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Mr. Barry Legg (Milton Keynes, South-West) : I fear that my hon. Friend may be contradicting a point that he made earlier, when he argued that the Bill would put monetary policy in a different compartment and seal it off from other aspects of monetary policy. My hon. Friend is
Column 550now saying that a Governor of the Bank of England with the incremental increase in powers suggested in the Bill would be subject to the pressures and consensus that exist in society in general.
Sir Peter Tapsell : He would be subject to pressures, but not parliamentary discipline. He would certainly attract all the unpopularity that we politicians rightly attract when we get economic policy wrong. But the Chancellor of the Exchequer can be dismissed by the House of Commons if we lose confidence in him. The Prime Minister of the day can dismiss him, as we have frequently seen. But the Governor of the Bank of England is virtually irremovable from office. I do not think that that contradicts anything that I said earlier.
Mr. Legg : My hon. Friend earlier referred to the many mishaps in monetary policy that have occurred over a considerable period. Can he name one Chancellor of the Exchequer who has been dismissed by the House because of his incompetence in dealing with monetary policy?
Sir Peter Tapsell : I believe that the dismissal of the previous Chancellor of the Exchequer, my right hon. Friend the Member for Kingston upon Thames (Mr. Lamont), occurred because many people in the House felt that he had not made a success of monetary policy. Selwyn Lloyd was dismissed by Harold Macmillan because many of us had lost confidence in Selwyn Lloyd's monetary policy--that is exactly what happens. Irrespective of whether it should have happened, the fact is that it can happen. It would be made much more difficult if an independent Governor of an independent bank were running these matters. He would attract enormous personal opprobrium and Threadneedle street would become very much like Rupert Murdoch's Wapping. The Bank of England would not like that.
In practice, the Bank has escaped virtually unscathed from the recent ERM crisis because of its consitutional position. I welcome that, because, of all the nationalisation measures put on the statute book by the Labour Government following the 1945 general election, the first and least controversial and the most successful was the one nationalising the Bank-- the Act which my hon. Friend the Member for Wolverhampton, South-West now wishes to amend.
Winston Churchill had five years of unhappy experience as Chancellor of the Exchequer in the 1920s dealing with an independent central bank. On 16 August 1945, as leader of the Conservative Opposition, he made his first speech in the House after the 1945 defeat. It was one of his greatest speeches and what he said in it about the Balkans could be said today. It was the speech in which he first mentioned the iron curtain. He did not, as is often claimed, first mention it at Fulton, Missouri in 1946. In the course of that great speech on the Loyal Address, Winston Churchill said : "The national ownership of the Bank of England does not in my opinion raise any matter of principle.--[ Official Report, 16 August 1945 ; Vol. 413, c. 94.]
Oliver Stanley, speaking later on Second Reading, as the Tory Front-Bench spokesman on finance--another great lost leader of the Tory party--did not make any severe criticism of the proposed nationalisation of the Bank.
Column 551It has always been accepted by the more numerate Conservatives--I use a neutral phrase--that the 1946 Act that nationalised the Bank of England is a good basis on which to operate our economic affairs.
Mr. Forman : Many of the earlier arguments in my hon. Friend's magisterial speech were devoted to excoriating the power of fashion in economic doctrine, but he has just given a vivid example of that same point. It was fashionable in the post-war consensus to approve of nationalisation, but the world has moved on and it is time to denationalise this institution and give it greater independence.
Sir Peter Tapsell : My hon. Friend is not quite right. It was not fashionable in the Conservative party to favour nationalisation. We bitterly opposed every nationalisation measure in the 1945 Parliament, except the one for the Bank of England. That was because Hugh Dalton, the Labour Chancellor, on moving the Second Reading of the 1946 Bank of England Bill, said :
"We do not intend any day-to-day interference by the Government or the Treasury with the ordinary work of the Bank. On the contrary, we intend to leave that ordinary daily work, much of it of great importance, with confidence to the Directors and to their efficient and well-trained staff." --[ Official Report, 29 October 1945 ; Vol. 415, c. 44.]
