|Previous Section||Home Page|
Column 562Another argument for the Bill, apart from what I believe to be the totally false argument about a causal relationship between an independent central bank and low inflation, and apart from the rather cynical argument that politicians do not like to bring forward, and that is behind much of the debate on the subject, is the notion of accountability. As someone who sat thorugh almost all the evidence-taking sessions, has read the Bill and is familiar with the report, let me say that the notion that, either in the
recommendations of the Treasury Select Committee or in the Bill, there is any real advance towards accountability is wholly fraudulent.
What in the Bill and the report does that increased accountability boil down to? There is the much-vaunted override, which is referred to in clause 5 of the Bill. Many hon. Members have far longer experience of politics than I have and have been in and out of government, but I put it to the House that the override in clause 5 and in the Treasury Select Committee report is, in practice, wholly unusable ; it could not be used in that form. It would become a weapon that was too dangerous to detonate. There is an element of fraud in hon. Members talking blithely about democratic override, which could not, as they know perfectly well--we discussed it among ourselves in Committee--in practice, be used.
In terms of accountability, another great gain that we are told that the Bill and the Treasury Select Committee recommendations encompass is the notion of greater openness. We saw the hon. Member for Wolverhampton, South -West standing before us, in his unaccustomed meek and mild guise, fluting sweetly about greater openness, as though greater openness in Government has ever been any particular concern of his.
Let us look at the greater openness that the Select Committee's recommendations and the Bill are supposed to amount to. It amounts to debating parliamentary orders. How many hon. Members here have stayed up recently to debate them? Such orders are notorious, because they are debated in the middle of the night by a handful of hon. Members. That is a wholly ineffective method of rendering any institution or policy accountable. Little time is given to debate those orders and few hon. Members take part in the debates.
We have heard a lot about how the Governor will come before the Treasury Select Committee to give evidence and account for himself. I would welcome yet another opportunity to hear Mr. Eddie George rumble on in his amiable and affable fashion. But where does the accountability lie in the Governor appearing before the Select Committee when it does not have the right to hire or fire or even to approve the appointment of the Governor? It has no direct control over policy. It would be charming to hear Eddie George rumble on in his inimitable, affable fashion, and his comments might be interesting to read, but that would not add one jot or tittle to effective, practical political control over monetary policy.
Mr. Duncan Smith : Surely the argument about parliamentary orders is not whether they are debated late in the evening by a certain number of hon. Members, because the blame for that lies with politicians. The opportunity to debate exists, and if we do not make use of it, it is our fault. Surely the argument should be that not enough time is allocated for the debates and that more is required.
Ms. Abbott : I accept that point, but I repeat that the proposals in the Bill and the Select Committee recommendations, which their supporters tout in evidence of the hugely enhanced means of accountability that will result, are token gestures. They will not give politicians, and, more importantly, the people any further direct control over monetary policy, which is so important to their lives, their jobs and their ability to pay their mortgages. There is no academic or economic argument to suggest that there is a direct relationship between an independent central bank and inflation. The Bill will not result in any huge improvement in the methods of accountability, so why are so many hon. Members scrambling on to the independent bandwagon, as the hon. Member for Wolverhampton, South-West has suggested? In part, they are victims of fashion. I can do no better than quote from "General Theory of Employment, Interest and Money" by Keynes, who said :
"Practical men, who believe themselves to be quite exempt from any intellectual infuences, are usually the slaves of some defunct economist".
If there was ever an example of that Keynesian theory, it is the current fashion in the press and in the House to talk about independence as some solution to what I suspect is the long-term economic decline of the British economy.
The problem with the Select Committee recommendations and the Bill, and the reason why I believe that the hon. Member for Wolverhampton, South-West and some of his colleagues have latched on to the proposals with such alacrity, is that they would institutionalise monetarist policies and the monetarist emphasis on low inflation above every other consideration.
Ms Abbott : Yes. It would institutionalise monetarism in our political processes. That is why enthusiasm has been displayed by such xenophobes as the hon. Member for Wolverhampton, South-West for what is, essentially, a foreign notion. That is why I am still amazed that my colleagues could find it in themselves to sign the Select Committee report.
