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Column 536arguable that any qualifications of the price stability objective and any use of target mechanisms and "overrides" risks losing a significant part of the increased market confidence and the reliability of the policy. At least the process is explicit and open, and that in itself is a considerable improvement on what we have now. One can imagine that the Government might have some difficulty in winning the political argument for what the Bank thought were weak targets.
If one brings that debate into the open, it becomes much more difficult for the Government to let inflation rip by surreptitious methods or by subterfuge. The slight difference of view over how far one should go has been reflected in the amendments that were tabled in the Committee. I was glad that the Committee accepted a raft of amendments of mine which were supported by the hon. Member for Milton Keynes, South-West (Mr. Legg). Those amendments were then sub-amended in various ways. It was a complicated process, but it arrived at a decision between people of varied points of view but with a shared belief that what we needed was a more open process in which the Bank has a declared objective of stability which is open to some public modification. That is what most people are talking about when they use the shorthand of "independent central bank".
None of that will affect directly the other functions of the central bank. Those include bank supervision, serving as the banker to the Government and safeguarding the health of the banking system. Those in themselves do not require changes in accountability, though there are arguments in favour of hiving off banking supervision to a different institution, a change which people might think necessary. It has been pointed out that there is a possible danger from the Bank's role as the banker of the Government to its independence in running monetary policy. What will be certainly required by a change to greater autonomy in monetary policy will be a change in the internal structure of the Bank, with a clearly distinct monetary committee. The basis for that requires further discussion, as the Committee acknowledged.
The process is easier to see in federal countries. I know that that term causes some embarrassment to Governments, but many countries run their affairs on a federal basis quite happily. In federal countries, it is easier to see how an element of independence may be drawn from the federal components of a country in forming the monetary committee of one's bank. Despite my support, and that of my party, for a federal system within the United Kingdom, let alone Europe, I do not wish to rely on potential developments, but rather to look for ways of getting the job done here and now. We have to look for ways of making the monetary committee of the Bank an appropriate one for carrying out those tasks.
Let us get rid of two myths. First, in delegating monetary responsibilities to the central bank, Parliament certainly would not be throwing away accountability. Where is the parliamentary accountability now? Even with greater openness, we do not know whether the Chancellor is acting on or rejecting the Bank's advice. Shared responsibility is the death of accountability. We can see that theme running through all of the stories about accountability in every kind of field, whether it is central banking or arms to Iraq. If several people are responsible, they can all say, "It was not me, it was him he didn't tell me he sent me the memo, but I did not fully
Column 537appreciate its contents." When responsibility is divided, it becomes diffused, and one gets less effective accountability.
Mr. Dorrell : I entirely agree with the right hon. Gentleman that shared responsibility means that the exercise of power is unaccountable. That is quite right, but the right hon. Gentleman is wrong in describing our present arrangements as "shared responsibility". It is clear that responsibility for the conduct of monetary policy lies with the Chancellor of the Exchequer. The Chancellor's accountability to the House is the accountability mechanism at present. The problem with what is proposed in the Bill precisely involves the issue to which the hon. Gentleman has referred--responsibility would become more diffused than it is at the moment.
Mr. Beith : Up to a point, that is true. The former Chancellor, Lord Lawson, made that point to the Committee in his usual modest way. He said that the policy was that when he believed interest rates should go up, they went up, and when he believed they should go down, they went down. He subsequently qualified that by revealing that, on two occasions, Baroness Thatcher did not let him have his way, but, generally, that was how it was to be.
What the Bank is saying at any one time is crucial to the matter. We do not want to know whether interest rates went up or down, because we know that the Chancellor made the decision. We want to know when he made the decision, and whether the Bank told him to do that, or to do something else. If we do not know that at the time, clearly we cannot understand the nature of the decision and we cannot have a public debate about it. Obviously, that would be destructive to the market perception of what is going on.
We cannot have bankers issuing press releases saying that they are on their way to tell the Chancellor that interest rates should go up, and then the Chancellor does not put the rates up. One can imagine the consequences of that. It is much better to have responsibility lying where the advice comes from. We would then know that, whatever happens, the decision is being taken by the institution that has been charged with working out what the effect will be on price stability. The institution can subsequently be held to account for how far it has achieved price stability by the methods.
There is always the hint that the Chancellor may or may not be acting with the support of the Bank. Under the system that is proposed in the Bill, the Chancellor is answerable to Parliament for the more specific responsibility of setting a target or, for that matter, for whether he is using an override if he chooses to do so. The Bank's carrying out of its duty can be questioned in a Select Committee and debated on the Floor of the House. I believe that it is a myth that, under the proposals, there would be less accountability than there is now. I believe that there would be more, and I have no doubt on that at all.