The post-war Labour Government were as good as their word. All Governments have supported Hugh Dalton's concept of how the Act should operate.
In the English way, much has depended on the personalities involved. My experience of the City, which stretches over 35 years, has been that attempts at codification, of which this Bill would be another, are usually counterproductive. The Governor's eyebrows were a great deal more efficient than sterling M3 or the Securities and Investments Board. Strong Governors such as Lord Cromer and Lord Richardson may have shown more independence than some other Governors, but, in practice, the Bank has never been, over a wide range of its responsibilities, either the Treasury's poodle or just its City office.
The Bank has performed its many roles with efficiency and distinction. At a time when many of our national institutions are under attack by cynics, as the Chief Secretary to the Treasury pointed out in his admirable lecture a fortnight ago, the Bank of England, along with the armed services, is still a part of our national life which is greatly respected. In addition, the Bank is immensely admired throughout the world. Those who attend, as I have attended, almost every IMF meeting in the past 30 years, will know that, in private, all the central bank governors speak with enormous respect of the Bank of England. Of all the central banks, it is the one which is most admired.
As a good Tory, I am instinctively reluctant to tamper with the roots of healthy trees, a point of view that I would have expected my hon. Friend the Member for Wolverhampton, South-West to share. My hon. Friend has performed a service by giving us the opportunity to debate these matters, but, for the practical, historical and philosophic reasons that I have given, I hope that elected Members of Parliament who are temporarily appointed to ministerial positions in the Treasury and fully answerable day by day to the House, will continue to conduct the monetary, as well as the fiscal, policies of our great trading nation.
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Dr. Jeremy Bray (Motherwell, South) : The nature of the debate has changed somewhat from that of Second Reading of a private Member's Bill to a general review of the evolution of monetary policy during this century. I should like to return to the Bill and I commend the initiative of the hon. Member for Wolverhampton, South-West (Mr. Budgen) in airing what has become a fashionable idea.
The hon. Gentleman's initiative appears to be part of a concerted campaign. We have had reports from the Select Committee on the Treasury and Civil Service and from the CEPR under the chairmanship of the noble Lord Roll of Ipsden, and a new Governor of the Bank of England has been appointed. All that has led to an opening up of ideas and the running of this hare.
Both the Select Committee and the Roll committee started work last spring in the aftermath of Britain's withdrawal from the exchange rate mechanism in September 1992. Their work was reinforced by the difficulties of France and other countries in July 1993. That wrecked the Maastricht timetable and postponed the prospects of early monetary union in Europe.
In that situation, the Chancellor, robbed of his nominal peg of an exchange rate target, having long since abandoned money supply targets, had to find another nominal peg by which to control inflation. he took the ultimate one, inflation itself, and adopted the target of 1 to 4 per cent. per annum as a practical, operational objective of current economic policy.
Previously, that had been dismissed as impossible because there is so much else that affects inflation. To bolster the credibility of that peg, the Chancellor invited the Bank of England to produce what it said would be an independent report on inflation. The first inflation report was issued in February 1993 and gave the Bank's view of the inflation process. It still makes good reading. The Bank argued that inflation is a monetary phenomenon, and that in the long run, monetary policy determines the rate of inflation. It argued that there was no necessary long run causality from costs to prices but that both reflect underlying real and monetary shocks. In other words, it has shifted its ground. Real shocks affect prices-- affect inflation. But in the short run, it argues, the dymanics of the inflation process mean that changes in costs are a leading indicator of changes in prices. In other words, money may cause the increases in prices, but we will see the changes in costs first. Therefore the inflation report contains a consideration of the costs of imports, of the exchange rate, of commodity prices, of unit labour costs, of business margins and of indirect taxation.