One of the problems that politicians often encounter is that it is sometimes difficult to interest the wider public and the popular press in issues which, although they are vital, seem very boring. Monetary policy is a case in point. I can only repeat what has been said throughout today's debate : the issue is too imporant to be left to bankers.
Let me quote again from a Treasury knight, Sir Douglas Wass. According to him,
"It is not the job of central bankers to judge how far it is right to go on damaging the standard of living of some members of the community or destroying the jobs of others, in order to bring inflation on to some particular path".
That, essentially, is the reason for my opposition to the Bill, and that is why I would not sign the Select Committee report. All hon. Members should take the trouble to read not just the report but the evidence presented to the Committee, which will reveal that some of the fashionable theories about independence that are being touted by politicians of all parties have no basis in fact. The notion of independence will join five-year-plans, little Neddy, monetary targets and the ERM : it will be seen as one of the series of failed nostrums for the underlying cause of the economy's failures.
I believe that any move towards greater independence and autonomy for the Bank of England in regard to
Column 564monetary policy would be anti-democratic. It would not be defensible in any economic or academic terms. No doubt both the Select Committee report and the Bill have brought a smile to the faces of Mr. Eddie George and his colleagues in Threadneedle street ; but it is not too late for hon. Members to consider the fundamental issues of democracy that underlie this debate on democracy. 12.41 pm
Mr. Quentin Davies (Stamford and Spalding) : I congratulate my hon. Friend the Member for Wolverhampton, South-West (Mr. Budgen) on winning the ballot, and on choosing to frame his Bill around such an important issue. I thank him for doing me the honour of asking me to sponsor the Bill ; I do so with great pleasure.
I agreed strongly with at least one thing said by the hon. Member for Hackney, North and Stoke Newington (Ms Abbott). This is not merely a technical issue ; it is a matter of major national importance. The future of the pound, and the monetary framework in which we are to lead our national lives, are issues essential to the achievement of our economic ambitions--and, indeed, to the maintaining of national self-confidence.
It would be a great shame--and, to some extent, a dereliction of parliamentary responsibility--for us not to take the opportunity presented by my hon. Friend the Member for Wolverhampton, South-West to debate this Bill, not only at this stage but in Committee. That will encourage the public who sent us here to consider the matter, absorb the arguments, send us representations and continue to discuss an issue which--whatever happens this afternoon--will not go away. For two reasons, the Bill is especially pertinent now. First, we have brought recorded inflation down to the lowest level for 30 years--the lowest level achieved in the adult lifetime of many hon. Members who are present today. That is thanks to decisions made by Ministers and, in large measure, to the decision to join the ERM. The great question is whether we can sustain that achievement. Can we prevent inflation from roaring ahead again? Have we cured definitively, or merely suppressed temporarily, the besetting British disease of inflation? Inflation was at the heart of our relative post-war economic decline ; it was also one of the major sources of the lack of national self-confidence from which the country has suffered for too long.
What can we do to lock in that achievement of low inflation--to prevent inflation, and inflationary expectations, from emerging again? If there is an institutional measure to be conceived that is likely to produce that result, it is the one proposed in the Bill. The second reason why it is pertinent for us to discuss the subject now is the international context. Only a few years ago it was exceptional for any country to have granted a central bank independence in the conduct of monetary policy. Until recently, the only examples were Switzerland, Germany and, to a slightly qualified degree, the United States. But it has now become the norm in the western world.
I am not suggesting for a moment that we in the House should be influenced by fashion. We should not consider making institutional changes, let alone any as important as the one that we are discussing today, merely because that appears to be the fashionable thing to do in the world. If we
Column 565believe that the fashion is misconceived, we should not follow it. But it would be thoroughly irresponsible not to take account of what is going on in the world.
There is competition among the different currencies in the world. International investors have a wide choice of convertible currencies in which to hold their assets. We want them to be keener to hold their assets in sterling than in other currencies, as that will mean, over time, that there are lower real interest rates in sterling than in other currencies. We must ensure that investors believe that the chance of the devaluation of sterling against other currencies, over time, is small, and the chance of revaluation is correspondingly high. We must improve our monetary credibility.
