench opposite in terms far more forceful than those which I have ventured to address to your Lordships this afternoon. But lest by peradventure I have offended any individual—and I certainly have named none—in anything that I have said, then, of course, I would willingly withdraw any kind of personal imputation that could even remotely be inferred by anybody who might have listened to what I said

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or who even might have inadvertently misheard it altogether.
I was giving credit to the party opposite for having, as a result of their policies, benefited certain sections of the country. I do not see why they should particularly take that amiss. They ought to be proud of it. I repeat: they have benefited property owners, and they are very pleased. They have benefited the banks, the oil companies, the multinationals, and I repeat once again—in dulcet tones—the farmers. I said, when I mentioned the term "farmers" that they were covered by the CAP arrangements, which are of a strictly interventionist character and which are completely outside the normal philosophy of the Conservative Party opposite, which believes entirely in free enterprise. We observe that when it comes to the farmers these are cast overboard.
Who is being clobbered by the existing monetary policies? First, the small, medium and large firms, excluding multinationals, that operate in the manufacturing and service sectors of the United Kingdom. They have been clobbered and they are the people to whom the party opposite normally appeals when it comes to election time. They always think that the small firms in particular can be relied on to support them, but they have been clobbered this time. The Conservative Party may have defended the shires, but it has certainly clobbered manufacturing industry as, indeed, industry well knows.
There are a number of solutions to our present problems that have been suggested. As the noble Viscount, Lord Trenchard, has very often said when speaking from the other side, there is, of course, no universal panacea to which we can turn to remedy the policies that are being carried out by the Government. I would, however, commend to the attention of the Government the very sensible suggestions that were made by the chief of the Confederation of British Industry, as reported in The Times of 29th May. It says:
"He suggested that the Government could help towards more sensible pay bargaining by setting up a national economic forum.
'We in the CBI think such a forum would play a vital educational role in bridging the gulf
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between the bargaining table and what the economy can stand. The forum would not set pay norms'.".
I think that that is a small step, but a step so that these matters may be discussed quite openly, so that the Press may adequately report them and so that the people of the country as a whole can understand the various factors that go towards setting incomes at various levels. This should be done. Very often the party opposite says that income policies have been tried before. True enough, they have. Maybe they have not been tried comprehensively enough. Maybe we have gone the wrong way towards setting up the consultations. But of one thing I think most noble Lords are convinced, particularly after their experiences with the monetary policy over the last two months—and this view I know is shared by many who sit on the Benches opposite—that an incomes policy will have to be adopted sometime. I would entirely agree with the observations made by the noble Lord, Lord Banks, upon that.
Therefore, may I hope that the Government will feel constrained, particularly in the light of the observations that have been made by the CBI, by other leading academics and those with very wide industrial experience, to abandon their present dogmatic stance and adopt a much more reasonable attitude towards all these matters than they have so far displayed?
7.1 p.m.
The MINISTER of STATE, TREASURY (Lord Cockfield): My Lords, perhaps I might be forgiven if I bring the debate back to the subject matter of the Motion placed upon the Order Paper by the noble Lord, Lord Lever of Manchester, which relates to the Government's monetary policy. I notice that in his maiden speech, which I greatly regret to say that I missed because I was out of the country at the time, the noble Lord, Lord Lever, said:
"I claim no expertise in this area".—[Official Report, 7/11/79; col. 886.]
He repeated the disclaimer this afternoon. Nevertheless, we listen to what he has to say not only with interest but with respect because he is a man of very great experience in both public and private affairs.
His speech was, indeed, an extremely able one because he succeeded in convinc-

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ing at one and the same time my noble friend Lord Thorneycroft, that he was "a reluctant monetarist" and his noble friend Lord Kaldor that he was an opponent of monetarism. If he will forgive my saying so, the noble Lord, Lord Bruce of Donington, said that he entirely agreed with every word that the noble Lord, Lord Lever, said. Therefore, we do not know on which side of the fence the noble Lord, Lord Bruce of Donington, thinks that the noble Lord, Lord Lever, stands.
From time out of memory, the world has periodically been plagued with inflation. In ancient and medieval times, of course, kings and emperors debased the currency and prices went up; the great gold discoveries of the 15th century, the 19th century and the 20th century all resulted in bouts of inflation. But since 1919 we have suffered from inflation of a rather different kind. This is inflation which fundamentally has been due to the creation of money by Governments and by the banking system.
The problem has been that progressively the situation has become worse. In fact the 1960s—and I am talking about the industrial world as a whole—were worse than the 1950s, and the 1970s were worse than the 1960s. Because of this we went through a period in the 1970s when we tried to live with inflation, when indexation became the fashionable approach. In this country we saw it with the indexation of pensions and social security benefits, with the indexation of tax thresholds and so on. We find the same idea resurfacing again in the debate today with the suggestion of indexation of the rate of interest payable on bonds. Increasingly Governments everywhere have come to accept the view that the social, political and economic damage caused by inflation is so great that we must try to cure the inflation itself.
I suspect from what the noble Lord, Lord Lever, was saying—and I sensed the same sentiments elsewhere—that he felt that we ought to be living with a modest rate of inflation. From my own contacts with him at the Treasury, I certainly know that that, indeed, was the view held by Keynes, and it was most certainly the view held by Hugh Dalton, who said it publicly on more than one occasion. Nevertheless, however, seduc-
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tive such siren voices may be, the simple truth is that that option is no longer open to us; that the rate of inflation has become such, and that it has become so endemic, that unless we find an answer to it, it is likely ultimately to destroy us and to destroy the fabric of both our society and our economy.
Basically there are two ways in which one can approach a problem of this kind. One can say that it is all very complex, that it is all very difficult; that we see rising prices, so let us therefore tackle that; that we see excessive pay settlements, so let us therefore tackle that; that we see high rates of interest, so let us tackle that, and so on. This, I rather gather, is the approach of the noble Lord, Lord Lever, and, if I may say so, also of the noble Lord, Lord Banks.
Alternatively, one can say, "Let us try to find out why this has happened; let us diagnose the causes, and let us tackle those causes at the root." This, basically, is the Government's approach. The noble Lord, Lord Banks, illustrated his argument by an anecdote based on medical experience, or imagined medical experience, but I think that it is much more valuable in this regard to look at what, in fact, did happen in the field of medicine.
For centuries the physicians treated the external manifestations of disease—the fever, the choler and the palsy. Some patients survived, others succumbed, as often as not from the attentions of the physicians as from the malady itself. Perhaps I may be forgiven for quoting from Shakespeare the words of King Richard II:
"Let's purge this choler without letting blood".
Those words, one might be forgiven for saying, could have been spoken of many of the speeches that we have heard from many on the Benches opposite. I hope that the noble Lord, Lord Kaldor, did not think that by quoting Shakespeare I was being in any way critical of him.
Lord KALDOR: My Lords, will the Minister not consider that to regard the money supply as the cause and not the consequence of inflation is really analogous to treating the symptoms and not the causes of a disease?
Lord COCKFIELD: My Lords, the noble Lord, Lord Kaldor, is, of course,

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committing the fallacy that he always commits; namely, confusing cause with effect. If I may continue what I was saying with reference to the noble Lord, Lord Banks, it is only in comparatively recent years, with better knowledge and understanding both of the body itself and of the nature of the ailments from which it suffers, that effective treatment has become possible. The same is also true in the field of the economy. We need to know and to understand what causes inflation if we are to treat it successfully. We need to direct the remedy to the causes and not to the symptoms.
There can be no doubt, based on both theory and practical experience, that a growth in the money supply is followed after a period of time by a rise in the rate of inflation: and equally, and more hopefully, that a fall in the rate of growth of money supply is also followed in due time by a fall in the rate of inflation. If one can express any disappointment with the speech of the noble Lord, Lord Lever, it is precisely on the point made by my noble friend Lord Thorneycroft in so telling a speech: namely, that the noble Lord, Lord Lever, glossed over rather quickly the experience of the Labour Government. This is not because on this occasion I wish to be critical of the Labour Government, but merely because it offered us a great opportunity of learning from experience, and it is only if we are prepared to learn from experience that we have hope of making progress.
One thing that the history of that Government surely illustrated was that when the drastic measures prescribed in part at any rate by the International Monetary Fund were applied it resulted in a fall in the rate of inflation; and when those policies were reversed in 1977 and 1978 it resulted in an upsurge in the rate of inflation, and from that we are still suffering. It is therefore on the control of the money supply that our policy is primarily based. This is why, like our predecessors, we have set target ranges for the growth in the money supply. And this is why, in contrast with our predecessors, we are determined to keep the money supply within the target range. This is why, over a period of years, we propose progressively reducing the permitted rate of increase in the money supply. And our plans and our determination are both demonstrated in the
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medium-term financial strategy which we have published in this year's Financial Statement.
But for ordinary people the money supply is a somewhat esoteric thing: one cannot see it: it is not always easy to define or even to pin down. It is not surprising, therefore, that people tend to look for an explanation in the things they can see and identify such as excessive wage claims, excessive Government expenditure, high interest rates, and so on. It is necessary therefore to explain just how things fit into the picture. They are, of course, all associated with the inflationary process, but this is quite different from saying that they are the cause. They may make it more difficult to control inflation: they may delay the cure; or make it more painful; but this again does not mean that they are the cause. If we were to divert out attention to the cure of these symptoms we should be following a false trail and jeopardise our chance of curing the disease itself.
Let me start with the rate of interest, both because it was raised of course by the noble Lord, Lord Lever, in his speech and because it was raised by a number of noble Lords, including Lord Roll of Ipsden and Lord Bruce of Donington, in subsequent contributions. Of course, in an abstract sense rates of interest are too high: of course we would all like to see lower rates of interest. But it is important to understand just why rates of interest are as high as they are, and what are the circumstances in which they can safely be allowed to fall.
As long as the public sector borrowing requirement remains as high as it is, the Government needs to raise money by substantial sales of gilt-edged securities. In order to sell the quantities required rates of interest have to be at a level which is attractive to buyers. This, indeed, is also the answer to the point that the noble Lord, Lord Lever, raised as to why gilt edged securities are still being issued with long, or comparatively long, dates of redemption. The reason is that if something is to be sold it must be something that the buyer wishes to buy. A large part of the demand for gilt-edged securities comes from the institutions, and the institutions want long-dated securities because their liabilities tend to be long-dated also, and they wish to match the two.