Having dealt with such a wide background to the whole economy, the Bank reverts to saying :
"Monetary conditions are the principal determinant of inflation in the long run."
"an analysis of monetary and fiscal policy. The former [monetary policies] relates to short-term developments in monetary conditions and the latter"
--that is fiscal policy--relates
"to expectations of future monetary conditions in the medium term."
In other words, it is not monetary policy that is creating the medium-term prospects of inflation ; it is fiscal policy that is creating those medium- term conditions.
Column 553So the Bank considers in its inflation report monetary policy instruments, interest rates and monetary aggregates, but then it continues to consider fiscal policy. It argues that the rate at which inflationary pressures respond to the monetary stance depend on demand and supply conditions in product and labour markets. So it considers business and consumer optimism surveys, debt, capacity utilisation, unemployment and inflation expectations. Initially, therefore, the Bank, in its outline of inflation, said that it was examining virtually the whole economy.
It is true that initially, in February 1993, there was fleeting reference only to competitiveness and to the balance of payments, but that increased in August to November once the Bank became a little more confident about what was happening in the balance of payments, because we had the black hole of no trade figures early in 1993. There is still no mention of total factor productivity and of endogenous growth, but one may be sure that it will not be long before the Bank climbs on to those bandwagons.
Effectively, the Bank is mapping out a picture of the entire economy in the context of its so-called independent inflation report. I do not argue with the pattern of its exposition. It is a straightforward and fairly eclectic view of the inflationary processes, but it is no basis for the assignment of the instrument of monetary policy simply to control inflation. There is no attempt to justify that in the Bank's inflation report.
Further, in its background argument, the Bank has published no research that I can find--not in the reviews at least--during the past year which has any bearing on that. There is a bit of work on something called VAR-- vector autoregressive estimates of forecasts--but that is a "black box" method for checking on the forecasts made by more economic and less handle- turning methods, and there is an exercise in the assessment of divisia measures of money.
The hon. Member for East Lindsey (Sir P. Tapsell) referred to the sorry history of the Members. The current fashion is that no particular Member will do. One tries different averages of all the Members and one searches for an average of all the Members which behaves as one expects it to behave. That was considered recently by the Bank of England, but nothing here considers the actual ways, given one's objectives, in which one sets instruments. The Bank in its own internal research is not equipped to do that. It is narrowly defined, a fairly technical thing--given these objectives, how does one adjust the instruments to achieve what one wants?
The Treasury can do it. The Treasury has been doing it for years, but the Bank has never equipped itself to do it. Further, the economist in the Bank of England--Brian Henry--who has the best published track-record of work in that field has latterly been posted to Washington. As far as I can see, the Bank has no one who is expert in that area at all. The talk in the inflation report, in technical economic terms, is just so much waffle.
I am sorry that the Treasury Committee does not get round to examining those things in the way in which we used to in the early days of that Committee. As a founder member, I well remember the efforts that we made to get at the underlying economic argument. Unfortunately, little attention is paid to that in the report on which the Bill is based.
Column 554Inflation is affected by just about everything and by all the instruments used by the Government in their economic policy. Those instruments affect just about everything else, so technically to assign one instrument to one objective is bound to produce an inferior solution. Let us consider the practical situation on black Wednesday. Given the stance on fiscal and monetary policy, the notion that the Bank could control the exchange rate was not on. In such circumstances, there is not a public row between the Treasury and the Bank.
To reminisce, I was Parliamentary Private Secretary to George Brown in 1964 and during the first sterling crisis I witnessed the half-hourly telephone calls between George Brown and the Bank of England, stating that so many hundreds of millions of pounds had gone. George Brown made frantic and hectoring calls to Dr. Blessing in the Bundesbank. That is not the image that the public have of what happens during a sterling crisis, but there is no public row. The damage is done in the months and years beforehand in which the conditions are created that make such a situation inevitable in today's speculative financial markets.