Many other countries have acted in a way that they consider will increase their monetary credibility. Some of them are neighbouring countries in the European Union such as Holland and France, as well as those hoping to join the European Union such as Sweden. Other countries on the other side of the world that have nothing to do with the European Union, such as New Zealand, have also taken interesting steps in the same direction. We must be concerned that we may not only not enjoy a competitive advantage, but actually have a competitive disadvantage if it appears to potential holders of sterling that the parity of sterling and the extent of growth of the monetary supply in this country are still at the behest of political pressures to a greater degree than in other countries. Those are two reasons for considering the subject today and for being grateful to my hon. Friend the Member for Wolverhampton, South-West for giving us the opportunity to do so.
Something remarkable has happened in the House. In the Treasury Select Committee, on which I have the honour to serve, we achieved a remarkable consensus between the three parties represented, with the sole exception of the hon. Member for Hackney, North and Stoke Newington, as she conceded.
There are differences of emphasis between us, and differences in some of our recommendations on the future shape of the Bank of England. But we were agreed on four essential points. The first subject of agreement was the importance of price stability and the need to prevent inflation from re- emerging in this country. It is clearly set out in paragraph 73 in the Select Committee's report. It states :
"the maintenance of price stability should be the primary objective of monetary policy."
There are many other such statements. We would not have obtained the consensus of the three parties on that subject, certainly not in that sense, a few short years ago.
Secondly, there was general consensus that there are strong theoretical grounds for believing that the greater the degree of independence of the institution responsible for the conduct of monetary policy from party political and electoral pressures, the greater the integrity with which that monetary policy will be pursued, and the greater will be its constancy and credibility and therefore its effectiveness in achieving and maintaining price stability. Thirdly, there was general acceptance of the great weight of empirical evidence that in practice there is a strong and postive correlation between the degree of independence of monetary institutions and inflation. That is so clear that the country that has given the greatest
Column 566independence to its central bank, Switzerland, is top of the league for monetary performance measured by price stability since the second world war. Second in that league is the Federal Republic of Germany. The United States is somewhat lower, but we know that the federal reserve system is slightly more at risk of being influenced by political pressures.
Only one country stands out from the general trend on the graph : that is Japan, but it is a special case because for 40 years until last year the Government of Japan was in the hands of a single political party, the Liberal Democrats. That party was committed to sound monetary principles, but it was never at serious risk of losing power, and for that reason monetary policy was not subject to the short-term electoral pressures that prevail in other democracies. Until the past few months the key power plays in Japanese politics were within and between factions in the ruling party rather than between parties. That goes a long way to explain that sole exception. It is unusual in economic affairs to have such a clear empirical relationship between an institutional framework and measurable economic outcome. That was the third important matter on which the Committee agreed.
Fourthly, the Committee agreed that the Bank of England is more than capable, by virtue of its world reputation and the proven confidence of the people who run it, from the Governor and the court to the various departments, of playing just as effective a role as an independent central bank as the role currently played by the Bundesbank and the Swiss national bank. There is therefore little reason not to capitalise on those talents and on the Bank's reputation and allow it to do for us what those other institutions have successfully done in their respective countries. There was considerable consensus on this important issue.
There was agreement in the Committee between all three parties, with only one person dissenting on these points which perhaps amount to 85 per cent. of the argument. But, of course, beyond that there are divergencies. I diverge on one or two matters in the Bill. My hon. Friend the Member for Wolverhampton, South-West has generously said that if the Bill goes to Committee he will be prepared to look at those matters. Perhaps I may anticipate some of the arguments which I hope will be heard at greater length in that Committee. For reasons that I fully understand, my hon. Friend sets out the possibility of a parliamentary override of the monetary policy being pursued by an independent Bank of England. I understand the strong reasons for democratic accountability and the sovereignty of Parliament that will cause many hon. Members to agree with my hon. Friend.
I think that that is misconceived, and the reason goes to the heart of the argument about democratic accountability, which my hon. Friend the Member for East Lindsey, (Sir P. Tapsell) developed this morning at some length. The reason is this. I believe that it is inappropriate for a non-elected agency to determine the complex moral and political trade-offs between different policy objectives, which can only, in a democracy, be debated openly and be determined by a representative body such as the House of Commons.