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If we were to try to sell short-dated securities only, the effect inevitably would be to force up short-term interest rates to even higher levels than they are at present. Unless we can sell sufficient gilt-edged securities, the only alternative way of financing the borrowing requirement is through the banking system. This would increase the money supply and thus lead ultimately to a further bout of inflation so that our final state would be worse than our first.
There is another element which contributes to keeping interest rates at the present level.
Lord LEVER of MANCHESTER: My Lords, before the noble Lord leaves that point, I am sure that he would wish to answer the question I directed to him, and not one which he directs at himself. The question I asked him was not why long-dated stock was issued but why, if the Government believe that their policies will inevitably reduce inflation, long stock is issued bearing a coupon rate which will give a quite ludicrous return in real terms if the Government's convictions have any validity about interest rates.
Lord COCKFIELD: My Lords, if the noble Lord cares to read my reply, he will see that I have in fact answered that, but I shall answer it in more detail if he wishes to detain the House. The present rates of interest payable on long-dated gilt-edged securities are in fact substantially below the current rate of inflation. They are, therefore, in real terms being sold on negative rates of interest. In deciding therefore whether to contribute, or subscribe to, or to purchase these securities institutions have to balance the real loss short term against what they hope to be a gain longer term, and the experience shows that the rates and maturities which are decided for the issue of Government securities are those which are needed in the market place for the sale of the quantities required.
If I may leave that point, the next element which contributes to keeping interest rates at present levels is the continuing heavy demand for credit from the private sector and particularly from industry. In some degree this is associated with excessive pay settlements, and that is a
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matter to which I shall return in due course. An excessive demand for credit by the private sector inflates the money supply, and the only effective way of restraining this demand is through the rate of interest. But as the demand for credit falls, this too will ease the pressures which require the maintenance of the current high rates of interest.
It should be clear from what I have said that interest rates are not themselves the cause of the inflation but, on the contrary, are part of the mechanism for controlling inflation. Just as it was essential for rates of interest to go up when the factors creating excessive pressure on the money supply so demanded; so, as and when these pressures slacken and the growth in the money supply has clearly been brought under effective control, this will be reflected in a fall in interest rates. The banking figures for May, which were published yesterday and which were referred to by the noble Lord, Lord Banks, indeed indicate the need for caution in this matter.
I now turn to the question of excessive pay settlements, a matter which is the subject, and rightly so, of increasing and unfavourable comment. If allowing for changes in output, pay settlements are in line with the target growth in the money supply, they do not add to the level of inflation the growth in the money supply itself permits. But if they exceed that level, they themselves set in train a series of extremely damaging consequences. Their first effect is to squeeze profits, and the reduction in the level of profitability of British industry, which we saw in 1974 and which we are seeing again today, was and is largely the direct result of companies conceding excessive pay settlements. Companies may try to pass on the increased wage costs in higher prices, thus adding still further, but only temporarily, to the increase in the price level. Provided strict control is maintained over the money supply, these higher prices, to the extent that they exceed what the growth in the money supply would allow, cannot be maintained, output has to be reduced and unemployment and redundancy follow.
What is crystal clear is that whatever course people take to try to offset the effect of excessive pay settlements, the inevitable result of excessive settlements will be lower output, lower profits, higher

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interest rates and higher unemployment. When, therefore, we talk about the need to restrain excessive pay settlements, we do so because we want both employers and employees to realise that, by pursuing and conceding excessive settlements, they are inflicting grave damage on themselves. We have in fact said this consistently since the Government came into office. It does not represent, as the noble Lord, Lord Kaldor, tried to suggest, a change in policy at all, and the one point I wish to make is that if people demand, and get, excessive settlements, it is not the Government they are hurting; it is themselves. And it is not to secure a political advantage that we are asking people to behave rationally and sensibly. It is to stop them doing damage to themselves.
Conversely, the people who would benefit from a greater sense of responsibility in these matters would be employers and employees alike, both unions and industry. The noble Lord, Lord Banks, and others suggested that this result could be achieved only by the imposition of an incomes policy. I accept their support in agreeing that a reduction in the level of pay settlements is absolutely essential, but, frankly, we have been round the course of incomes policy seven times since the war and its breakdown in the dying days of the Labour Government surely ought to be demonstration enough of the fallibility of such policy.
Both the noble Lords, Lord Thorneycroft and Lord Nugent of Guildford, raised the question of public sector settlements, and I entirely agree that, if we are asking the private sector to settle on a reasonable and sensible basis, the same must be true of the public sector as well. The position this year in the public sector has been made to look much worse than it really is by catching up awards made to public sector workers by the Clegg Commission and other bodies working on the basis of comparability; and these awards are themselves the inevitable aftermath of the breakdown in the Labour Party's incomes policy, and one of the reasons why we believe that that experiment ought not to be repeated. But once the present wage round is ended, this inflation of public sector pay awards by the catching-up process will, for all practical purposes, be behind us as well. As my right
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honourable friend the Chancellor of the Exchequer has made clear, pay settlements in the public sector must in future be on a basis which is consistent with our determination to bring the rate of inflation down.
I turn to the question of exchange rates. The present high exchange rate is not in any sense a cause of inflation. On the contrary, by reducing the cost of imports, including imported raw materials used by industry, it is one of the major factors keeping down the rise in prices. This comes out very clearly in the fall which has now occurred in the index for materials and fuel purchased by industry, a most encouraging sign. We indeed understand the difficulties created for exporting industries by a high exchange rate, and the noble Lord, Lord Lever, has spoken at length about this—and, understandably, has received support from many other noble Lords—but it is quite wrong to regard a high exchange rate as a bad thing for the country as a whole. A high exchange rate places a high value on our labour and the products of our labour and it means that for every pound's worth of goods we export we can buy that much more in imports. That is a good thing, not a bad thing.
Be that as it may, there is nothing we could do to bring the exchange rate down artificially, even if it were desirable to do so, and any attempt to do so would set loose further inflationary forces which would do great damage and leave the position of industry worse than it is today. As interest rates fall, that may bring the exchange rate down, but, as I have indicated, a fall in interest rates must depend on success in controlling the increase in the money supply. But, in any event, we are likely to continue to have an exchange rate which is persistently high and, so far as industry is concerned, the answer must lie in an improvement in efficiency and productivity and in strenuous efforts to curb the rise in costs and particularly the rise in labour costs.
Despite all that has been said, industry has succeeded remarkably well in coping with the high exchange rate of the pound. The level of exports was higher in the second half of 1979 than it was in 1978 and, despite the deepening world recession, we seem to be holding our own. This is a remarkable achievement of which industry