The second myth is that unemployment would be kept lower if the Government had direct disposal of the instrument of monetary policy. That means that the value of money would be destroyed to meet short-term crises, with the result that property investment and reckless borrowing became more attractive than saving and industrial investment. We have been through all that in the recent experience of the country. That is the route to
Column 538long-term unemployment and to failure. In the short term, price stability targets can assist by taking account of the need to move at an unmanageable speed to price stability. Big external shocks to the system could justify an override, or a change in the target. Nobody is suggesting that a system be devised in which it is impossible for monetary policy to take account of something dramatic ; for example, the oil shock which hit the world economy. Some of those who like to regard themselves as latter-day Keynesians seem to assume that Keynes would, for precisely those reasons, have no truck with the use of monetary policy. That is quite false. Keynes is recorded by Chamberlain, for example, as arguing for a very long and continuing hike in interest rates in 1920. Even as his views evolved during the later crisis, Keynes never lost a degree of commitment to the use of monetary policy to maintain price stability. He had an overriding concern with the management of demand, but that did not make him someone who would advocate lax monetary policy in the face of raging inflation. It is a total abuse of Keynes when some, including the hon. Member for Dagenham (Mr. Gould), appear to suggest that Keynes might have favoured an extremely lax monetary policy when faced with severe inflation.
Under the proposed system, fiscal policy could not be operated at total war with monetary policy, so both the Government and the Bank will have to take the economic circumstances and each other's decisions into account. Stable money is just one of the building blocks for a stronger economy. An autonomous, but accountable, central bank with responsibility for the conduct of monetary policy is a big step towards stable prices. For much, but not all, of the time, that should enable lower interest rates because of greater market credibility. That is not a panacea for other economic problems, but it leaves the Government free to tackle the problems within a more stable framework.
The hon. Member for Wolverhampton, South-West is well known for his rigorous critique of Britain's participation in anything European. He pointed out that, for many people who take his view, there would be attractions in having an independent central bank in this country, rather than our being involved in a European central bank. I take a different view. I believe in the great merits of a single currency. We can secure the economic conditions to make it feasible, and I believe that it is an appropriate and necessary component of a single market. It would be of great advantage to British industry if it could operate in one market with one currency, and I should like to see that come about.
However, we need that to come about by a different mechanism from the ERM-- the ERM is a draughty waiting room in which to stay for a long time. Experience has demonstrated that the final stage of entry into a single currency needs to be a shorter one. We cannot operate a single currency as a nearly-single currency for any length of time, unless there is a commitment from all participants to safeguard each other's currencies. Without that determination, the currencies can be picked off one by one. A change of route will be essential if we are to get a single currency. That is a safe bet, whether one is in favour of a European single currency or opposed to it. The one thing that the two sides of the argument seem to have in common is the determination to build a non-inflationary economy for this country.
Column 539Whether we do that as an island, strongly separated from what is happening in the rest of Europe, as some believe is possible--I do not--or as a full participant in Europe, we need to have monetary policy primarily dedicated to price stability. That is what the mechanism in the Bill can do. It can do it on a basis that gives greater openness and accountability. It would be far clearer and more understandable than our present system.
Sir Peter Tapsell (East Lindsey) : Many types of Bill come before the House : Government Bills, private Bills, personal Bills, hybrid Bills, attainder Bills--rather underused nowadays, especially in the case of Treasury Ministers--and private Member's Bills. When I first heard that my hon. Friend the Member for Wolverhampton, South-West (Mr. Budgen) intended to produce this Bill, knowing his well-known opposition to the Maastricht treaty, with its great emphasis on the establishment of, first, an independent British national central bank as a stepping stone to a still more independent European central bank, I assumed that we would be presented with a new category of Bill--a sardonic Bill.
Now that I have read my hon. Friend's article in The Times yesterday, heard him on the "Today" programme this morning and listened to his admirable speech, I realise that the Bill is not a sardonic Bill but a probing Bill, rather like a probing amendment. With his characteristic modesty, my hon. Friend described the Bill as a very narrow and technical measure. But my feeling is that it represents the not so thin end of what would prove to be a very thick wedge.