But that is not to say that it is not thoroughly reasonable for us to decide democratically that we wish to endow ourselves with a better chance and better mechanisms of achieving price stability and therefore that we shall give to an institution, the Bank of England, a specific and single
Column 567technical task--to achieve price stability. That is a democratic decision. We are saying to the Bank, "We would like you to produce a monetary framework in which businesses, Government, employers, employed, savers and consumers can plan their affairs and operate--a framework of stability."
That is a framework which would replicate the objectivity of the monetary system that we enjoyed for three generations before 1914, in the heyday of the gold standard. At that time, the supply of money in the world was not determined by politicians' choices. It was determined by an entirely objective fact--an exogenous fact, as economists would like to call it, no doubt--which was the supply of gold in the world. That was a fairly arbitrary factor, and there was always a danger that, as did occur, if someone found more gold in the Yukon or elsewhere, prices throughout the world would increase as a result.
I am not for a moment suggesting that we should return to the gold standard, but the degree of objectivity that the gold standard provided before 1914, which assured a stable monetary environment, was a framework in which the human race enjoyed a level of growth rates, of output, of employment, of prosperity and of international trade, which was unprecedented.
My hon. Friend the Member for East Lindsey dwelt a lot on the 1930s, 1940s and 1950s, but if he had looked a little further back he might have found himself inspired, rather than put off, by examples of greater monetary stability.
Another aspect of my hon. Friend's Bill may be misconceived. That is the suggestion that Parliament should quantify price stability and should state that a specific price index has to be targeted. That is a dangerous principle because there never has been agreement between experts or even non-experts as to what index is the best reflection of inflation, and the Bank of England continually produces a series of new indices which, it believes, better reflect inflationary conditions.
No one believes very much these days in the retail prices index--RPI. We have been focused for some time now on RPI X, which excludes mortgage interest. The Bank of England has now suggested that we should watch a third index, RPI Y, which excludes mortgage interest and indirect taxes. No doubt, as the months and years go by, a plethora of alternative indices will be proposed. Therefore, any monetary policy that is expressed in terms of hitting a particular target in a particular index will always be open to question. People will ask whether the appropriate index is being used, because they will say that inflation is much greater than that index would indicate because other indices show a very different result. If Parliament continually changes the indices that it is targeting, that in itself will undermine the policy's stability and credibility. It is far better that Parliament establishes that an independent Bank of England has a responsibility to maintain price stability. It is then up to the Bank to defend its achievement of that objective--to defend it in the markets, to public opinion, to the House, to the Treasury and to the Treasury Select Committee or to any other Select Committee to which the Bank will, from time to time, have to give an account of itself under the Bill.
Column 568Treasury which, after consultation with the Governor of the Bank of England, will set policy targets for the Bank's carrying out of its primary objective.
Mr. Davies : I take my hon. Friend's point, but, of course, I am not assuming that we make the Treasury independent of Parliament. The assumption behind my remarks was that Treasury Ministers would still be subject to the House and that whoever happened to be Chancellor of the Exchequer would have to have the House's support and confidence. I am personally very attached to that principle as, I am sure, is my hon. Friend. I do not think that any conflict will arise. If the targets were defined by the Treasury or by Parliament, there would be a problem deciding how frequently they were to be restated. The Bill is rather coy in this respect and simply states : "Policy targets may be set for the term of office of the Governor, or for specified periods during the term of office of the Governor, or for both".
So the targets can be set for any length of time. As we know, there are long time lags between adjustments of monetary policy and the outcome in terms of retail, consumer or even producer prices indices. There can be time lags of one, two, three or even more years in certain circumstances, so it would be absurd if the targets were reset at too short intervals. For example, if a target were reset annually it would be reset long before anyone could know how effective the one set the previous year had been because it would be too early to judge the outcome. If a target were set for a much longer period, there would be a greater chance of spanning a general election and Parliament would then be fully entitled to reconsider it.
That leads me directly to the issue of the parliamentary overrides. There would be a great deal of speculation in the markets about whether Parliament would override or perhaps change the target. I think that both options would be regarded as equivalent dangers. Many people will believe-- cynically but perhaps correctly--that if given the chance to fiddle the targets or to introduce an override, politicians would not be able to resist the temptation so the credibility of policy would be undermined and one of the purposes of giving the Bank greater independence would be negated.