Where do we go from here? The Roll committee is a different animal from the Treasury and Civil Service Select Committee. Incidentally, Eric Roll is not inexperienced in the handling of fashionable ideas. He was the permanent secretary to the Department of Economic Affairs when George Brown produced the national plan before later going on to other things in the City. Realising that one could not build a case on the assignment argument of using monetary policy to stabilise inflation, the Roll panel appealed to credibility.
Before black Wednesday, we were told that interest rates would be higher if we devalued because of the loss of credibility. Had I known that the ex- Chancellor was going to be here today, I would have dug up the speeches that he made at the time assuring us that that would be the practical effect, that we should have higher interest rates if we abandoned the exchange rate mechanism.
Of course, the real problem was that before black Wednesday the policy stance had ceased to be credible in the financial markets because the markets had ceased to believe that a Government would continue paying the cost, in jobs, growth and output, that resulted from our trying to maintain the exchange rate. The real economy made the monetary stance incredible.
Credibility has nothing to do with the degree of masochism with which one is prepared to take the slings and arrows of outrageous financial conditions ; it is about one's ability, in the political reality, to continue to do what one says that one is doing. The Government ceased to be credible. It was not simply a matter of commitment to a financial target. One can scarcely restore one's credibility, in real or political terms, by assigning the instrument of monetary policy to the particular target of inflation and parcelling it up to hand to the Bank of England.
The metaphor of juggling balls is confusing and misleading because it suggests short-termism and that there is something clever in what one does this week and next week and what one did the week before. It is not that kind of game. If they are balls that are being juggled, they are huge balls of dough, which flump around and cannot be pushed down the corridor, but, nevertheless, roll and sweep people out of the way. Such vast, amorphous tides in the economy need to be anticipated and sensed in the months and years ahead.
Column 555The Treasury and Civil Service Select Committee and the Roll panel sought to tackle that problem by correcting the economic argument and by altering the political accountability of the Bank of England. That was to be achieved by appearances before the Treasury Committee, by debates in the House, by approval of orders, and by an emergency override for the Treasury. I am a supporter of Select Committees. I was a founder member of the Treasury Select Committee and was a member of other Committees before and have been since. The Bill, or an amendment to a Government Bill, presents a more realistic picture of the real powers and the ways in which they are exercised. Select Committees cannot act as an executive override with present concepts of parliamentary accountability.
A recent example of a Committee that came nearest to moving in that direction was the Select Committee on Industry which discussed the coal crisis. It produced a well-argued and practical report which appeared to have the support of Government Members, and there was some indication of dissatisfaction on the Government Back Benches. Potentially, that Select Committee report could have shaped Government policy, but political pressures overrode it. One can wager that we shall see in future that the Whips' office will be at it to ensure that future appointments to the Industry Select Committee do not include those subversive Tory Members who might undermine the Government's ultimate control over that Select Committee. That was what happened in the Treasury Commitee in 1983. It was overruled by the Whips' Office and never allowed to exercise its degree of independence. At the time, we had Kenneth Baker, Terence Higgins and a number of others who--
Madam Deputy Speaker : Order. May I remind the hon. Gentleman that Members are not referred to by their names but by their constituencies.
Dr. Bray : I beg your pardon, Madam Deputy Speaker. I was unforgivably lapsing into informality.
Select Committees cannot possibly act as a short-term check on executive mistakes in the way in which the Bill outlines. Clearly, the Bill argues for the assignment of instruments to enable the Bank of England to formulate and to implement monetary policy and to stabilise prices, and for the Treasury to set inflation bands and have a temporary override and to direct the Bank to aim monetary policy at other objectives if things come unstuck.
I give half a cheer to the hon. Member for Wolverhampton, South-West for raising the issue, but I am afraid it comes nowhere near the right diagnosis or answer. I encourage the Treasury Committee to look further.