It seems to me inconceivable that any such change in the status and powers of the Bank of England could be brought about by anything other than a major and most important Government Bill. Nevertheless, it is extremely helpful that my hon. Friend has given us the opportunity in the Bill, which I hope will not reach the statute book, to have a valuable discussion of the principles and issues that the Bill raises.
In his article in The Times yesterday, my hon. Friend referred to something that my right hon. and learned Friend the Chancellor of the Exchequer was reported as saying in the Select Committee report. He said that the idea of an independent central bank, a more independent central bank, or a central bank with power to look after at least monetary affairs, had become fashionable. My hon. Friend queried in his article what the word "fashionable" meant. I should have thought that it was fairly clear what it meant. Lord Healey made the same point to the Select Committee. He described the idea of an independent central bank as a gimmick. He said that it was an apologia to be used by failed Chancellors to shuffle off their responsibility onto the Bank of England.
Lord Healey went one better. At an early stage of his Chancellorship, he shuffled off responsibility for both monetary and fiscal affairs on to the International Monetary Fund. I am bound to say that if one starts moving responsibility away from the Chancellor of the Exchequer, one should make sure to move his fiscal responsibilities along with his monetary responsibilities. I shall return to that point later.
The question of passing fashions in economic affairs is a real one. One thinks of prices and incomes policies, control of the money supply, medium- term financial
Column 540targets, the shadowing of the deutschmark, joining the exchange rate mechanism and then the attempt to establish a single European currency. They are all fashions which have come and gone. They have all been extremely disruptive and damaging to the management of the British economy. I have not the slightest doubt that the idea of transferring monetary power to the Bank of England falls happily into that category.
All those economic panaceas are designed primarily to achieve price stability. No one doubts that price stability is a highly desirable objective. It has been an objective of all Governments since the Stuarts, who set up the Bank of England and to whom my hon. Friend the Member for Wolverhampton, South-West referred. Most Governments, starting conspicuously with the Stuarts, have failed to produce price stability. Even during the long period in which Britain was on the gold standard and had an independent central bank, the price of wheat and the purchasing power of wages often fluctuated greatly. That shows that price stability is an infinitely complex problem which is not susceptible to any simple or single solution.
The fact is that stable prices, even when achieved, are a necessary, but not sufficient, element in the pursuit of steady industrial growth and general prosperity. Many different factors affect price levels. A successful economic policy requires a wide variety of interconnecting financial and economic policies constantly in need of modification in relation to each other.
I argue that to hive off control of monetary policy and interest rate movements to a so-called independent central bank would reduce our ability to co-ordinate fiscal and monetary policy. The Bundesbank is often cited as an example of an admirable independent central bank. No one denies that it has done a good job in Germany or that it enjoys enormous prestige due to Germany's experiences of appalling inflation in the early 1920s. However, in the past three years, Germany has demonstrated the great disadvantages of placing power and responsibility for monetary affairs and fiscal affairs in separate hands.
Ever since the reunification of Germany, to which my hon. Friend the Member for Wolverhampton, South-West referred, the Germans have run a far too lax fiscal policy, combined, partly as a consequence, with a far too strict monetary policy. That has caused tremendous problems within Germany and throughout Europe. It was, of course, the reason why the exchange rate mechanism impinged so harshly on Britain and continues to impinge harshly on France.
In my judgment, to give special separate monetary powers to the Bank of England would tend to produce exactly the same results for Britain. My basic technical criticism of all moves towards an independent Bank of England, particularly in monetary affairs, is the disadvantage of separating monetary policy from fiscal policy. The act and the art of balancing monetary and fiscal policy produces good economic performance.
Any fool can create stable prices or falling prices by plunging the country into slump conditions. That is precisely what the independent Bank of England under Montagu Norman did during the 1920s by its obsession with the gold standard and maintaining sterling at an overpriced parity against the United States dollar. Montagu Norman, the Governor of the day, took the view that the consequent unemployment was no responsibility of his.
Column 541That was a matter for the Ministers, whom he so despised, to grapple with. It was for them to shoulder the blame. His diaries make that absolutely clear.
By the same token, one may be certain that, while the modern Bank of England is happy to be given an inflation target--I understand that my hon. Friend the Member for Wolverhampton, South-West is now the hero of the Bank of England hierarchy--it would be horrified if, at the same time, it were given an unemployment target or a growth target. Indeed, senior people in the Bank of England--I do not talk to quite such senior people in the Bank of England as my hon. Friend does--have indicated to me that they would not be prepared to accept any such contract about unemployment or growth. I use the word "contract" in the New Zealand context.