If we want to give the Bank greater independence, we must resist the temptation to reduce that independence subsequently in practice, or we shall undoubtedly negate a large part of the purpose in which we are engaged.
The only way to ensure that monetary policy is seen as being thoroughly and definitively emancipated from short-term political pressures is to give the Bank of England an entirely independent status. Of course, nobody can overturn the sovereignty of Parliament and, as my hon. Friend the Member for Wolverhampton, South-West is proposing to alter the Bank of England Act 1946, so future Parliaments will be able to alter the Act that may emerge from his Bill. No one would wish to deny future Parliaments that possibility, but that would be an explicit strategic decision, which would be difficult for a political party to take, unless it had promised to do so in its manifesto and it would require a Bill to go through all its stages. It could not be a mere order, which, as the hon. Member for Hackney, North and Stoke Newington said, could be easily slipped through the House without a full appreciation of its risks, dangers and costs.
There are two points that need to be dealt with in that context. One issue was raised by my hon. Friend the
Column 569Member for East Lindsey while talking about the need to co-ordinate fiscal and monetary policy. I am sorry that he is not in the Chamber now, but I enjoyed his speech and his anecdotes about conversations with some of the great figures of the past were fascinating. However, his economic theory had a nostalgic flavour. He was honest enough to say that he considered that the distillation of economic wisdom was the 1944 White Paper on unemployment. He was clearly attached to the formalisation of much of that thinking, which was achieved by Phillips in the 1950s with the famous Phillips curve. My hon. Friend clearly believed that there was a long-term trade-off between monetary rigour and price stability on one side, and employment on the other.
That view is not generally shared today either in financial markets or in academic circles. If one takes the view that my hon. Friend does, that Government should be pursuing different objectives, low inflation, employment, balance of payments and so forth, one is pursuing potentially contradictory policies. Perhaps it is not an accident that Governments who have tried to target different variables believing them to be contradictory have ended up by achieving none of them. That has been the sad story of British Governments since the 1940s--
Mr. Deputy Speaker (Mr. Michael Morris) : Order. I am having difficulty in relating the hon. Gentleman's speech to the specifics of the Bill. Will the hon. Gentleman analyse the Bill and not analyse somebody else's speech on a policy which is outside the Bill?
The separation of fiscal and monetary policy is clearly an issue raised by the Bill and the kind of objection that my hon. Friend the Member for East Lindsey made was easy to anticipate in the debate. I shall pursue another issue raised by my hon. Friend. If the Bank of England is given the monetary independence sought by my hon. Friend the Member for Wolverhampton, South-West, should it lose any of its existing responsibilities?
The Bank's two main responsibilities are its supervisory responsibility and its responsibility for the management of the public debt. I do not believe- -and the Select Committee made it clear in its report that it did not believe--that the Bank should lose its supervisory responsibility. There is a theoretical conflict between the Bank's supervisory responsibility--the responsibility to maintain the integrity of the banking system--and its responsibility for monetary policy. If there were a systemic crisis and a threat to the liquidity of banks, the Bank might be forced to increase the money supply and relax monetary policy which, on general economic grounds, it might not wish to do. I do not think that that conflict can be avoided. It seems to me that one and the same institution should know where the danger signals lie--and be able to pick them up as quickly as possible if the banks are running into trouble--and should be responsible for taking the monetary measures required to deal with that problem if the need arises.
The same does not apply to the Bank's role of handling the Government's debt--or their cash, if they ever have any. There is a much more fundamental contradiction in
Column 570respect of that role. I cannot conceive of such a case arising in the foreseeable future, but a Government who were heavily overborrowed and had some difficulty in funding their debt might put considerable pressure on the institution acting as its agent in the financial markets--which would have a fiduciary responsibility to get the Government debt away on the best possible terms--to reduce interest rates. The Bank might feel pressurised to do that to help its particular, rather important client, the Government. In those circumstances, there would be a fundamental conflict of interest, which would be extremely disturbing. If the Bank were given independent responsibility for monetary policy, the Treasury should therefore have to make its own arrangements--internal or by sub-contracting or otherwise--for the management of the public debt in future.