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can justifiably feel proud, and we should feel proud with them.
I revert to the economic situation generally. We have always made it clear, and have done so repeatedly—this has been said also by the noble Lord, Lord Harris of High Cross—that a resolution of our difficulties will take time. This is partly because of the inevitable time lag between changes in the money supply and changes in the rate of inflation to which I have referred. Thus we are still suffering the consequences of the excessive monetary expansion which occurred between mid-1977 and 1979. It is also partly because the present level of price increases has been exacerbated by special factors, such as the inevitable surge in pay settlements, particularly in the public sector, following the breakdown in the Labour Government's incomes policy; partly because of the rise in nationalised industry prices which had deliberately been held back by the Labour Government; partly because of the world rise in oil prices; but perhaps most importantly of all because of the time that it takes pay negotiators to adjust their ideas and their expectations to the new circumstances they face.
The crucial question here is, just how long does it take for realism to break through the fog created by many years of inflationary financing? There are already signs of greater realism—and this point was referred to in a very telling speech by my noble friend Lord Nugent of Guildford—and those signs will grow as people come increasingly to recognise that one cannot demand 20 per cent. pay settlements if there is no increase in output to support them, and that the result of demanding and receiving such increases is only to damage those who demand them and those who pay them.
I realise that there are those, both in politics, for obvious reasons, and in industry, out of apprehension, who are increasingly claiming that by the time the policy works there will be no industry left to benefit from the cure. Of course in times of difficulty there are always faint hearts. But I believe this particular diagnosis to be baseless for another and more fundamental reason. If one strips away all the rhetoric and all the technical phraseology, our policy is based on one
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simple proposition; namely, that you cannot have a higher standard of living unless you earn it through higher output.
We are asking people to accept and believe that printing paper money does not enable you to avoid the necessity of producing more if you want to consume more. And just as people in their private lives believe this and act accordingly, we are asking that in their economic lives, as workers and as employers, they should also behave reasonably and sensibly and in a way which is in fact in their own best interests. I do not think that this is beyond the understanding or the spirit of the British people. There is a brighter tomorrow. We are confident of our ability and of the ability of the British people to achieve it.
Lord KALDOR: My Lords, before the noble Lord sits down, may I ask him one question which I directed to him earlier but which he has not answered? How does the noble Lord explain the growing negative yield gap associated with a growing volume, absolutely and proportionately of funding, if at the same time he claims that the Government must offer higher and higher interest rates in order to attract private individuals to take up new issues? In fact, the new issues are taken up at 3 per cent. below the official lending rate.
Lord COCKFIELD: My Lords, at this late hour let me say no more than that I do not accept any part of the noble Lord's diagnosis.
7.33 p.m.
Lord LEVER of MANCHESTER: My Lords, at this late hour I shall be as brief as possible. I am very grateful to the noble Lord, Lord Cockfield, for the very lengthy exposition of Government policy that he has given the House, though I must confess that most of it struck me with something less than the shock of novelty. However, there were two novel points which I emphasise. One is that it is the noble Lord's view, and presumably the Government's view, that since 1919 there have been self-indulgent Governments all over the Western world who have been content to live with a modest rate of inflation, with the disastrous consequences that we have witnessed of full employment in recent years, trebled standards of living and trebled production

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—little matters of that kind which seem not to come into the noble Lord's reckoning; that we are now moving to a stern Government who are not content to live with a modest rate of inflation, but who believe that they have a complete and final answer to inflation; and therefore presumably before they leave office we shall have no inflation at all. I do not know whether we shall have any industry at all, and we are given no reassurance whatsoever about what our rate of unemployment will be.
However it is interesting, and it is certainly novel, when the Government claim that for the last 60-odd years all other Western Governments have been acting with great blindness, folly and self-indulgence until we had the good fortune to acquire a Government—brought into office by a rather narrow majority of votes of the electorate—who alone in the world have the sure-fire cure for inflation.
However the noble Lord did not quite put at rest all our anxieties, because, when he painted the scene of what will happen if society does not behave according to the way that the Government expect as a result of their financial efforts, it seemed to me that he was merely underlining that there would be produced the dire results that we all fear, and some of which we have already experienced. At this late hour I do not want to go beyond that, but at one stage it seemed to me that he was saying—and I am sure that the TUC will be interested to read Hansard —that high wage rates were not themselves a cause of inflation. That is a very interesting thesis which I am sure will be noted by the more turbulent spirits in the TUC.
I am very grateful to the House for the privilege of being able to raise these matters. Apart from anything else, the debate enabled me to hear a scintillating and witty speech from the noble Lord, Lord Thorneycroft, in which he answered every single criticism of the Government's policy except those that I made. The noble Lord covered with fervour all the areas of the Government's policy, and then rebuked me for not addressing myself to totality in Government policy but actually condescending to focus upon the Motion itself.
I was very grateful to the noble Lord for his speech and I should in return like
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to put his mind at rest, too. He and the noble Lord, Lord Nugent of Guildford, have in common the view that we have tried every other remedy for inflation and other similar malaises, and therefore that justifies the trying of the remedy so ardently espoused by the noble Lord and by the Government. That does not seem to be a logical argument, but it does seem that it could equally well be relied upon by my right honourable friend—I do not know how to refer to him without rebuke—Mr. Wedgwood Benn, who also claims that all remedies have been tried and have failed.
I want to assure the noble Lords, Lord Thorneycroft, and Lord Nugent of Guildford, that I do not find myself in the tormenting dilemma of having to support either the extreme follies of this Government in the monetary area, or perhaps the wilder shores of romantic perfectionism on the Left of politics. I do not find myself in that difficulty. I know that the noble Lord, Lord Thorneycroft, was very troubled about my absence from the conference and he assumed that it was because I entirely endorsed all the resolutions that were therein passed. The noble Lord may rest assured that there is some lack of enthusiasm on my part for every single resolution that was passed on that occasion.
I am also grateful to the House for giving me the opportunity, unique in something like 30 years' acquaintance with the noble Lord, Lord Kaldor, of being able to utter sentiments which whether or not properly understood by the noble Lord—and I think that there was some question about that from the noble Lord—enabled him to express unqualified approval. This was a unique experience after 30 years of affectionate acquaintance, and I am deeply grateful that in the course of a learned speech the noble Lord felt able to say that. I do not want to comment too much on the speeches of other noble Lords, but I feel that I could endorse without hesitation every single word of the speech of the noble Lord, Lord Roll of Ipsden.
I should like, in a sentence or two, to clear up any ambiguity about my own position on the matters of this debate. First, I am not a monetarist in the sense of believing that monetary aggregates as here computed confer some sacred power to assess thereby the state of the com-

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munity, or economic community, or to enforce particular results on the outside economy. However I think that it would be wrong not to include in any policy designed to keep inflation under control a very careful regard to total monetary aggregates as a broad guide to the way the economy is going. So that is my position on monetarism.
On parity, unlike the noble Lord, Lord Cockfield, or the representation of my view by the noble Lord, I perfectly accept a strong pound if that derives from the economic fundamentals of our industry. If in fact, with us, the strong pound derives (as does the strong mark with Germany or the strong yen with Japan) from industrial competitiveness compared with other countries, I would live with it and accept it and see many virtues in it. The trouble about the present parity of the pound is that it derives from artificial considerations. First, there is the Government's misguided high interest rate policy. Of course they have got to sell gilts, but it does not follow that they have to raise interest rates to their present level or increase the cost to home-owners of their mortgages in order to curb bank lending. The parity of the pound derives partly from the Government's misguided high interest rates and partly from the malaise of the world's monetary situation, about which I cannot expound now but which relates to the vast, unspendable surpluses of OPEC and the entourage of hot money that follows OPEC.
If I understood the noble Lord correctly, he said that he does not care how high the pound goes so long as somebody buys it; he is going to do nothing about it, and in fact he cannot do anything about it compatible with the Government's policy. This cannot be a sane policy. If the pound goes up into the sky because the ruler of Kuwait or the King of Saudi Arabia feels resentful at the risk of dollar investment and thereby switches more and more of his money to sterling investment, does that mean that our exporters have got to keep battling with the utterly impossible task of a grossly overpriced currency? I beg the noble Lord to think again about this.
Incidentally, if I have sounded combative in my arguments, I can promise the noble Lord that when I made the same argu-
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ments internally to my own Government and to my own party I was equally combative. To me, this is not a party political matter at all, and I do not pursue it in that way. I beg the Government to think again. One of the interesting things about this debate, if they will not mind my so describing them, is the dogs on the other side who have not barked. The other side is richly endowed with ex-Chancellors, experienced economists and the like, and we have not heard from most of them in support of the Government. I beg the Government to believe that it is possible that their obstinate self-approval may not be universally acceptable.
Lord SANDYS: My Lords, I wonder whether the noble Lord, Lord Lever of Manchester, whose very agreeable remarks the House will appreciate, would feel disposed to withdraw his Motion.
Lord LEVER of MANCHESTER: My Lords, I am grateful to the noble Lord. In the heat of the moment, I forgot it. I beg the leave of the House to withdraw my Motion.
Motion for Papers, by leave, withdrawn,

LICENSING (AMENDMENT) (No. 2) BILL
7.46 p.m.
Baroness PHILLIPS: My Lords, I beg to move that the House do now resolve itself into Committee on this Bill.
Moved, That the House do now resolve itself into Committee.—(Baroness Phillips.)
On Question, Motion agreed to.
House in Committee accordingly.
The LORD SEGAL[The LORD SEGAL in the Chair.]
Clause 1 [Amendment of provisions for upgrading of on-licences]:
Baroness PHILLIPS Baroness PHILLIPS moved Amendment No. 1:
Page 1, line 17, leave out ("commencement of this Act") and insert ("end of the period of one month beginning with the day on which this Act is passed").
The noble Baroness said: The nub of the amendments, really, is the second one,

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but, as is the nature of legislation, one often has to move an earlier amendment which has to be explained before one comes to the second amendment. Perhaps I might say to your Lordships that there are two amendments which alter the time of the Bill's commencement. While it is still proposed that the provisions of Clause 1, which concerns the upgrading of licences, will come into force one month after enactment, the appeal amendment, which we shall be coming to next, will need a consequential amendment to the Crown Court rules, for which there would be insufficient time in the month between the enactment of the Bill and its coming into force. It is therefore now proposed that Clauses 2 and 3 should be brought into force by a commencement order. That is the nature of the amendment I am now moving.
The PARLIAMENTARY UNDERSECRETARY of STATE, HOME OFFICE (Lord Belstead): May I just say from this Bench that, for reasons which I sought to explain on the Second Reading of the noble Baroness's Bill, the Government entirely recognise that Section 37 creates an anomaly; and, therefore, if this Bill (as I very much hope) goes through your Lordships' House, the Government would not wish the coming into force of the provisions of Clause 1 to be delayed, and accordingly support this amendment.
On Question, amendment agreed to.
Clause 1, as amended, agreed to.
Clause 2 agreed to.
Clause 3 [Special hours certificates; amendment of supplementary provisions]:
Baroness PHILLIPS Baroness PHILLIPS moved Amendment No. 2:
Page 3, line 6, at end insert—
"Special hours certificates: appeals
(81B.—(1) Subject to subsection (2) of this section, any person aggrieved by a decision of licensing justices or a magistrates' court—