I was honoured earlier this week to receive a letter from my hon. Friend the Financial Secretary to the Treasury, dated 25 January, which started by reminding me that tax and spending should not be separated from one another and must be viewed together.
I am grateful to my hon. Friend for reminding me of that very important fundamental economic and financial fact. I suggest that the same argument applies to fiscal and monetary policy. That is the crux of the problem. The 1944 White Paper on employment, produced by all the political parties, is, in my view, still the best modern state document on economic policy. I recommend it to any right hon. or hon. Member who has not recently read it ; it makes excellent reading, partly because, in addition to being exceedingly wise men, Keynes and Beveridge had the rare capacity in public servants of being able to write good English.
The White Paper laid down four objectives. It did not just try to pick out monetary arguments alone. It laid down the four objectives of post-war economic policy of trying simultaneously to achieve stable prices, high levels of employment, a healthy balance of payments and an expanding economy. Surely those are the objectives which every Government of whatever political persuasion should pursue in this country.
Only briefly, from 1952-54, under the Chancellorship of Rab Butler, at the time when I first joined the Conservative research department, of which he was also then chairman--we used to see a lot of him personally when he was Chancellor--have those objectives been achieved simultaneously in Britain in the post-war period. There was a considerable element of luck about that, because of the ending of the Korean war and the tremendous shift in the balance of payments and terms of trade in our favour. Nevertheless, it happened under Rab. I often heard him talk in private about the great difficulty when juggling with the economy of keeping all four balls in the air at the same time without dropping one. Harold Macmillan used to say the same thing. Those four balls need to be juggled with. It is no good thinking that one can just toss one of them across to the Bank of England and leave the politicians to play with the other three. If the Bill became law, it would, by tossing away one of those balls, make the management of our economy more, not less, difficult, because it would separate monetary from fiscal policy.
Column 542his point of view, of separating monetary and fiscal policy, will he care to comment on the current reality, rather than that which pertained in the early 1950s? With the exception of Britain and Japan, no other leading member of the OECD now shares his view that it is necessary institutionally to concentrate monetary and fiscal policy, and the prime responsibility for those policies, in one institution, whether it be Government or bank.
Sir Peter Tapsell : My hon. Friend dismissed Japan, which, until recently, has been the most successful country, economically speaking. In a few moments, I will quote Mr. Paul Volcker on the American experience. As to Europe, because of the dominance of the Bundesbank, there has been a fashion to allow the central banks much more power to control this, but that has recently had disastrous results. One has only to look at the economies of western Europe. Spain now has an unemployment rate of 22 per cent. France, my in-laws tell me--I have a French wife--is on the brink of revolution. Despite the popularity of Mr. Balladur personally, the French people are desperately unhappy with the present economic situation. That is partly because the central banks of western Europe have been allowed to have too much power, and the Ministers, for a variety of reasons, partly perhaps through a lack of understanding of economics, have been pursuing a far too deflationary policy which is causing widespread unemployment through western Europe, and may, in due course, cause political instability.
Mr. Budgen : May I take up with my hon. Friend his point about the role of the Government in agreeing these targets? Of course, under clause 2, it is the duty of the Bank to attempt to achieve and maintain price stability. When the agreement is reached, the Chancellor comes to the decision with his knowledge of employment considerations, fiscal policies and all the rest, and brings into the agreement all those points that my hon. Friend makes about the three other balls. If, at a later stage, he finds that his consideration of the three other balls was not sufficiently taken into account in the agreement, there is the override power.
I hope that my hon. Friend will not be too much taken by the arguments of those who want an independent central bank. We considered an independent central bank in the Treasury Select Committee. Some of us were initially attracted towards that and the New Zealand model. But when we came to agree to the final recommendations, we abandoned that. This is a much more modest proposal.
Sir Peter Tapsell : It is a much more modest proposal, but it is, in fact, a stalking horse for a much less modest proposal, if I may use a term familiar to my hon. Friend. It is undoubtedly the case that the great majority of the people outside the House and in the City of London--Lord Roll's committee produced an extremely distinguished report on the subject recently--are the same people who were so enthusiastic for Britain to join the ERM, who argued that we should stay in it and rejoin it, are in favour of the Maastricht treaty, want us to go for a single European currency and want us to have a single, independent European central bank.
My hon. Friend is being wholly naive, which is a rare quality in him, if he believes that this modest measure is not regarded outside the House as something that will take us down the federalist path. That is my judgment.