Mr. Alistair Darling (Edinburgh, Central) : I will not follow the hon. Member for Stamford and Spalding (Mr. Davies). He made his case at some length and it is not necessary for me to dwell on it, except to say that I do not share his view that the Bill is purely a technical measure. We are addressing complex issues and it is not simply a matter of making a technical decision that one aspect of what is currently the responsibility of the Government should be given over to a reformed Bank of England.
Reform of the Bank of England is necessary whether or not we proceed to the third stage of monetary union. The Opposition have a number of proposals to make, and some criticisms of the Bill. In my view, the Bill does not address five crucial points. The first concerns the governance of the Bank of England itself. We believe that the existing court needs to be replaced by a new monetary policy board that would both reflect the interests of the financial world and manufacturing industry and ensure that there was proper representation from the different nations and regions of the United Kingdom. If--and it is a big "if"--we grant greater autonomy to the Bank of England, its decision-making process must adequately reflect the competing and different pressures in the economy and a wider range of interests must be represented on the governing body than at present. That change is necessary now, whether or not the Bill makes any further progress. The Bill has nothing to say about that and, for that reason alone, it ought to fail.
Secondly, there is the important question of what is meant by independence. An examination of central banks throughout the world reveals that there is no clear pattern indeed, the word "independence" is overused. Some banks that are considered to be independent are more so in practice than in law, and much depends on their reputation and track record. The German Bundesbank is independent by statute, but has shown itself to be open to persuasion by politicians ; yet its reputation remains largely intact. As the hon. Member for Wolverhampton, South-West (Mr. Budgen), the promoter of the Bill, said, the 1 : 1 conversion rate on the unification of Germany was determined by political factors and opposed by the Bundesbank in principle, although the bank acquiesced in the event. In that case, it could be argued that, because the
Column 571question was essentially to do with exchange rates--for which Ministers are responsible in Germany--rather than with monetary policy--for which the Bundesbank is responsible--that is not a criticism which can be levelled against the fact that the Bundesbank is an independent central bank.
However, that episode illustrates the inherent tension between exchange rate policy and a policy on inflation. On the other hand, the United States Fed is less independent in legal terms, but it has a high degree of credibility--at least at the moment. Its governing body is appointed by the President, who is a political creature. Many central banks are said to be independent, but have Ministers sitting on their boards. Canada and Spain are examples of that. They cannot really be said to be independent if the people who can ultimately take away their power are on the board providing the appropriate nod or wink. There is provision in many cases for the Government to override a central bank. New Zealand is a prime example of that and that is the model which the Bill largely seeks to follow.
It is arguable that if there is an override, there cannot be independence. However, I accept that it is the perception of what is likely to happen that is important, rather than what could happen in theory. Put simply, the argument for an independent central bank is that the public trust bankers more than they trust politicians. It is a question of credibility.
It is said that politicians tend to manipulate interest rates to win elections. The right hon. Member for Kingston upon Thames (Mr. Lamont), who was in the Chamber for a short while this morning, was good enough to admit in his resignation speech that this Government did manipulate interest rates for political purposes. Despite the protestations of the present Chancellor, I do not believe that the Government will be able to resist the temptation to use whatever mechanisms they can to try to manipulate victory at the next general election, given the linkage between our interest rates, short-term rates and mortgage rates.
It is argued that bankers, who, it is said, take a long-term view, would be more likely to conduct their interest rate policies to secure price stability. Proponents of that style of independence argue that bankers do not have political views. That seems to be a matter of academic theory rather than practical experience. However, it illustrates the point that if the Bank is to have greater autonomy--and in any event--the membership of the court or monetary policy board must have a far wider membership base than at present. It is not so much the constituencies from which the members come that matters, but their calibre. It is important to have a far greater range of experience than is presently the case.
Independence is an inappropriate term. We should be talking about the appropriate mechanism employed by the Government to operate their monetary policies. Changing institutions does not change the economic culture of a country. The fear of high inflation in Germany, born of the German experience of the 1920s, is the reason why the Bundesbank is probably still trusted more than German politicians. There is no guarantee that an independent central bank in Britain would remove an inflationary tendency. The performance of Mr. Viktor Gerashchenko is a startling example of that.