(a) to revoke or not to revoke a special hours certificate on an application under subsection (2) or (4) of section 81 of this Act,

(b) to impose or not to impose a condition under subsection (1) of section 81A of this Act on an application for the grant of a special hours certificate or to impose a
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condition under that subsection on an application for the revocation of such a certificate, or

(c) to impose or not to impose a condition on an application under section 81A(2) of this Act,

may appeal to the Crown Court against that decision.
(2) Only the chief officer of police may appeal against a decision not to revoke a certificate as mentioned in paragraph (a) of subsection (1) of this section or not to impose a condition as mentioned in paragraph (c) of that subsection; and a person may appeal against a decision not to impose a condition under section 81A(1) of this Act only if he has appeared before the licensing justices or magistrates' court and made representations that the condition be imposed.
(3) A person other than the appellant shall be a party to an appeal under this section if, and only if, he has appeared before the licensing justices or magistrates' court and made representations on the application to which the decision appealed against relates.
(4) Licensing justices shall have the same power to make an order for the payment of costs on the abandonment of an appeal under this section as a magistrates' court has by virtue of section 85 of the Magistrates' Courts Act 1952 on the abandonment of an appeal to which that section relates.").
The noble Baroness said: In moving this amendment I would refer your Lordships to the Second Reading debate, when I mentioned that representatives of the entertainments industry had pointed out that there should be a right of appeal to the Crown Court against decisions by the licensing justices in magistrates' courts in relation to the Bill's provisions for special hours certificates, and this is what this technical amendment seeks to do.
At the present time, the powers of licensing justices and magistrates in relation to the grant, refusal or revocation of special hours certificates to licensed premises and members' clubs is somewhat restricted. If the Bill is enacted, they will be able to exercise a much wider degree of discretion as to whether or not to restrict the hours of operation by the imposition of a condition which will be imposed under the proposed Section 81A of the Licensing Act 1964. The entertainments industry feels strongly that, since the livelihood of its members could be affected by the imposition of these conditions, they should at least have the right of appeal against decisions to impose them. I believe, too, that other parties affected by decisions of justices and magistrates should enjoy a similar

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right. This amendment would give such a right. It also provides rights of appeal against a decision to revoke special hours certificates.
If I may summarise the amendment, it provides for the insertion of a new Section 81B to the Licensing Act 1964. Subsection (1) specifies the decisions against which appeals may be made; subsection (2) specifics who may appeal; subsection (3) requires that a party to an appeal other than the appellant must have appeared before licensing justices and have made representations on the application to which the decision appealed from relates; and subsection (4) empowers licensing justices to make an order for the payment of other parties' costs on the abandonment of an appeal in the same way as a magistrates' court is empowered to do under the Magistrates' Courts Act. That is an explanation of this rather technical amendment, and I beg to move.
Lord BELSTEAD: I should like to register the Government's support for the noble Baroness in this long amendment. In homely terms, as I understand it, it is right that those whose livelihood may be affected by the proposed new powers of the licensing justices and the magistrates' courts which are contained in this Bill should have, as a collorary, rights of appeal. The noble Baroness has explained those rights absolutely clearly. I find them most acceptable.
On Question, amendment agreed to.
Clause 3, as amended, agreed to.
Clause 4 [Short title and extent]:
Baroness PHILLIPS Baroness PHILLIPS moved Amendment No. 3:
Page 3, leave out lines 9 and 10 and insert—
("(2) Sections 2 and 3 of this Act shall not come into force until such day as the Secretary of State may appoint by order made by statutory instrument.")
The noble Baroness said: This amendment is allied to the first amendment and deals with the date of commencement. I beg to move.
Lord BELSTEAD: I ought to give the Committee an assurance that, if the Bill is approved, the Government will endeavour to bring the provisions of Clauses 2
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and 3 into force at the earliest day possible after enactment. I thought that your Lordships would wish to know that from the Government.
On Question, amendment agreed to.
Clause 4, as amended, agreed to.
Baroness PHILLIPS Baroness PHILLIPS moved Amendment No. 4:
In the Title, line 1, leave out ("the grant of").
The noble Baroness said: This amendment is what is usually described as a technical or tidying up amendment. I beg to move.
On Question, amendment agreed to.
House resumed: Bill reported with the amendments.

LICENSED PREMISES (EXCLUSION OF CERTAIN PERSONS) BILL
Read 3a, and passed.

BROADCASTING LICENCE FEES
7.53 p.m.
Lord HILL of LUTON Lord HILL of LUTON rose to ask Her Majesty's Government why they fixed the broadcasting licence fee at a level which, over the next two years, involves the cutting of BBC expenditure by £130 million and the loss of 1,500 jobs. The noble Lord said: My Lords, in putting this Unstarred Question to ask the Government why they fixed the broadcasting licence fee at the level that they did, I do not propose to raise the question as to the various cuts and changes which have followed but to adhere to the main question as to what led the Government to take the attitude they did in fixing the broadcasting licence fee at £34 for the colour licence—the one to which I refer as an example, without duplicating it by reference to the monochrome licence.
It was in August last that the BBC submitted to the Home Office its plans for the next 10 years for capital and operating expenditure, as well as the hours of output and the changes expected, in cost per hour. It asked for a colour licence fee of £40. In December the

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Home Secretary announced a colour licence of £34 a year, a figure to last for at least two years, to cover an appreciable reduction in the BBC's overdraft. And, in so deciding, the Home Office knew that this meant a cutting of staff and a cutting of services in the BBC. It knew that in real terms that figure of £34 represented a cut in the licence fee. Why?
One can understand the Government's preoccupation with public expenditure. But this is not public expenditure; it is not expenditure of public money. The domestic services of the BBC, as your Lordships will know, are financed entirely by licence fees. Why, then, it not being an issue of public expenditure, it representing a cost of some nine pence a day did the Government decide on a licence fee that meant a fall in capital expenditure of some £90 million and a reduction and change in services amounting to some £40 million? Why?
I suppose it might well be that the Government thought, perhaps rightly, that in a body the size of the BBC, there was room for economy of one kind or another. But inflation has already done that. In the 12 years since the colour licence was introduced, its level has increased by 240 per cent. During that time, the retail price index has increased by 270 per cent., average earnings have gone up by 380 per cent. and the retirement pension has gone up by 500 per cent—all during those same 12 years. In other words the real value of the licence fee has fallen in those 12 years and the public's capacity to pay that licence fee has risen. The Government's preoccupation with the retail price index may have played a part, but the difference between the £40 which was sought and the £34 which was awarded represents but one-tenth of 1 per cent. of the retail price index.
It could not have meant—and I do not suggest that it could—that the Government were seeking to weaken further the BBC's financial capacity to compete with independent television. But it has done just that thing. The figures tell their story. From a rough parity some five years ago, ITV today enjoys 20 per cent. more income than does the BBC on a regular basis. The BBC runs two television services; independent television runs one service. But it can be fairly argued—and let me say it straight away—that the
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income of independent television has special outgoings in levy, corporation tax, selling expenses and so on.
I think it fairer to look on what was spent on making television programmes for 1978–79, for which the figures are available. Each week over that period the BBC produced 21½ hours of programmes; ITV produced 14½ hours of programmes. The BBC spent on those programmes £208 million and ITV spent £233 million. In other words, the BBC produced 50 per cent. more viewing than the ITV at a lower total cost. I do not for one moment begrudge Independent Television its income, but I do begrudge the effect of this licence fee division in reducing further the BBC's financial capacity to compete. That is the essence of what I want to say.
Having made the point of the addition to the financial margin between them, I want to come to the points that above all seem to me to emerge from the Government's decision. It is in my experience—and I have experience of both services—fortunate that this country found its way to a system involving the competition between a commercial service and a public service. I believe that that has proved to be a satisfactory basic organisation, provided there exists in term of resources a fair competitive capacity between the two services. Upset that financial capacity, and one has disturbed the basic principle upon which Independent Television was founded—and wisely founded.
It is in the public interest that there should be this competition with the two kinds of service. The commercial service, once it has overcome its financial difficulties in competing with the public service, soon wishes to enjoy the esteem that has hitherto belonged to the public service only. The public service, for its part, is compelled to step down from any higher level from which it may have felt it was operating, and get away from a "holier than thou" attitude and compete reasonably with the commercial service. I believe that this licence fee decision substantially upsets that balance. It brings a kind of poverty to the BBC at a time when Independent Television, in spite of its heavy outgoings and even the strike that it had last year, is in a much stronger financial position.
The second general consideration is one about which I am greatly disturbed. All your Lordships accept the principle that broadcasting should remain independent of Government. That is the source of the strength of British broadcasting, the envy of so many parts of the world. The licence fee system is, I believe, an important part of the butressing of that freedom. There may be other ways but I frankly do not know them. The licence fee system provides that gap between Government and broadcasters. It does it adequately. It provides the protection when in fact it is assessed, say, every four or five years. Once one gets to the situation in which the licence fee is re-examined every year or every other year, one is not far from the situation in which the service is financed by the Treasury on an annual allocation, with all the possibilities that that presents for intervention in broadcasting. At a time of inflation we must get away from this system. The licence fee is provided for 2 years 4 months, and next time it may have to be for one year, if the present system is continued.
I suggest a modification of the licence fee system. It ought to be possible for the Government to appoint a few assessors who would hear the BBC's claim in public and in detail and would recommend to the Government the licence fee and perhaps a formula for adjusting the licence fee for the next few years before the next major assessment. It could be done—but I am sure that no one would accept it—by an indexation of the licence fee. The suggestion that I make leaves the Government's control of the licence fee as it is. It spares the civil servants at the Home Office from a great deal of work over a long time. It enables the issue to be put and judged in public and gets away from some of the worst features. But we must get away from this near-annual assessment of the licence fee if we are to sustain the freedom, the independence, of broadcasting from Government interference.
I know that it is so often said, and it may even be in people's minds now, that the way out of this difficulty is for the BBC to take a little advertising. "Gentle, of course. Only superior advertising. Only a little. Would that matter?" My Lords, it would be the thin edge of the wedge. It would be starting on the slippery slope. Can we imagine what a
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Government's response would be to an application for an increase in the licence fee once advertising revenue was being obtained for one small part of the service? "Add more advertising. Extend the scope of the advertising". Then there would be competition between advertising services. No one who has ever seen television on the American Continent would ever wish to inflict on this country competing advertising commercial services. I hope that we shall sustain this position of a wholly public service, and, on the other hand, a commercial service.
I know that there are possibly added financial burdens to come to Independent Television, though I doubt whether they will come in in the next two years. I want the licence fee to be seen not merely in the context of this economy or that economy; I want it to be seen in terms of two essentials. One is, if there is to be fair competition between the two great services, then let there be some reasonable relationship between their financial resources. Secondly, let us get away—with a little ingenuity maybe—from the position into which we are rapidly moving: more frequent assessments of the licence fee than are good for the independence of the BBC. The independence of the BBC means the independence of broadcasting as a whole. Do not, for Heaven's sake, let us do anything to injure that independence, in either our own interests or the interests of the many services of the world which point to the BBC as the model they would wish to follow.
8.10 p.m.
Lord WINSTANLEY: My Lords, it is a pleasure and indeed an honour to follow the noble Lord, Lord Hill of Luton, on a subject in which he has a great personal interest and involvement and of which he has almost unparalleled experience and expertise, whether inside or outside your Lordships' House. The Question he has asked the Government seems to me to be both highly pertinent and very urgent. Also, as he has said himself, it raises questions of principle which should be of the greatest possible concern to noble Lords in all parts of your Lordships' House.
First, I think I have to ask whether we and the BBC have got this particular