Mr. Jenkin : I am most grateful to my hon. Friend for giving way. On the point about the four objectives of the 1944 White Paper, and maintaining those in balance, can he point to a period when we have ever allowed an unchecked rise in inflation? Has that ever assisted in the achievement of the other three objectives?
I point out to my hon. Friend that, during the period to which he refers, under the former Chancellor, Rab Butler, we were in a fixed exchange rate system, secured to a very solid and dependable anchor--the United States-- during the 1950s. We are now in a period of floating exchange rates and, therefore, are dealing with more variables. Therefore, there is a stronger need for an anchor on one of those four policy objectives.
Sir Peter Tapsell : I certainly do not advocate inflationary policies, and I accept what my hon. Friend says ; there has never been a period when, by running a lax monetary policy and allowing prices to rise, we have in any way safeguarded the other three areas of economic activity. Of course not. As I have said, stable prices are a necessary, but not sufficient, basis on which to establish success in the other three spheres.
I have not yet replied to the question of my hon. Friend the Member for Wolverhampton, South-West about the override. It is cloud cuckoo land to believe in an override, where the Chancellor of the Exchequer or, in some other countries, the Minister of Finance, can suddenly publicly announce that he has had a flaming row with his central bank and that the Government are going to take emergency powers to override the bank. The Governor of the day would resign, the gilt market would collapse, there would be a run on sterling, the Opposition would table a motion of censure and I would vote against the Government.
One need only read the history of flaming rows between Prime Ministers, Chancellors of the Exchequer and Governors of the Bank of England in the first 46 years of the century to discover that the one thing that they were determined not to do was to let the market know what was happening. No doubt the Mr. Soroses of the day would have a pretty good inkling of what was happening. One should not institutionalise an arrangement whereby the Treasury of a country will have public rows with its central bank.
As one of my hon. Friends has already said, there would not just be a problem with the tremendous increased cost of funding the borrowing requirement ; it is also important to consider the wider political, financial and economic repercussions of a public dispute between the Prime Minister of the day, the Chancellor of the day and the Governor of their central bank. Those repercussions are so horrendous as to be unacceptable.
Dr. Jeremy Bray (Motherwell, South) : If the hon. Gentleman shifts his scenario to black Wednesday, does he really think that it would happen quite in the way that he has described? Surely the Governor of the Bank of England would say, "For Christ's sake take this shambles off my hands. Something must be done and it obviously affects your parish. Over to you." That is the reality of the situation.
Sir Peter Tapsell : From all accounts, although we have not yet had frank accounts of what happened on 15 and 16 September 1992, there was a panic. We do not know who said what to whom. The world realised that there was a
Column 544financial crisis in Britain, set off by the president of the Bundesbank, Mr. Schlesinger, who gave an extremely unwise press conference a few days before.
There is nothing new about such crises, because a similar situation arose when we went off the gold standard in June 1931. As it happened, Montagu Norman was on a Cunard liner in the middle of the Atlantic. When all the experts at the Bank of England decided that they had to go off the gold standard they told poor Mr. Philip Snowden, the Labour Chancellor--no one had ever told him before that that could be done and he had not thought of it for himself. They wanted to know how to get that news to Governor Norman, in the middle of the Atlantic, without anyone knowing. They spent a lot of time concocting a telegram and eventually Mr. Cockayne, the deputy Governor of the Bank of England, sent a cable which read, "Old lady goes off on Monday."
Montagu Norman was sitting in a deck chair on the promenade deck of the liner when that telegram was handed to him. He had spent the whole of his central banking career trying to keep Britain on the gold standard, having ensured that it was put on it in the first place. He read the message and assumed that it referred to a change in the holiday plans of his mother.
That incident shows that the crisis of September 1992 had honourable predecessors in our history. Nothing very much changes in the practicality of the management of economic and financial affairs whether the Bank of England is nationalised or independent. Most changes in interest rates in this country have, in practice, been driven by external factors, not by domestic ones. They are usually connected with the exchange rate of sterling, which will remain a Government responsibility under the proposals of the Bill. So far as I know, there have seldom been serious differences of opinion between the Treasury and the Bank of England about interest rate policy, despite what the right hon. Member for
Berwick-upon-Tweed (Mr. Beith) said. Arguments have arisen about the timing of an announcement, but the main arguments have been between No. 10 and No. 11 Downing street. That has happened under all Governments.