There is a void in the economic and financial objectives of the Government. Simply having an inflation target of 1 to 4 per cent. is not an operational guide, because inflation is such a long-term phenomenon. Hon. Members on both sides of the House are committed to low inflation, but we are also committed to the other objectives of growth, managing the balance of payments and restraints on public borrowing
There was an operational framework in the Maastricht treaty to which hon. Members on both sides of the House were committed. It did not encompass growth and it did not deal with the balance of payments in the same way as it dealt with borrowing requirements, the debt-income ratio
Column 556and the rate of inflation. Nevertheless, it was a set of objectives which was achievable within the field that it tackled.
The difference within the parties related not to the reasonableness or desirability of those objectives or to the process of convergence in Europe in a common move towards the achievement of greater stability in underlying conditions. The difference within the parties related to the whether it was appropriate to abandon elements of sovereignty and our ultimate control of the exchange rate. The Maastricht framework is still on the statute book--a commitment to the outline of European policy. It may not appear very relevant in the short term, but nothing stays still for very long in the world's economy and, sooner or later, we shall have to get back to the formulation of reasonable objectives. I believe that the framework set out in the Maastricht treaty is one to which we shall return. We shall be forced to do so and we shall find ourselves able to do so because we have had a bit of a fright. The political effects of that are only just being realised by Conservative Members, who express incomprehension at the fact that their party is being labled the party of economic irresponsibility by comparison with the Labour party. Perhaps we have both changed.
At the moment, people differ not on the objectives but on the technical question of how we can shape our economic policy in pursuit of those objectives. It is at this time of doctrinal uncertainty about the underlying shape of policies that Select Committees can play their most useful role in analysing the problems and pointing the way ahead. The Treasury Select Committee did that in its 1981 report on monetary policy, which pointed out that one cannot ignore the exchange rate. The Government followed that advice.
The steps that the House can take are perhaps best illustrated by an amendment that I moved to the Industry Act 1975, which required the publication of forecasts, access to models and so on. The amendment, as originally moved, required the Government to set out their priorities. Once Governments have described their priorities, we can proceed to the technical task of finding the instruments that will be most likely to achieve those objectives. That is the kind of work that the Treasury and the Treasury Select Committee can do now, but which the Bank has abandoned.
I hope that the Bill will get no further than Second Reading. The debate on it has been useful but I hope that the public debate will now shift from the gimmick of the concept of the independence of the bank to address the much more important question of how objectives of economic policy should be formulated and how instruments of economic policy should be directed at achieving them.
Mr. Max Madden (Bradford, West) : On a point of order of which I have given you brief prior notice, Madam Deputy Speaker. I wish to draw to the attention of the House the killing in Bosnia of a British aid worker, Mr. Paul Goodall, and the injury of two other British aid workers. As we express our sympathy to Mr. Goodall's relatives and friends, I am sure that the British public will want us to ask what the Government propose to do to ensure that all aid workers and United Nations personnel in Bosnia, including British forces, are protected. With that in mind, would it be possible for the Government to make a statement later today? If not, can we be assured that a
Column 557statement will be made by the Foreign Secretary on Monday to provide information about the background to this tragic incident and to tell us what action is to be taken in the matters to which I have referred?
Madam Deputy Speaker : As the hon. Gentleman will know, it is not for the Chair to call for statements from Ministers. I have had no indication that a Minister wishes to make a statement to the House today. However, there are Ministers on the Treasury Bench and I have no doubt that they will have heard what the hon. Member for Bradford, West (Mr. Madden) has said.
Mr. Michael Spicer (Worcestershire, South) : I shall be very brief because several of my hon. Friends wish to speak and because my hon. Friend the Member for East Lindsey (Sir P. Tapsell) has made most of the points that I wanted to make.