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question the right way round. I believe that repeatedly we are asking the BBC—and this is not a new exercise: as the noble Lord, Lord Hill, suggested, it occurs every two or three years when the BBC is in financial difficulties—to cut its coat according to the arbitrarily fixed length of some piece of cloth. We should really be doing the more sensible thing; in other words, deciding together what range and variety of services public broadcasting should provide, be they TV or radio services, local, regional or whatever, and then calculating the cost, deciding how much money is needed to provide the services and how that money is to be provided.
Lord TAYLOR of GRYFE: My Lords, would the noble Lord tell us who would decide this?
Lord WINSTANLEY: My Lords, if the noble Lord will be good enough to bear with me I shall come to that, although I do not think we can go in this way into the whole question of broadcasting, its organisation and financing, on an Unstarred Question. However, I will come to that question and, of course, it is an important one. As things are, I think we have to accept the situation in which we are placed and we have to ask the questions which inevitably arise from it. I should like to add two supplementary questions to those put so very eloquently by the noble Lord, Lord Hill of Luton. First, is the BBC making its cuts in the right way and in the right places? Secondly, and in my opinion very much more importantly, are we satisfied that the licence fee is the best or indeed the only acceptable method of financing public broadcasting?
To begin with, I should like to draw your Lordships' attention once again to the perpetual problem of the shortfall in licence fee collection: that is a technical question. I am not quite sure what the figures are but no doubt the noble Lord who is to reply will be able to tell us about them. It seems to me that over the years, had we been able to collect all the licence fees to which the BBC is undoubtedly entitled, many of their difficulties would not have arisen. Therefore this is not a matter solely for the BBC: it is for the Government and for other bodies as well. Are we doing enough to
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make absolutely sure that we eliminate the shortfall in the collection of licence fees?
Secondly, with regard to the steps which the BBC itself is forced to take, are they looking in the right direction? It seems to me—and I say this with the greatest possible respect to the BBC, for whose officials and officers I have the highest regard—that there is fruitful soil in the whole question of the elimination of waste in the BBC. For example, in the engineering field—I am not an engineer and therefore perhaps not qualified to talk in any detail—I believe there are opportunities for economies. Maybe they have not all been grasped, and some of course are not wholly under the control of the BBC—as indeed in the situation which we have, though whether we still have that situation to the same extent I am not entirely sure, when the BBC were forced to rely on renting of lines from the Post Office at very high rates instead of having control over their own microwave links. That might have been a greater economy. I am sure there would be other opportunities for economies in the engineering field.
In the administration field I am bound to say that, from my experience of the BBC, it seems to me that here, too, is an area which might perhaps attract the scrutiny of "Marks and Spencer" along the lines on which the Civil Service administration and other bodies are now being investigated. It is possible that economies should be made there. But on the question of programme making—and I think the BBC inevitably looks towards that—there are possibilities for genuine economies. Here I would refer to the BBC's apparent reluctance to enter into arrangements with Independent Television and to avoid unnecessary and wasteful duplication. I am all for competition, but it seems to me that if both channels present, as perhaps they should, a Royal Wedding or some other important occasion, it may well be necessary to have two programmes, with two commentators, two producers and two editors. But is it wholly necessary that there should always be two crews of cameramen, of lighting engineers, of scene shifters, studio hands and so on? Is there not room for economy in the kind of duplication which now occurs?

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Here I am perhaps falling into the trap which I think the BBC itself is inclined to fall into occasionally, of looking immediately to the programme area for making cuts, instead of looking rather more at the infrastructure which is necessary for any programmes to be made at all. Even if we accept the need for cuts within the programme area of the BBC's activities, I do think it is regrettable that whenever these situations arise the BBC should automatically look to its orchestras.
The BBC really must accept that it is deeply dependent for its programme output on music and musicians, and it must also accept that unless it continues its traditional role in the sponsorship of orchestras it may well be that there will be no musicians upon which it can depend. It is no good the BBC saying: "We shall still have as much music and there will be more 'needle time' and more recorded music". I do not think you can have that unless you have the musicians to produce it, and without the BBC's traditional role—I shall not name particular orchestras, save that of one in my own area which was once known as the BBC Northern Dance Orchestra and is now the BBC Northern Radio Orchestra—these are the kind of bodies which are threatened; and somehow one dries up the supply of the musicians upon which the BBC is going to have to rely for its other services.
As regards flexibility in relation to programme-making—and I have mentioned the question of programme duplication with Independent Television—when the BBC is once faced with the situation of making cuts, it never dreams of cutting out any particular area and saying, "We will no longer cover this, that or the other; we will no longer cover the Cup Final, the Olympic Games or whatever". It must go on trying to cover everything. It is rather like saying: "Never mind the quality; look at the width". Perhaps there are opportunities for the BBC to drop out of certain fields, rather than feel they must go on doing absolutely everything.
Here I should like to say just a word about the BBC's role in relation to local radio. I must choose my words very carefully, because I have an immense
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regard for friends and colleagues who do remarkable work in the BBC's local radio stations; but they are doing that work under very grave difficulties and with wholly inadequate support and resources.
Perhaps I might remind the noble Lord, Lord Hill of the history of the emergence of local radio. It arose at a time when I was a member of the BBC's General Advisory Council, a position which I greatly enjoyed, though I began to suspect from time to time that the BBC preferred advice of a somewhat different character from that which it received from me fairly regularly. At that time the noble Lord will remember we had a document, in a situation which was just the same as that which the BBC is now facing. The document was known as Policy Document: Broadcasting in the 'Seventies. Essentially, it was a document designed to achieve cuts, but it also included a proposal to introduce local radio at a cost of something like £6 million.
At that time I know there were those working in the BBC who were wholly dedicated to the idea of local broadcasting, but I also know there were many who believed that the introduction of BBC local radio would pre-empt the introduction of commercial radio by possibly an incoming Government. I warned them at the time that it would not pre-empt it and that commercial radio would come and then they would be left with local radio which could not necessarily be fully supported.
I took the view—a very different view from that of the noble Lord, Lord Hill, at that time—that having advertising on Radio One essentially and almost solely a pop channel, pop music—which, it seems to me, in every country throughout the world is supported, in broadcasting terms, financially by advertising—was a very different thing from having advertising in ordinary, in documentary or in any other kind of programmes. Indeed, the interpolation of an occasional advert into Radio One would provide a merciful relief from the programme content. However, it is my view that, had the BBC gone for that option, they would then, first, have made themselves a little more independent of the Government for finance; and, secondly, they would probably have pre-empted local commercial radio. But that is water under the bridge. The point