The most serious blunder in monetary policy since an independent central bank persuaded Churchill to return to the gold standard at the wrong dollar parity in 1925 was our decision, strongly urged by the Bank of England at the time, to join the exchange rate mechanism in 1990. To join it at all was a mistake, to join it at the wrong parity to the deutschmark was a blunder and to remain within it throughout the first nine months of 1992 was a folly, as I said at the time. Nevertheless, that policy, as far as we know, was fully supported by the Bank of England and by the leaders of the Labour and Liberal parties. They had urged the Government to join the exchange rate mechanism for a long time before we did so in the autumn of 1990.
My hon. Friend the member for Wolverhampton, South-West warned against that decision at every stage of the proceedings. He was much wiser--
Sir Peter Tapsell : I only spoke against it. I did not have the courage to vote against it. I have only fairly recently got into the habit of voting against my Government. I learnt at the feet of the master. However, my hon. Friend was right
Column 545when the Treasury officials and the Bank of England were wrong. Even Baroness Thatcher was converted and we joined the exchange rate mechanism.
If we had to choose an expert to run the monetary authority, we should not choose the Bank of England but my hon. Friend the Member for Wolverhampton, South-West, because he has a much better track record on such matters than most of the rest of us. He knows that I had a good deal of sympathy with his arguments throughout those years, as I said in public from time to time.
Short-term interest rate movements and fluctuations in the sterling exchange rate impinge much more directly on the political scene in Britain than they do in Germany or the United States. All the attempts to bring in bits of foreign countries to Britain are rather like heart transplants-- they are extremely difficult operations which tend, in the course of time, to go wrong. The United Kingdom is a unique country. We cannot look at New Zealand, Germany or the United States and decide that we rather like a bit of their arrangements. We cannot plant that down in the British context in the hope that it will work.
I shared the views of Michael Foot and Enoch Powell, who were against the establishment of Select Committees, if I may say that in this gathering, because I thought that that was an attempt to introduce an American system into our way of life. It did have the result of emptying the Chamber of the House, as Michael Foot had predicted.
Our system is different. I have enormous admiration for Mr. Paul Volcker, who was chairman of the Fed for 10 years. In an recent lecture on the centenary of the Bank of Italy, he said :
"Economically large nations, relatively less exposed to foreign trade than the closely knit economies of Western Europe, may be less concerned about what the pursuit of an independent monetary policy does to their exchange rates."
That is undoubtedly true, because sterling and the exchange rate have largely determined the level of interest rates, not the other way round. Almost all the crises about interest rates that I can recall have resulted either from sterling being under pressure or because it was thought to be getting too strong.
Neither Germany nor the United States has a close link between its short- term interest rates and its exchange rates. Nor is there a close link, as there is in this country, between their short-term interest rates and the home-owning millions and home-buying millions. I remind my hon. Friends that those people are crucial to the future of the Conservative party. They are potentially, and have traditionally been, loyal Conservative voters and I am not keen to hand them over to the tender mercies of the Bank of England.
Mr. Budgen : A new social and economic factor is the rise in self- employment. Most self-employed people are borrowing their money short term from the clearing banks, and will be very much affected by interest rate changes.
Sir Peter Tapsell : That is absolutely true. Home owners and small businesses in this country are tremendously concerned with short-term interest rates--probably much more, in a political sense, than those in any other country. Also, we export much greater proportion of gross domestic product than other countries, even Japan.
Column 546In America, the foreign exchange aspect hardly affects domestic politics. When the Americans had a huge double deficit under President Reagan, of which we heard so much and of which I was rather an admirer--they had no difficulty in financing it, through vast sales of US Treasury bills to the Japanese. We have never been able to do that when we have been in a similar position ; we have always had to raise interest rates to a high level to protect ourselves. Analogies with foreign countries are often irrelevant to the British position.
Mr. Forman : Is not the volatility of interest rates--particularly short-term interest rates--most damaging to a country such as ours, which has something of a housing fetish ? It also damages small and medium-sized business men, who depend on short-term money. Does not the record show that such volatility is reduced when monetary policy is the sole responsibility of a more or less autonomous central bank ? Given a record--under this or any other Government--of abrupt interest rate movements, we must surely favour a more autonomous banking institution.
Sir Peter Tapsell : I do not know whether than can be said with any certainty. I agree that interest rate volatility has been one of the banes of economic management in this country, but I do not think that it would necessarily be much reduced if responsibility for interest rates were transferred to the Bank of England, which would still have to face crises as they came along.
In the German crisis over reunification in recent years, the central bank tried to counterbalance the expansion and slackening of fiscal policy with an excessively stiff monetary policy. There is no historical proof that interest rates would be less volatile if they were controlled by the Bank of England ; they must reflect the balance of payments, among other factors.