My hon. Friend the Member for Wolverhampton, South-West (Mr. Budgen) presented his Bill very eloquently. I particularly enjoyed the dying phrases of his speech when he pointed out some of the paradoxes that might be thought to exist between the Government's defence of responsible Ministers--in this case, Ministers responsible for the monetary policy of this country--reporting to Parliament and the decrease in that responsibility through the foundation of the organisations of the EMI and the progress that that has made through the Maastricht treaty.
My hon. Friend the Member for Wolverhampton, South-West made a clear, precise and pleasing presentation. However, he was disingenuous. The idea that the Bill does not give greater autonomy to the Bank of England is disingenuous. The Bill starts by saying that it is a Bill to
"Amend the Bank of England Act 1946 so as to remove the general powers of the Treasury to give directions to the Governor of the Bank".
My hon. Friend made it clear in an intervention that, for some time, he has had it in mind, for various reasons, to give greater autonomy to the Bank. Quite properly, the Bill should be seen from that perspective on both sides of the argument.
At one point, my hon. Friend the Member for Wolverhampton, South-West said that the Bill was all about openness. However, I see it in rather a different light. I believe that the Bill removes openness, but I will return to that point later.
I have two arguments against the Bill. I want first to focus briefly on the European dimension. It is not wrong to do that, because if the Bill received a Second Reading and there were further moves towards an autonomous Bank of England, it would be that much more difficult to argue against this country finally joining a single European monetary organisation run by a single central bank of which we would be part.
I do not want to re-run the Maastricht argument, but there is a specific point which I should like to draw to the attention of the House in respect of a single European monetary policy, which would be made easier if we had a single central bank in this country. It relates to a point made by my hon. Friend the Member for East Lindsey. He said that there is a relationship between fiscal policy and
Column 558monetary policy. Nowhere is that clearer than if we conceive of a single European monetary policy run by a single central bank. If we had such a single monetary policy, there would be a single pricing policy throughout Europe. As there would not be a single wages policy throughout Europe, within the framework of Maastricht, the cohesion fund and so on, there would be the increasing introduction of compensatory fiscal policies. For instance, Greece, which had Greek wages but German prices, would be compensated for the very unsatisfactory position in which that would put Greek wage earners, so a massive fiscal undertaking would inevitably follow. We cannot distinguish or compartmentalise monetary policy, vital though it is. My hon. Friend the Member for Wolverhampton, South-West used the word "important", not "exclusive". That point is highlighted by the European dimension in which a separate central bank would lead us.
Even if I am wrong, surely it is plausible that central banks, particularly those that become autonomous, operate as a co-operative. The inevitable result of a co-operative of autonomous central banks is that they focus on a common and fixed exchange rate between their various currencies. The excuse that they use--they certainly used it during the ERM period--is keeping inflation under control. I think that a quiet life is at the centre of the policies that automatically occur when central bankers get together- -that is, fixing the exchange rate between their various economies. Even if I am wrong in suggesting that the Bill would make it easier to move to a single currency for this country, a more autonomous central bank, working together with other central banks, is likely to lead us straight back into managed and fixed exchange rates.
Mr. Duncan : Will my hon. Friend consider the other side of the Bill and answer a question that I should like to hear teased out? On one side there is the argument about independence and the question whether there is such a thing. I accept that, to a degree, that matter is ambivalent and not necessarily provable. However, the key point about the Bill is the accountability aspect, which, whatever happens to the idea of independence, is vital and might answer some of the charges about what happened in the run-up to the ERM and subsequently exercising policy within that. I refer to accountability to this Chamber.
Mr. Spicer : That is my second point, and I am grateful to my hon. Friend for leading me to it, now that I have dealt with my European worries.
I now refer to the second important issue--accoun-tability. The independence that my hon. Friend the Member for Wolverhampton, South-West offers would lead to the Bank of England becoming a quango in spades. We must examine the Public Accounts Committee's report on quangos. I have great sympathy with that report. The Bill contains the concept of autonomous operational responsibilities. All hon. Members have written to a Minister on certain matters, for example the Child Support Agency, and received an answer saying, "I am not responsible for day-to-day management. Operational responsibilities have been passed elsewhere"--let us say to the chairman of the Legal Aid Board. I just happen to have had a lot of correspondence with him recently.