Reference has been made to the Bank's quarterly report which is a very welcome institution. We will watch with
Column 572interest to see what it says in future. In an intervention on the hon. Member for Wolverhampton, South-West, I said that it would be interesting to see what happens if the Government do not reach their inflation target of 2.5 per cent. by the end of this Parliament. Some have unkindly said that the inflation rate will be closer to 3 per cent. and perhaps higher.
Will the Bank fire a warning shot? We and others will watch with interest to see whether it does. The test of credibility will be whether the Governor is prepared to say bluntly that he thinks there is a problem and does not resort to the form of words so familiar in this country in order to avoid a conflict, or apparent conflict, between the Governor and the Chancellor at what might be a sensitive time.
Interest rates are not the only thing that influence inflationary pressure. The Bill, with its notion of a contract--at least that is what I assume clause 3 means--recognises that other factors apply. Nearly every central bank in the world can be influenced by its Government, either through the appropriate representation on the board or through specific overriding provisions.
I assume that article 107 of the Maastricht treaty was drawn up with that point in mind. It is explicit and states that banks cannot "seek or take instructions" from the Community or national Governments. There are many ways around "seek or take instructions" which would achieve the purpose that many Governments now wish to achieve. They can influence their banks indirectly rather than directly.
Section 4 of the Bank of England Act 1946 is overt. It is quite clear. If we remove it, that would not exclude the appropriate nod or wink in the right club or golf course. The Bill proposes the substitution of a contract, which is another way round the problem. The Centre for Economic Policy Research report, which has been referred to, chaired by Lord Roll, recognised the problem, which is why it proposed a limited power of override and a very narrow remit. The New Zealand model, in the terms of the Bill, envisages a contract which can be varied. Over the next few years, it will be interesting to see the experience of the New Zealand Government.
I am not condemning that solution out of hand. I am simply saying that the Bank cannot be independent and not independent at the same time. As I have said, independence is the wrong concept. Putting the Bank on a proper footing might be a more appropriate manner of dealing with the problem.
There is another important point, and that is the override. The override provisions are rather like having a nuclear bomb--one can use it in theory, but in practice one knows that one never can. Once it became known, and it would become known very quickly, that the Governor proposed to override the Bank, the consequences on the currency would be catastrophic, which might be helpful in negotiations between the Governor and the principal Finance Minister, but only as long as the Governor thought that the ultimate deterrent would be used.
In theory, we have that situation now. If it were thought that the Governor would resign, the Government would be in substantial difficulties, as would our currency. There is no accountability in that way unless we can use it and we are prepared to use the mechanisms provided for.
There is no doubt that there is a stateable case for a reformed central bank in the United Kingdom. There is something in the credibility argument, whether we like it or not. It is a counter-inflationary force locked into the
Column 573system, although it has to be said that there is no evidence that a central bank's independence is a necessary condition for achieving low inflation rates. However, from examination, it is clear that there appears to be a premium, although we do not know exactly how much it is. Of course, there is the argument about causation, having regard to the political and economic culture that prevails in countries with independent central banks.
The third criticism of the Bill arises from accountability, which is crucial. The hon. Member for Worcestershire, South (Mr. Spicer) mentioned the growth of quangos in the United Kingdom. Perhaps today, only 24 hours after publication of the report of the Public Accounts Committee, which provided such a resounding condemnation of what is happening in quangos that the Government have set up, we should not skip over that matter.
Indeed, the Chief Secretary to the Treasury and the Financial Secretary, who appear to have given up their economic policy and are now given to discussing matters of moral philosophy, might reflect on the fact that quangos, which are now responsible for much Government administration, are not accountable to the House. If one cannot sack someone, he or she is not accountable, to put it crudely. We cannot be satisfied with handing power to the Bank of England in any form unless we address accountability. I do not think that accountability would be met by the sight of the Governor of the Bank of England being doorstepped by the tabloid press every time he put up interest rates. He might be accountable to the press, but he certainly would not be accountable to the House.
Let us acknowledge that the Bank of England is not accountable to Parliament now in practice, although it clearly is in law, at least in constitutional theory. As the right hon. Member for
Berwick-upon-Tweed (Mr. Beith) said, many successful independent central banks throughout the world are part of a general constitutional settlement which we do not have. The United States Fed is part of the United States constitutional structure, and the Bundesbank in Germany is in a similar position. Both countries have written constitutions which we do not have. Nomination to the central bank council for the Bundesbank rests ultimately with the Bundesrat, which represents the German Lander, which is part of the in-built checks and balances on the federal Government. We have nothing like that in this country.