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in recriminating about the past, as Mr. Churchill once said, is to ensure effective action in the future. I mention that merely in the hope that, as time goes on, the BBC will become a little more flexible and a little less conservative in its attitude towards change.
So far as local radio is concerned, it is there. There is great benefit in competition. Commercial radio is doing a good job, and here I should declare an interest as a director of a very successful independent commercial company. I believe in competition, but it really must be fair competition. Either the BBC must give effective support to its local radio stations, so that they can genuinely compete fairly, or it should draw out of that field.
I will conclude with my other question, which is much more important. Is the licence fee the best and only way in which to finance public broadcasting? I do not need to remind anybody in your Lordships' House that the whole object of the establishment of the BBC under its Charter, and of independent broadcasting under what was then the Independent Television Authority and is now the Independent Broadcasting Authority, with the related Act, was to put the control of broadcasting at a distance from government, be it central Government or local government. That is wholly right and it is something which we in your Lordships' House must defend to the very death.
But I am bound to say, as the noble Lord, Lord Hill, said, that making the BBC dependent on a kind of biennial basis on going to the Government about the licence fee is, in a sense, putting its independence at naught. We have to devise some kind of new system. What that would be, this is not the time to go into in detail. I do not think we have thought enough about Pay TV, which is an opportunity for minorities to pay big prices for minority programmes. I do not think we have been enough into the question of the possibility of a levy on the sale or rental of sets. There are many other possibilities, but we have to look at this question very closely.
Years ago in another place I had the honour of opening a debate on this subject. Unusually the Liberals had a
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Supply Day, because we had suddenly become, in numbers, a baker's dozen. That was rather unusual and entitled us to a Supply Day. We discussed this subject and, at the end of the debate, the then Paymaster-General, Mr. Short, now the noble Lord, Lord Glenamara, in your Lordships' House, said this about organising the finances of the BBC:
"I cannot see the present kind of organisation lasting for very much more than the decade which we have ahead of us".
He went on, referring to the change in the Post Office and the new role which the Postmaster-General, if there was one, would have:
"From that time"—
after the reorganisation—
"the residual Minister will be able to devote a great deal more of his time to broadcasting, and I hope that, in the spring of 1969"—
this was a long time ago—
"a long, cool look will begin at the whole system of broadcasting in this country".—[Official Report, Commons 28/6/67; col. 456.]
Since then, have we had a long, cool look? Certainly we have had the very important report of the noble Lord, Lord Annan, but we have emerged from that report so far as the licence system is concerned, totally in status quo ante bellum; in other words; no changes at all. I am bound to say to the Government, and the noble Lord, Lord Hill, that we must either underwrite and guarantee the BBC's necessary income under the licensing system, or, if we cannot do that we must take that long cool look which has been so long delayed and devise a new system.
Lord TAYLOR of GRYFE: My Lords, before the noble Lord sits down, I wonder whether I may pursue the question that I put. He said that we should decide the range and type of services which the BBC should provide and make finance available accordingly. I am interested to know what he had in mind when he said "We should decide". Is it the Government or the new institution? What had he in mind?
Lord WINSTANLEY: My Lords, the noble Lord will recollect that I said that together, the BBC and us—and by "us" I meant Government as a whole—we, ought collectively to decide. It has to be that kind of decision. It has to be

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looked at by everybody. But I was referring to the need to do this operation the other way around. We should decide how much money is necessary and then produce it, rather than say "There is the money, and now you decide what you can do with it."
8.26 p.m.
Lord BOOTHBY: My Lords, the House will have listened with very great interest to the authoritative speech delivered by the noble Lord, Lord Hill. I thought that his argument was quite unanswerable. The present system of licensing is, in itself, intolerable. I do not see how we can possibly maintain the standards of broadcasting in this country, if it is continued for any length of time. It should not be an annual Treasury decision. Licensing of the BBC should be the result of discussion between the Government and the BBC, and should last for a considerable period, so that the BBC can plan properly ahead what to do.
I so agreed with the noble Lord, Lord Hill, when he said that successive Governments have treated the business of licences for the BBC as if it were part of the Budget, a kind of annual haggle; as if it were public expenditure. It is not public expenditure at all. If it can be described as anything, it is public taxation; and the question is whether or not the public wish to pay the tax. In my submission—I shall develop it in a moment or two, but I shall not make a long speech—the public do; and the Government have seriously misjudged public opinion in this country in setting the licence fee for the BBC at a figure which is manifestly too low, because I do not think they realise what the public want.
I have sat in Parliament now, in one or other House, for well over 40 years and I should just like to say this. I have watched throughout that period the development and growth of broadcasting, first by radio, then by television, and finally by both. Neither House has ever really grasped the extent to which it has revolutionised the lives of everybody in this country and, indeed, life itself. It is tremendously important and we do not realise—the condition of this House tonight is further proof of it—the important part that broadcasting plays. We
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never have; but we are beginning to come to it now, and I believe that the Government will reconsider their views about the licence fee.
There are obviously enormous defects, but the fact remains that we still have the best broadcasting system on radio and television in the world. Between the ITV and the BBC, we provide the best in the world, on the cheap. The licence fee in this country is lower than in almost every other country, while the programmes are the best. That situation cannot possibly continue. There are many criticisms to be made of broadcasting in this country. For example, the BBC has been much criticised for its recent action over the orchestras. It is arguable that it has attempted over the last 10 years to run and finance too many orchestras up and down the country.
On the other hand, the assassination of the BBC Scottish Symphony Orchestra is not on. It is, quite simply, unforgivable. I can tell your Lordships that I know that Sir Thomas Beecham, who was not apt to praise orchestras other than his own, held that orchestra in very high regard, not only on its own merits but as a training ground for both musicians and conductors. It also has a tremendous influence and effect not only in Scotland but all over the world, and I think the proposed assassination of that orchestra is absolutely appalling.
But the BBC itself can come forward, quite legitimately, and say, "Well, we're very sorry, but with the present licence fee we simply cannot afford it". The present licence fee holds down—I have no doubt of this—the standards, which are very high today, but which will not be maintained if the Government's present policy is continued indefinitely. The licence fee is too low on any count.
I have said that Parliament has never recognised the important part that broadcasting, and especially television, plays in our lives. I am bound to say for myself that I did 30 years ago, and I have spent a great part of my life in it and at it. I would be the first to say that the BBC has never paid anybody, apart from pop singers, enough. I know that to my cost. They ought to pay more, and so should every other broadcasting company. If one goes to America and is asked to broadcast, one is staggered by

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the cheque one gets. When one broadcasts in this country one is appalled by the cheque. Even so, the standard remains very high indeed.
I do not want to detain your Lordships for long; but what a difference television has made to the lives of everybody, although it is not wholly without its difficulties and defects. Certainly it has had a deleterious effect upon the live theatre; I have no doubt about that. Why should one pay £10 for a rather uncomfortable seat in a theatre, and another £20 if one wants supper, and then fail to get a taxi when one wants to get home, when one can probably see something much better sitting comfortably in one's own armchair with a glass of whisky? That is what goes on all over the country today. More and more people are depending to a greater extent than they realise even themselves upon the "tele". One great thing about it is that one can always switch it off. If one goes to a theatre one cannot switch it off.
Television has already brought the world before a vast public which otherwise would know nothing about it. The news itself—the "World About Us" for example, on the BBC—tell people about things they never knew anything about. The other dangerous effect, a deleterious effect, is that apart from its effect on the live theatre it has to a considerable extent stopped people, especially the young, from reading. But one cannot help that; one cannot reverse that. There is only one answer to it and that is to keep the standards as high as they are and, if possible, make them higher.
The present licence fee policy—I am sure of this—is bound to lower the standards of broadcasting generally in this country. That would be a pity because it is, and should be, one of our greatest prides. I believe that Parliament is beginning to realise how important it is. If there were a referendum in this country today as to whether it would be desirable to pay £10 or even £20 a year to maintain and improve the standards of the BBC, I am quite sure there would be an overwhelming majority, even from the poor, even from the unemployed, in favour of it. They would feel that they were getting marvellous value for the price, as indeed they would be.
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That is what public opinion really wants. It is not, as my noble friend Lord Hill said, a question of Government expenditure. We are not asking for increased Government expenditure which would go against the financial policy of the Government. We are asking the Government to increase the licence fee by taking more money from the public; and I submit with fervour that the public would be glad to pay if they were told that, if they did not pay, the standard of broadcasting would go down.
I do not think I have anything more to say except that I hope the Minister will give us a little encouragement that this policy of the annual fixing of a licence fee which is lower than that anywhere in the world for a service which is unparalleled in the world, and which means a great deal to every family in this country, will be reconsidered at the earliest possible moment.
8.37 p.m.
Lord O'NEILL of the MAINE: My Lords, I think we all owe a great debt of gratitude to the noble Lord, Lord Hill, for raising this subject. I am only sorry, if I may say so, that not more of your Lordships are present to follow something which is so important, as the noble Lord, Lord Boothby, said, to every man and woman in this country—in fact, it is not only more important but rather more understandable than the debate which we heard earlier today.
As long as I can remember there has been trouble over the licence fee. This time the trouble has been very much worse, but it has gone on and on. In view of the fact that in a few minutes I am going to say something in agreement with what the noble Lord, Lord Winstanley, said, I must say, just for the record, that I have the greatest admiration for the BBC. Anyone who has watched American television, and particularly anyone who has listened to American sound radio, must know how fortunate we are. There are no studio managers in America, Canada, Australia or anywhere else. The perfection of sound radio at its best on the BBC is unparalleled anywhere else in the world. Admittedly, in the eastern States of America there is Channel 13, which is sponsored and is an excellent pro-

