HL Deb 08 July 1981 vol 422 cc697-8

3.7 p.m.

Lord Beswick

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 that rewards to capital by way of interest, as with rewards to labours by way of wages, should be related to productivity.

Lord Cockfield

My Lords, the function of interest rates is to bring the demand for money into line with the supply. Increases in wages unmatched by increases in productivity reduce the demand for labour and hence create unemployment. If this is what the noble Lord means, I would agree with him.

Lord Beswick

My Lords, I am grateful to the noble Lord for what he has said and I am always anxious to define an area of agreement with the noble Lord. But if the function of high interest rates is to reduce the money supply, would the noble Lord claim that they have been conspicuously successful in that attempt? Are we not really getting down to the saying that inflation is a matter of too much money chasing too few goods? If by high interest rates we reduce the money supply but at the same time reduce the volume of goods, are we not left with as bad, or even worse, an inflationary situation?

Lord Cockfield

My Lords, no. It is perfectly true—and we have made no secret of it—that the control of the money supply is a difficult exercise. Nevertheless, it is essential that we continue to direct our best efforts to doing this, and it is what we are doing. The statement that the noble Lord made about inflation being due to too much money chasing too few goods is a popular truism, in the sense that the more money there is and the fewer goods, the higher prices will be. But the natural consequence of that argument is to point towards reducing or controlling the money supply, which is exactly and precisely what the Government's policies are directed to do.

Lord Beswick

My Lords, would the noble Lord be good enough to answer the one part of my question in which I put forward, as a fact, that the policy of high interest rates has had the effect of reducing the volume of goods?

Lord Cockfield

My Lords, the reduction in the level of output is due to the slowness of the economy in responding to the economic measures taken. The biggest problem here has been the persistence of a high level of wage settlements, way beyond what the economy could afford. This has produced severe strains on the money supply and it has also resulted in a reduction in the level of output.

Lord O'Brien of Lothbury

My Lords, would the Minister agree that the phenomenon referred to by the noble Lord, Lord Beswick, of inflation produced by too much money chasing too few goods, is one form of inflation, but it is not the form of inflation from which we are now suffering?

Lord Cockfield

My Lords, we are indeed suffering from the problem of people demanding too high money incomes for the goods that they produce. It is this which ultimately leads to inflation. The main cause of the demand for too much money lies in the level of wage settlements. Fortunately, this level is coming down. The present level of settlements is about half what it was last year, and we must look forward to a continued reduction, which will be followed in due time by a fall in the rate of inflation.

Lord Alport

My Lords, may I ask my noble friend whether he attributes any of the inflation which has taken place over the last few years to the increase in oil? Why does this not appear to be part of the answer which he gives on this occasion? It has always struck me that the increase in oil fuelled the inflationary tendencies of the last four years.

Lord Cockfield

My Lords, the increase in the price of oil—and there have been two great oil price explosions, one in 1973 and a further one in 1979–80—did in fact spark off very severe inflation throughout the whole of the industrialised world. Some countries however coped with this situation much better than did others. The German economy, for example, by following strict financial policies succeeded in keeping their rate of inflation much lower than we kept it in this country, which was due to a failure to follow adequately firm financial and monetary policies.

Lord Beswick

My Lords, finally may I ask the noble Lord whether he is aware how grateful we are that he has at least spared us the claim he usually makes, that Government policy is bringing down interest rates?

Lord Cockfield

My Lords, the rates of interest have fallen from 17 per cent. last summer to 12 per cent. now. That is a very considerable achievement.

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