Britain, as I have explained, is different, because of the importance of our exports, our exchange rate problem and our house mortgage position. Moreover, the Bank of England is different from other central banks : that is often overlooked. I described the ways in which it was different at great length in one of our Maastricht debates, on 24 March 1993, so I shall not fully cover that ground again. It is a fact, however, that the Bank of England has an entirely different range of responsibilities from most other central banks--a much wider range.
For instance, neither the Fed nor the Bundesbank has supervisory responsibilities. They would have had nothing to do with BCCI or Johnson Matthey. There may well be a strong case for removing the Bank of England's supervisory responsibilities ; but that is a different argument, and I shall not go into it now.
In comparing the Bank of England with other central banks, we must remember that we are not comparing like with like. The Bank of England is responsible not only for banking supervision, but for the management of the Government's borrowing requirement, the operation of the foreign exchange portfolio and what used to be one of its most important functions--exchange control. In many other countries, those four responsibilities would be carried out by organisations other than the central bank.
The enormous range of the Bank's responsibilities has been one of its great strengths. That is why it has had its finger on the pulse of the City and the international markets, and why--despite the embarrassment that its
Column 547supervision role has caused it in recent years--it wishes to retain that role. The Bank of England does not think that it can know all the detail of everything that goes on in financial markets unless it can supervise the banks.
The Bank of England is more or less unique in that regard. The proposition that an independent central bank need only focus on its role in monetary policy does not apply to it. Conversely, giving the Bank freedom in that one role but not in the rest of its wide range of roles would produce an administrative dog's breakfast. It reminds me of my later days in stockbroking, when Chinese walls were introduced. It was almost impossible to speak to some of one's colleagues ; a separate lift had to be installed in my firm, so that we would not meet any of the chaps in the corporate finance department. I do not think that such moves are administratively sensible, apart from other considerations.
Monetary policy is only one of the many instruments of policy that have a bearing on inflation. If beating inflation is so important--and I agree that it is--and if politicians cannot be trusted to give it the priority that it deserves, logically we should take out of their hands not only monetary policy, but a range of other policies, starting with fiscal policy. I take the opposite, traditional view, however. It is said that war is too important to be left to the generals ; I believe that national prosperity is too important to be left to the bankers. That is what makes all these panaceas and gimmicks so fundamentally undemocratic, however much effort is made to disguise the truth by means of artificial and inevitably ineffectual devices to achieve occasional accountability. One reason for the present level of support for a more independent central bank is the idea that monetary policy is different from other policies. It is seen as a simple technical operation with a single clear-cut objective, and with well -understood and reliable techniques of operation. Let me tell my hon. Friend the Member for Wolverhampton, South-West, who has been a passionate monetarist over the years and with whom I used to clash in the early 1980s, that that is a delusion. It is the same delusion which led to excessive reliance on monetarism in the early days of the present Conservative Government and the latter days of Lord Healey's Chancellorship.
I frequently used to point out to Keith Joseph, Enoch Powell and Margaret Thatcher at that time--both in public and in private--that, while control of the money supply was an important instrument of economic management, it was exceedingly difficult even to measure the money supply, and virtually impossible to control it with any accuracy. Over many years, the Government have tried all the Ms, from M0 to M6, in an effort to prove me wrong ; and they have failed. We hear very much less now about all these wretched Ms.
Historically, when high inflation has existed in the United Kingdom, it has not been only, or even mainly, the result of lax monetary policy--except, briefly under the Chancellorship of Lord Lawson ; and that mainly reflected his mistaken exchange rate policy rather than his interest rate policy. Nor have I ever heard it suggested that interest rate policy has ever been conducted for long on terms of which the Bank of England disapproved, or that interest rates would have been significantly higher or lower in the past 15 years if the Bank had enjoyed monetary independence over that period--although, admittedly, the
Column 548Bank was a good deal more sceptical about monetarism in the early 1980s under Lord Richardson's governorship than were the politicians, rightly in my view.
The idealised picture of monetary policy that exists in some quarters extends further to the notion of the supposed infallibility of the men who would practise it within an independent central bank. In the same lecture to the Bank of Italy's centenary meeting, Mr. Paul Volcker also said :
"There are those who look upon monetary policy as a kind of abstract process conducted by a kind of special priesthood imbued with concepts about the money supply and inflation but somewhat removed from contact with the real world."
That is a good satirical description of the view of some convinced monetarists on the subject.