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gramme, but that is the exception which proves the rule. NBC have the "Today" show on television, upon which our equally good sound "Today" show is based. Nevertheless, despite these facts, we have the finest service in the world.
But, as there is always trouble over the size of the licence fee, may I suggest, as the noble Lord, Lord Winstanley, did tonight and as I did in this House six years ago—the suggestion was thoroughly squashed—the possibility of advertising on Radio One and Radio Two during the long hours of the night? Can it really be sustained that the quality of those programmes is so high that they would be spoiled by some advertising? One of the BBC's daughters, CBC in Canada, uses advertisements, and I think I am right in saying that they do so in New Zealand as well. And ABC in Australia is considering it at the moment. So it is not a terrible heresy to talk about advertising; it is something which may well have to be faced at some time.
Also, as the noble Lord, Lord Winstanley, mentioned earlier, one often wonders, as a private citizen, how much money is lost by the evasion of payment of the licence fee. None of us knows, but it could be a considerable figure. Again, it may be that this is a weakness in the licence fee' system. As I see it, the BBC is undoubtedly better off with the licence fee than with the direct Government grant which ABC get in Australia. While I was in Australia just before Christmas I heard that ABC were delighted because they had just got a grant from the Government for two or three years. But that does not alter the fact that this makes them even more dependent on the Government than is the BBC with its licence fee. I am not, therefore, suggesting for a moment that there should be a direct grant; I think that would be a retrograde step. On the other hand, I do think that there are very great problems over the licence fee.
At the conclusion of my few remarks may I say that I think that new methods of financing the BBC should be investigated. If successive Governments—this goes for Labour Governments just as well as for Conservative Governments—are not going to give the BBC enough
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money, then I think that alternative methods of financing the BBC should be investigated.
8.42 p.m.
Lord PONSONBY of SHULBREDE: My Lords, by leave, my noble friend Lord Donaldson of Kingsbridge had hoped to reply to the debate from these Benches. Unfortunately, he is unable to do so as he has a previous engagement which makes it impossible for him to be here. He had hoped that the earlier debate would finish early enough for him both to take part in this debate and to fulfil his engagement. Unfortunately, that has not been possible and it has been agreed, through the usual channels, that I should speak instead.
Let me say at the outset that I know my noble friend Lord Donaldson of Kingsbridge would wish me to say that the House is honoured and pleased that it should have been the noble Lord, Lord Hill of Luton, who raised this evening the question of the broadcasting licence fee and gave the House an opportunity to debate it. As many other noble Lords have already pointed out, as a former chairman of both the IBA and the BBC the noble Lord is uniquely qualified to speak on this matter.
In his speech, the noble Lord rightly pointed out that after its application for the new licence fee the BBC received permission for a fee which fell some 15 per cent. short of what it had expected. He also pointed out that the rate of inflation and other costs have exceeded the rate of increase in the BBC's licence fee and that the income of the IBA has exceeded the rate of inflation. Of course, this means that the BBC's ability to maintain its standard of excellence is impaired. This standard of excellence which the BBC has set over a number of years—indeed, since the BBC first started transmitting—is admired throughout the world. It has set a standard which other commercial television stations in the United Kingdom have competed with—and, indeed, have successfully competed with. However, anything which inhibits the BBC from maintaining that standard of excellence must be condemned.
As the noble Lord, Lord O'Neill of the Maine, reminded us, this is not the first

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time that the Government have interfered with, or perhaps I should say have restricted, the amount of the increase in the licence fee which the BBC required. It is important that the BBC should retain its freedom and ability to maintain its standards. The view of the noble Lord, Lord Hill of Luton, and of the BBC is that the licence fee should be increased to a sufficiently high level to enable it to be maintained for a number of years and not just for a year or two—or two years and four months, as in this case.
I am not sure that I agree entirely with this view. The BBC must certainly have an assurance about its future level of income so as to enable it to plan ahead. One way is, certainly, to have a sufficiently large increase in the licence fee every five years or so to enable them to do this. Another way would be to have an annual increase. As it now stands, however, the BBC would not find this an acceptable way of proceeding, because it would never know what its licence income would be one year ahead.
One wonders whether a system could be arrived at by which the Government agreed upon a basic licence fee for a period of five years which was then index linked throughout that five-year period, so that the BBC would be able to plan ahead and would know that during that period of five years it would have a constant level of income, whatever the rate of inflation might be during that period. This would also enable the Government to review the question of the basic licence fee once every five years. Index linking is a phenomenon which the public are beginning increasingly to accept. Indeed, I feel that in some ways it is more acceptable to the public than a very substantial increase once every three, four or five years, as the case might be. Within the last decade we have seen index linking introduced in a number of areas, with annual increases taking place.
The noble Lord, Lord Hill of Luton, was authoritatively hacked up by the noble Lord, Lord Boothby, who pointed to the damaging cuts being forced upon the BBC. The noble Lord, Lord Hill of Luton, referred in his Unstarred Question to the loss of 1,500 jobs, a point which we have not discussed very much this evening. That is, of course, a very considerable loss of jobs, resulting from
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the failure of the BBC to get the increase in the licence fee which they wished to have. The BBC is a most valuable institution in the whole world of the arts, and it is important that it should be able to maintain its standards of excellence. The noble Lord, Lord Hill of Luton, rightly pointed out that the fee is not a part of Government expenditure and that therefore there is really no need for the Government to take this niggardly attitude towards the proposed increase in the fee. I hope that the Government will in future note the serious effects which the restriction of the increase has had, and I very much support the noble Lord in the remarks he has made.
8.50 p.m.
Lord BELSTEAD: My Lords, all of your Lordships who have spoken in this short debate this evening, for the initiation of which we are grateful to the noble Lord, Lord Hill of Luton, have made the point that the services of the BBC are of the greatest value. That point has been made finally in the very interesting speech to which we have just listened, made by the noble Lord, Lord Ponsonby. I associate myself with the speeches of your Lordships in this matter. The way in which the BBC has provided public service broadcasting over the years has been an object lesson to anyone who cares to listen and to see; and therefore any debate of this nature, particularly one raised by someone who has the experience not only of public life but also of broadcasting, as has the noble Lord, Lord Hill, raises questions which must be taken very seriously.
However, I do not agree with the terms of the noble Lord's Question, which refers to the cutting of expenditure by a sum of £130 million without any qualification being put to those words. I hope it is not out of tune with the serious way in which this matter has been discussed this evening if I ask the noble Lord to imagine for a moment that he is going to a public house for a drink. The noble Lord—although I know that he is almost a total abstainer —decides to consume one pint. Then he consumes another; then he finds that it would be desirable if he consumed a third but he has not got enough money to finance this attractive objective. The noble Lord considers the desirability of asking the landlord to allow him credit but decides against incurring any debt, so