If one writes to the chairman of the Legal Aid Board or to the CSA board director, he will say that he is responsible for the day-to-day running, but that he is working within
Column 559parameters and policies that have been laid down by Ministers and that he cannot answer your question in that respect. The tone of that letter would be different from that which one would get from a Minister. If a Minister is rude to an hon. Member, he can ask rude questions back to the Minister on the Floor of the House. The right hon. Member for Berwick-upon-Tweed (Mr. Beith) said that we have a lack of responsibility in the case of the Bank of England. However, his claim that by setting up greater autonomy, we would get more responsibility is the reverse of the case. There are so many examples of organisations that have been set up and given something called "operational responsibility". Those organisations must work within parameters that are not their responsibility. We do not get proper answers, and no one is apparently accountable.
I am concerned with the idea that somehow one can hive off something called "operational responsibility", but leave behind apparently the responsibility for setting parameters. That way lies the muddle that we are getting into. I am all in favour of privatising as much as possible, but, ultimately, one leaves the Government with certain responsibilities. The major responsibility that one leaves an autonomous Government is that of managing the economy.
Mr. Duncan Smith : I want to make the point again that this place has, in a sense, been a spectator of so much of what has happened with regard to the setting of interest rates during the past four or five years. In reality, the House would have wanted to have much more say in that. Perhaps if we had had more say, some of the ERM arguments would have been exploded earlier. Does the Bill contain an essence of that, and does my hon. Friend agree that it is a salvageable element, whatever else he may feel about the Bill?
Mr. Spicer : I accept that there is a party structure and a whipping arrangement within Parliament which makes it difficult for individual hon. Members to get across views that are off-centre. I accept that that is the way in which we manage things. The history of the two-party structure sometimes makes it difficult for individual hon. Members to hold Ministers directly accountable for their policies.
It may well be the case that, because of that, Parliament was not effective in holding Ministers properly accountable during what I would see as the debacle leading up to the ERM period, and our exit from it. I do not think that that is an argument in favour of hiving policies off to a great extent, or hiding them behind the closed doors of the Bank of England. I think that it was our fault collectively, although there were individuals who fought against the ERM policy. There is the structure within Parliament of forcing a uniform view, and I accept that entirely.
The question is whether we will obtain greater insight into policy by hiving off large chunks of it to the Bank of England. In my view, we are totally capable of holding government to its collective responsibility, because we have the means.
My hon. Friend the Member for Wolverhampton, South-West has done a great job in exposing an issue that has been lying dormant in many of our discussions for several years. My hon. Friend and others are right in believing that there is a fashion for saying that all our problems would be resolved by hiving off fiscal and
Column 560monetary decisions to the Bank of England. I disagree with that view. I am glad that the matter has been brought out into the open by my hon. Friend and that we have had an opportunity to discuss it in the way that we have.
Ms Diane Abbott (Hackney, North and Stoke Newington) : The Bill is best understood as a paving Bill for the independence of the Bank of England. It is for that reason that its deviser is a hero in Threadneedle street. It is to the value of increased independence and autonomy for the Bank of England that I propose to address my few remarks this morning.
I listened with some wonder to the hon. Member for Wolverhampton, South- West (Mr. Budgen) speaking in the unfamiliar persona of a man who is both meek and mild. I wondered whether this could be the savage disciple of Enoch Powell, the lion of Maastricht that the House has come to know so well. We were presented this morning with a mere humble handmaiden of the Governor of the Bank of England, Eddie George.