One does not have to look into a crystal ball when one can read the book to see what happened when the Bank of England made all those monetary decisions. People sometimes forget that we had an independent central bank until quite recently. When I first started writing essays at school about the money supply we had an independent central bank--it was not nationalised until 1946. The "special priesthood", to use Paul Volcker's mocking phrase, was epitomised by the two Governors who dominated the Bank of England for most of the preceding years of this century : Lords Cunliffe and Norman. Andrew Boyle, generally regarded as the best biographer of Montagu Norman, wrote on page 122 of his biography, which I have with me : "Cunliffe proved himself a turbulent, mischief-making force to the end."
Montagu Norman described Cunliffe in his diary as a "dangerous and insane colleague". Cunliffe said :
"The idea of Montagu Norman as Governor simply terrifies me". Those were the men who ran the independent Bank of England for virtually the first half of this century and made such an appalling mess of the British economy. They helped to bring Hitler to power and brought Mosley marching down Threadneedle street with his blackshirts. Now, some of my idealistic hon. Friends want to give back those powers to that source. That seems to be an incredible misreading of British history. Those were the special priests who ran the Bank of England.
Mr. Duncan Smith : I am listening attentively to my hon. Friend. The process of joining the gold standard, maintaining our membership of it and subsequently coming out of it was the result of a political decision. It was the Chancellor who took the decision, and many people around him advised him not to do it, although I accept that the Bank was not one of them. The decision to enter the gold standard was, therefore, a political decision, much like the recent political decision to enter the ERM. Does my hon. Friend agree that it is not altogether true that the so-called independent Bank of England was wholly responsible for those problems prior to the war? It was implementing a political policy.
Sir Peter Tapsell : Yes, but it was Montagu Norman who persuaded Winston Churchill to do that. In his old age, Winston Churchill told me that it was the biggest mistake of his political career--bigger even than that over the Dardanelles. He said that he had always regretted that, but the technical experts--Montagu Norman, the banking establishment and the City of London--unanimously advised him to do it.
Such unanimity has now prompted the Select Committee to recommend that we transfer monetary
Column 549powers to the bank of England. We must be extremely cautious about that, as the historical omens have not been good.
It was not only Winston Churchill who had problems with the Bank of England. Andrew Bonar Law as Chancellor of the Exchequer found Lord Cunliffe intolerable. Bonar Law wrote to Lloyd George, then Prime Minister, accusing the Governor of
"an act of extraordinary disrespect towards the British Government and as I think a direct insult to me."
Churchill, as Chancellor, found Montagu Norman, as Governor, almost as intolerable as Bonar Law had found Cunliffe. The Governors were utterly contemptuous of their Chancellors. If we were to recreate the independent Bank of England in the far more political and democratised atmosphere of contemporary Britain, those tensions would certainly return, probably in heightened form.
We must guard against the danger of the exceptionally agreeable character of the present Governor of the Bank of England misleading us into building permanent institutional arrangements that will one day be operated by much less emollient people. If I want sound advice on monetary policy I go to Sir Alan Walters. My experience of him over the past 10 years has shown me that, on monetary matters, he is nearly always right. He has enabled me to make quite a lot of money for myself by operating in foreign exchange markets following conversations with him--not when he was in office, as it were--on what was about to happen, when everyone else disagreed with him. If one wanted an expert on monetary affairs with a good track record, and did not choose my hon. Friend the Member for Wolverhampton, South-West, one would appoint Sir Alan Walters to run monetary affairs. However, much as I admire and like Sir Alan Walters, I would not appoint him as Governor of the Bank of England. Such appointments have to be made on an institutional, not a personal, basis.
Tensions do not simply arise between independent governors and Chancellors ; they arise directly between independent Governors and the public and the press. As Andrew Boyle says in his book on the life of Montagu Norman, by 1931 the Governor was "execrated" by everyone outside the top echelons of the City of London. His monetary policy, and that of his close friend and colleague Dr. Schacht, the governor of the Reichsbank, had been seen to be an absolute disaster for years.
Now, with the much more intrusive tabloid press and the immensely sophisticated corps of financial journalists, which did not exist in the 1920s and 1930s, a Governor of the Bank of England who was responsible for a highly contentious monetarist policy, in difficult times of rising interest rates and rising unemployment, would attract an astonishing degree of personal opprobrium. The Sun newspaper would take a keen interest in the private lives of even the most staid clerks in the Bank of England. I do not think that those working in the Bank of England have any concept of what they would be letting themselves in for if they accepted responsibility for monetarist policy.