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the noble Lord is forced to forgo this final item of desirable planned expenditure.
With his experience of broadcasting I think the noble Lord might well say to me that there is no analogy here; that there is a world of difference between expenditure for the purposes of pleasure and expenditure for the important purposes of the BBC, justly regarded as leading the world in public service broadcasting. But, if I may say so, I think there is an analogy between my concept of the noble Lord's third pint and the expenditure plans of the Corporation. In both cases a certain amount of money is available; in both cases, in the event, the money will not pay for everything, however desirable it may appear to be, and in both cases it is recognised to be undesirable to borrow.
Your Lordships who have taken part in this debate have each asserted that there ought simply to be more money available for the BBC, but I think that that assertion pays scant regard to the increases which my right honourable friend announced last November, from £25 to £34 for a colour TV licence and from £10 to £12 for a monochrome licence fee. If I may follow the noble Lord, Lord Hill, by sticking in my remarks to the colour licence, that represented an increase of 36 per cent. for a colour licence, over a period of two years, and provided the largest cash increase ever known in the history of the fees—not, if the noble Lord will forgive my saying so, a figure which could be called niggardly, I should have thought, as the noble Lord, Lord Ponsonby, sought to do. The new licence fees will provide over £1,000 million for the period 1980–1982, a considerable increase over the Corporation's previous expenditure levels.
When my right honourable friend announced those increases over six months ago there was no chorus of protest—at any rate, there was no chorus of protest that I heard—that these fees should be higher; and on the evidence that I have just been trying to give your Lordships I do not find that surprising. My right honourable friend has to decide what is fair, both to the BBC and also to the licence payer. Although the noble Lord, Lord Hill, asserted in his speech that we are not talking about public expenditure, of course it is compulsory expenditure for anyone who wishes to watch television; and for
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many people, as the noble Lord will know, with his medical experience, television makes all the difference to their lives. Indeed, I rarely heard a more eloquent exposition of that case than was put in the speech of the noble Lord, Lord Boothby. If I may just finish this part of my remarks before giving way to the noble Lord, Lord Hill, the noble Lord, Lord Boothby, explained how people can sit at home, drawing not only entertainment but also comfort from their television screens, and for that reason alone my right honourable friend the Home Secretary must take the greatest care in deciding what has to be paid by the individual television viewer. Your Lordships may wish me to remind you that the poll, published in the Sunday Times last Sunday indicated that over 60 per cent. of the public are not disposed to pay more for their television licences.
Lord HILL of LUTON: My Lords, I do not rise in any way to pursue the analogy of beer. The thirst is so growing on me that I want no further reference to it. But will the noble Lord, Lord Belstead, look at this from the angle of what £34 means to the Corporation? The angle of a reduction or a postponement of £90 million worth of capital development, a reduction of £40 million in current expenditure, a loss of 1,500 jobs and—what is very serious—a movement of trained staff at an increasing pace from the BBC to Independent Television because their rates of pay are 20 per cent. and 25 per cent. higher, something with which the Corporation cannot compete. Those are the facts of the reality of the application of the Government's decision; not the contemplation of total amounts that are being given. It is a question of the amounts that are not being given, and the results that flow from that.
Lord BELSTEAD: My Lords, the noble Lord anticipates what I was about to put to your Lordships. Your Lordships may remember that the chairman of the BBC, Sir Michael Swann, while making no secret of the serious implications for the BBC of the level of the licence fee, none the less in his lecture to the Royal Television Society, speaking of the Government's decision on the new licence fees, said:

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"to be fair, this is more or less in line with what they are trying to achieve elsewhere in the public sector. And to be truthful, quite a lot of the £130 million—in fact, £90 million—will be found by deferring or abandoning planned new developments".
If I may go on on the same tack, and answering the point that was put to me by the noble Lord, Lord Hill, in announcing the fee increases my right honourable friend made it clear that they must last for at least two years. This was a genuine attempt to do exactly what the noble Lord, Lord Hill, and the noble Lord, Lord Boothby, have been asking, namely, to give a sensible period of time for the duration of the licence. My right honourable friend said that he had taken account of the need for the BBC to pay off its deficit on current account, that the level of the fee took account of the need for an increase in capital expenditure and recognised the need for an increase in Welsh language broadcasting by the autumn of 1982.
Before the noble Lord says to me that these considerations which were taken into account were not enough, may I say quite openly that of course it is absolutely true that the increases were less than the BBC had hoped for. The plans of the BBC would have involved a colour TV licence fee some £7 higher, as I understand it, which would have meant £41 rather than £34. But the Government thought that this was more than they could reasonably ask the licence fee payer to meet, for reasons that I have tried to lay before your Lordships this evening.
Of course, we will not encourage the BBC to borrow further. Only last year the previous Government decided not to improve their 1978 licence fee increase, but rather to relax the borrowing powers of the BBC, which has led the Corporation to run a deficit on current account alone of some £40 million. This, of course, is a very serious matter in the situation in which the Corporation finds itself at the moment.
The economies—and I make no secret of the fact that the BBC have had to look at these very seriously indeed—are nonetheless a matter for the governors themselves. Without going into unnecessary detail they have—if I may repeat it—made it clear that £90 million of the figure of £130 million involves deferring improvements and increases which were
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planned in expenditure. But £40 million is needed partly to finance £14 million of new developments which the BBC governors regard as essential; and partly to finance increases in labour costs. The reduction in manpower—which the noble Lord, Lord Ponsonby, particularly referred to in his speech, and the noble Lord, Lord Hill, has just referred to again in his intervention—of some 1,500 jobs will be achieved largely by natural wastage.
The noble Lord, Lord Hill, spoke of various indices which could perhaps be compared with the licence fee. The noble Lord, I am sure, appreciates better than I do that the licence fees are not really the right measure when we are talking about this. It is the income you actually get from the licence. Buoyancy, the switch from monochrome to colour, has, of course, increased the BBC's income from given fees. In 1970–71, when the noble Lord was indeed chairman of the BBC, there were, as I understand it, some 600,000 colour licences and they produced some £7 million in money. But in 1978–79 there were some 12 million licences producing some £300 million in money.
The noble Lord also proposed in his speech a system of independent assessors, and also spoke of the desirability—as indeed did others of your Lordships—of indexation for the licence fee. As to the case for independent assessors, I think for the reason which I sought to give when I was talking about compulsory expenditure, which I believe the fee is, the Government must really always make the final decision, and they must consider what is fair to the licence payer and what is the proper allocation of national resources. Independent assessors would inevitably be looking, I should have thought, only at the needs of the BBC.
I suspect that this was the sort of thing which was in the mind of the noble Lord, Lord Taylor, of Gryfe, when the noble Lord intervened during the speech of the noble Lord, Lord Winstanley. I can quite understand the noble Lord, Lord Winstanley, saying that it would be desirable to find out first what are the needs and then to provide the money to pay for those needs. But that would be putting the cart the other side of the horse compared to the way that we have

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it at the moment. That is not always the best way of driving the cart down the road.
So far as indexation is concerned, if there is a measure of inflation, indexation builds an inevitability into it. Only if prices, wages and salaries can be kept below an existing rate of inflation can that rate be reduced. In case your Lordships think that that is a very stuffy thing to say in this speech, and that I have simply read out a brief in saying it, the answer is yes, it is rather forbidding; yes, I have read out some prepared words; and yes, I intended to read them out because I think that this is a fact of life that we have absolutely got to face.
Indeed, if I may just say so, I think we have also, in a debate of this kind, to look at whether alternative proposals have been put forward in the debate this evening. As I understand it, apart from my noble friend Lord O'Neill of the Maine, who recommended limited advertising on BBC radio, I believe that this evening there has been broad agreement that public service broadcasting will only retain its character, its quality and its independence if the BBC continues to draw its finance essentially from a licensing system. It is therefore inevitable as a follow-up to that that my right honourable friend the Home Secretary has to decide the level of the licence fee. He believes that the increases he has announced are fair, bearing in mind the interests of both the payers as well as the Corporation. But it is the responsibility of the governors of the BBC to decide how they spend their money. The governors have already indicated that the BBC cannot be isolated from the realities of the economic situation. Indeed, they have said that if inflation worsens, and there is no compensating increase in income, further economies will be needed.
The governors have set out their priorities for the future, and have set the cuts particularly in the regions in context against sizable levels of expansion in recent years. The governors have clearly reached their decisions with great care, and I would just like to repeat something which I ventured to say to the House a few weeks ago: the governors of the BBC have gone to great trouble to say that they will encourage any efforts which
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may develop to find additional money for orchestral music, a matter which the House debated on 29th April on an Unstarred Question by the noble Lord, Lord Ross of Marnock. At the same time, the governors of the BBC have not suggested that they are unable to carry out their public duty with this level of fees. Much of the reductions are, as I have been at great pains to try to point out, in planned rather than in existing expenditure and staff.
Although I assure your Lordships that I have listened, and will draw the attention of my right honourable friend, to what has been said in this debate, at the same time may I express the hope that this debate has set matters in a clearer perspective.
Lord TAYLOR of GRYFE: My Lords, before the noble Lord concludes this interesting debate, may I ask him one question? I apologise for not giving notice of it. He talked about the limits on BBC borrowing. Is the BBC limited in its borrowing by the same constraints as apply in other public industries, or have the BBC examined the prospect of financing some of the requirements by leasing devices or other devices which would attract money from the private sector?
Lord BELSTEAD: My Lords, the second part of the question the noble Lord asks is, of course, a matter for the BBC governors. The first part of the question is a matter of fact. There was a ceiling on the borrowing powers of the Corporation which was raised—the word I used in my speech was "relaxed"—by the previous Government, for perfectly understandable reasons, early in 1979. But the effect of that relaxation was that certainly last year the BBC was running a formidable debt on current account which amounted to some £40 million.
Lord WINSTANLEY: My Lords, may I ask one final and simple question? Irrespective of whether the money is enough, and irrespective of the difficulty of index linking or finding other means, does the noble Lord agree that a situation in which the BBC is deeply dependent on the Government of the day on a continuing basis for its housekeeping really is a situation containing very great dangers?
Lord BELSTEAD: My Lords, we have said, certainly in another place—I am not sure whether it has been said in your Lordships' House—that my right honourable friend is instituting and has instituted discussions between his department and the BBC on the future financing and financial arrangements of the BBC. This is, of course, in an attempt to ensure that when the licence fee is fixed, in the interests of the Corporation and everybody that licence fee fixing will be for sensible periods of time. I do not think I can go further this evening along that particular path, except to say to the noble Lord that, although we have this evening discussed at some length some of the great problems which undoubtedly arise as a result of the licence fee system, I think that would be as nothing compared to some of the suggestions which are occasionally made—for instance, that perhaps the BBC should be financed out of direct taxation, precisely the sort of thing which would mean that the BBC would lose the independence which we all so much desire.