I put it to the House that both the conclusions of my colleagues on the Treasury Select Committee and the underlying premise of the Bill are based on certain false assumptions. Let me state first and foremost why the issue of monetary policy is so important. One might imagine from the poor attendance in the Chamber this morning and from the looks of puzzlement of some of the members of public in the Strangers' Gallery that monetary policy was a mere arid, technical matter. One might wonder why there should be such feeling, concern and focus on the issue among practical politicians.
Monetary policy is not an arid, technical matter. It is a crucial matter for industry, for which interest rates are vital, and for home owners, who are particularly important in Britain, with its high proportion of home owners. I can do no better than quote some of the evidence on monetary policy given to the Select Committee by an ex-Treasury knight, Sir Douglas Wass. He said :
"making decisions on monetary policy involves judgments about social welfare and the allocation of costs and benefits on a large scale between different sections of the population--judgments of a kind that we all recognise as essentially political."
The fact that decisions on monetary policy are essentially political led me to dissent from the view expressed in the Treasury Select Committee report and leads me to oppose the Bill.
Monetary policy is not an arid, technical matter which a few bankers in a back room can deal with quietly. It is a matter at the centre of the political debate in Britain. The first fallacy that underlies the conclusions of my colleagues on the Treasury Select Committee and which underlies the Bill is the notion that there is some automatic causal relationship between an independent central bank and a strong economy and low inflation.
My colleagues on the Treasury Select Committee were so enthusiastic, gently nudged by Mr. Eddie George, to scramble on the bandwagon of independence that they did not take the trouble to read and listen to the evidence brought before the Committee. The conclusion of our own Clerk was that there was
"no conclusive evidence of a causal relationship between the status of the central bank and inflation performance."
That is what the evidence says, as opposed to what fashionable commentators and the chattering classes now try to nudge the House towards.
Column 561The truth is that the bandwagon of independence as the answer to the long-term economic decline in Britain is centrally based on the West German experience. Until recently, Japan had one of the most successful economies in the world. It does not have an independent bank. The argument that I put to my colleagues and that I put to the House is that one cannot extrapolate from the West German experience to make a watertight model that proves that purely from the creation of an independent central bank will flow the benefits of low inflation and growth that we saw in West Germany.
Mr. Ken Livingstone (Brent, East) : Will my hon. Friend give way?
Ms Abbott : I am sorry, but I should like to make some progress. The point is important because the balance of argument rests on a single pinpoint, the West German experience. I believe that one cannot, academically or intellectually, extrapolate from the West German experience and argue, as my colleagues seem to think one can, that there is a direct causal relationship between having an independent central bank and having West German standards of economic growth, and thus a West German-type strong economy.
Mr. Livingstone : The most recent example of a country moving towards having an independent central bank is, of course, Russia. Does my hon. Friend agree that that has not been a particularly good indicator of an independent central bank helping to reduce inflation?
Ms Abbott : I should think that the Russian experience is that not only is an independent central bank not the ideal weapon for fighting inflation, but it is not necessarily something that brings about great social cohesion and stability.
If there is no academic basis for believing that an independent central bank automatically brings low inflation and a strong economuy, what is the overwhelming attraction of it to hon. Members on both sides of the House? I believe that it would allow politicians to shuffle off the responsibility for interest rate levels that might well be democratically unacceptable to the population as a whole. During our inquiries leading to the production of the report, the Treasury Select Committee was fortunate enough to meet Mr. Camdessus, the current president of the International Monetary Fund and an ex-governor of the Bank of France. In that knowing French manner, Mr. Camdessus put it to us that we as politicians should see the attraction of an independent central bank, because it would allow politicians to avoid the unpleasant political and democratic consequences of interest rates that are too high.
Although I understand the cynical argument for not allowing people to express their anger at high interest rates by directing it at politicians, who then say "Well, it is not us ; it is the Governor of the Bank of England", I cannot see how anybody could argue that that would lead to an increase in democracy and accountability. Politicians and commentators who argue for an independent central bank are arguing for a monetary policy that is characterised by the slogan, "Not me, guv. Go and see Eddie George".