In theory, the Chancellor answers to this House, usually after the event. In practice, Ministers will do everything that they can not to answer a question. It was interesting to hear the Chief Secretary this morning trying to sidle out of the commitment that he and his party gave on tax cuts. He is now almost suggesting that they said nothing of the sort. There is a tendency for Ministers to say that, no matter what the policy is, it was nothing to do with them and they knew nothing about it--it is somebody else. The Bill would provide a convenient scapegoat if the need arose.
Of course, the Treasury Select Committee can embark on some cross- examination, but it has a roving role--it is not just to supervise the Bank of England. That point was made by my hon. Friend the Member for Hackney, North and Stoke Newington (Ms Abbott). How many times have Select Committee reports been debated in the House? If
Column 574any autonomy is to be given to the Bank in this matter, it is absolutely essential to have greater accountability. The Bill has nothing to say about that matter, as far as I can see.
Fourthly, what about the Bank's terms of reference, which are absolutely crucial? Again, there appear to be two models. The Bill proposes a narrow objective of maintaining stability in the general level of prices, although there is clause 5 to which I shall return. Other central banks are also instructed with regard to the aims and objectives of the general economic policy of their country. The Bundesbank is charged with supporting the general economic policy of the federal Government. The terms of reference of the United States Federal bank contain an injunction to promote effectively the goal of maximum employment. The New Zealand model--that is a solution designed for New Zealand and, as hon. Members have said, we should be wary of importing other countries' models and hoping that they will work here--has the concept of a contract. That is an odd concept, although I would not dismiss it out of hand.
The terms of reference are crucial because they raise the question of economic philosophy. That was touched on by Sir Brian Hopkin and Sir Douglas Wass, who pointed out that monetary policy was only one of many instruments that have a bearing on inflation. Government borrowing, taxation, competition policy and pay all have their part, as they said in an article in the Financial Times on 22 January. I think that the hon. Member for Lindsey, East (Sir P. Tapsell) might have been quoting from that article in his speech. The article continued :
"if meeting inflation is so important and the politicians cannot be trusted to give it the priority it deserves, logically we should take out of their hands not only monetary policy but a range of other policies as well."
Clause 5 seems to hint that a broader consideration would be possible. It is not clear exactly what is in mind, but, in any event, as has been conceded, it is an exceptional step. Indeed, it is doubtful whether it could ever be used because its consequences could intervene before it could be used. If politicians, as it is said, are tempted to manipulate interest rates to win elections, why should not the same politicians manipulate fiscal policy? That could be done at the same time as they are telling downright untruths about what they intend to do. We have some recent experience of that in this country.
It is difficult to see how the Government and the Bank could pursue objectives which could be quite different from time to time, such as the competing demands of the price of money and perhaps the need to keep the exchange rate down. There is an inherent conflict there which needs to be addressed.
Finally, there is the question of regulation, which cannot be ignored. The Bill does not deal with that, and it should do. We believe that the time has come to give responsibility for the supervision and regulation of the banking system to a separate body. I do not accept the conclusions reached by the hon. Member for Stamford and Spalding or by the Select Committee. While the steps taken by the Bank of England which are contained in the memorandum submitted in the appendix to the Treasury reports are welcome, I do not believe that they go far enough. I also do not believe that a review of the Bank of England's functions and constitutions can be conducted in isolation from its regulatory functions. The collapse of confidence in the
Column 575regulatory system in the financial services industry means that a review is long overdue, although the Government have not got around to accepting that yet.
The increasingly blurred distinction between banks and building societies which want to become banks ; insurance companies and banks that want to become insurance companies ; and other people operating in the field mean that the time has come to embark on a thorough review of the whole regulatory system.
Mr. John Watts (Slough) : The hon. Gentleman will know that the Treasury Select Committee is about to embark on a wide-ranging inquiry into financial services regulation. That will encompass all the matters to which the hon. Gentleman has referred, and, once again, will address the question whether the supervision of the banking system should remain a Bank of England function. In the report that is before the House today, the Committee made it clear that it would be reverting to that question in the context of wider financial services regulation.