Previous Section Home Page

Mr. Darling : I am grateful to the Chairman of the Select Committee for his brief commercial. I am well aware of the review on which his Committee is about to embark and, as the hon. Gentleman will know as he attends most of these debates, that is a theme that we have been pressing for the past 18 months.

It is most unfortunate that, while the Opposition would like an examination conducted and while the Committee has agreed to do that, so far the Government have not shown much interest in the matter. Perhaps the Chancellor has not got round to reading some of the difficulties which are now arising. There are concerns that are shared by hon. Members of all parties, as a recent debate on insider dealing showed. It is a matter, not just for the Select Committee, but for the Government. There are undoubtedly substantial problems in the regulatory system which the Government need to address. We are continuing our examination of the constitution of the Bank. For that reason and in the light of the criticisms that I have made, we shall not support the Bill. Hon. Members who have spoken in the debate so far have referred to the cause of an independent central bank as fashionable. I do not know whether it is fashionable or not, but I am certain that we should not rush into something until we have considered all the consequences and taken the opportunity to examine the problems that exist with the Bank of England now, let alone any that may arise in the future.

1.29 pm

The Financial Secretary to the Treasury (Mr. Stephen Dorrell) : I begin by welcoming the statement that my hon. Friend the Member for Wolverhampton, South-West (Mr. Budgen) put in clause 2 of his Bill of the primary objective of monetary policy as he would see it in the context of the reformed Bank of England that he wishes to create. That is a fundamental about which there is much greater agreement in the House than previously and certainly fundamental agreement between my hon. Friend and the Government.

It must surely be the lesson of our history as well as the lesson that should be drawn from the experience of other countries, that there is no trade-off between growth and price stability. Price stability is what creates the circumstances for maximising economic growth. It is the

Column 576

most benign environment that one can create in terms of monetary policy for the creation of wealth. So I whole- heartedly welcome the commitment in my hon. Friend's Bill to that primary objective. The primary objectives of monetary policy are much less a matter of argument now within the House and outside than previously. It would be surprising if they were still the subject of argument in the way that they were. We must surely be assumed to have a responsibility to learn the lessons of our experience.

In the past 20 years, three times we have seen inflation rise to levels at which the Government had to take action to bring it down. We have seen three times in that 20-year period the damage that is done to the wealth- creation process and the social fabric by the process of bringing inflation under control. So to those people who say that the Government should pay more attention to social and economic damage caused by recession, I say amen, but please understand why recessions happen and the most important proximate cause of our most recent experience of recession--the failure of Governments to deliver price stability and good monetary discipline.

Ms Abbott : On that point, I draw the attention of the Minister to a recent academic study in the Cambridge Journal of Economics by Stanners which ended with the conclusion :

"No evidence has been found to support the notion that a low rate of inflation has in the past and in various countries been associated with improved growth rate".

Mr. Dorrell : I cite two bits of evidence to the hon. Lady. The first is the evidence of experience. The experience of low-inflation countries has been better growth than that of their low-inflation comparators. The second is the evidence of analysis. It is not difficult to understand why it is easier to run a business wealth creation process against a background of monetary certainty that allows long-term planning and allows time for investments to repay the investors. It is easier to do that against a background of price stability than against a background of the short-term planning horizons that are imposed by the stop-go economic cycle.

I simply do not accept the hon. Lady's proposition. The evidence of both experience and analysis supports the assertion that price stability is the best circumstance that monetary policy can create for the generation of wealth. Of course it is true, as my hon. Friend the Member for East Lindsey (Sir P. Tapsell) said, that price stability is necessary but not sufficient. Other aspects of economic policy are important to the process of wealth creation. They are not immediately relevant to my hon. Friend's Bill. As I do not intend to speak for very long, I do not propose to talk about them. For the purposes of the debate, it is common ground at least among everyone other than the hon. Member for Hackney, North and Stoke Newington (Ms Abbott), that price stability is a shared objective. The question is how best to deliver the objective of price stability in our society.

In introducing the Bill, my hon. Friend the Member for Wolverhampton, South -West was at pains to argue that it represented a modest incremental development of existing institutions. He stressed that it was not an attempt to introduce a new and foreign idea--a fancy foreign scheme for managing monetary policy--but an inch-by-inch development of an existing institution. I want to come back to that point, because I do not believe that the Bill is

Column 577

accurately characterised in those terms. Before I do, let us be clear that, however modest or immodest the development envisaged in the Bill, it is clearly in an identifiable direction : of something called independence. It has been qualified that it is towards a more independent monetary policy institution and a more independent central bank.

As many hon. Members have said, these are familiar and perhaps even fashionable arguments. They have been deployed and, indeed, accepted by Governments in New Zealand relatively recently, and the new Government of France. They have been advanced in the House, most notably in recent years by former Chancellors of the Exchequer, who have sought to learn from their experience about how monetary policy could be better managed. The hon. Member for Edinburgh, Central (Mr. Darling)--I think that I quote him correctly--said that he thought that there was something in the direction of institutional development on monetary policy towards greater independence. The arguments can broadly be summarised : it frees the conduct of monetary policy from day-to-day political interference. As the hon. Member for Edinburgh, Central put it, price stability is better delivered by bankers than by politicians. The depoliticisation of monetary policy is one of the strands of the argument that is put in favour of a more independent central bank ; the other is the argument of experience-- that if one looks at the experience of other countries, one concludes that a more independent institution tends to be more successful at delivering the objective of price stability.

As I have said, those are familiar arguments. I think, however, that even if the Bill is only a modest development in that direction, it is important for us to consider briefly the strength of the argument in favour of going down that road. It is, of course, as one or two of my hon. friends have pointed out, not open to Government to argue that it is inconceivable for us to proceed down the road towards greater independence. As my hon. Friend the Member for Wolverhampton, South-West said, the Maastricht treaty allowed the possibility that we might see more independent conduct of monetary policy.

I do not propose to get involved in arguments about the Maastricht treaty, but when I arrived in the House this morning and saw my hon. Friends taking their places, I did have a great sense of de ja vu. There is no hour of the day in which I have not been in the company of my hon. Friends, who sat in similar places in the Chamber, engaged in the debate about the treaty. I do not propose to go back over that ground this afternoon. I simply want to observe that it is clearly not open to the Government to say that it is inconceivable that we should have a more independent institution conducting monetary policy. Furthermore, that is true, in the context not only of the Maastricht debate, but of the changes that the Government have made in the conduct of monetary policy since 16 September 1992. The publication of a report on inflation prospects by the Bank of England--it is entirely the responsibility of the Bank of England, and is not something agreed with the Treasury--is a small step in the direction of greater independence for the Bank of England on monetary policy. The decision announced in the autumn of last year by my right hon. and learned Friend the current Chancellor of the Exchequer--that, henceforth, the Bank of England would

Column 578

be responsible for the timing of interest rate changes--is a further step in the direction of greater independence for the Bank of England. The position currently is clear. I think that that answers the point made by the right hon. Member for Berwick-upon-Tweed (Mr. Beith), that one must be clear about who is responsible if the accountability mechanism is to work. Where that responsibility currently lies is clear, because the Chancellor is responsible for fixing the level of interest rates and the Bank of England is responsible for managing the announcement of any change in those rates.

Mr. Beith : The hon. Gentleman's explanation might be misunderstood, because one might assume that the Bank acts as a press officer for the Chancellor. Surely the hon. Gentleman would like to add that the Bank is expected to give advice to the Chancellor about whether interest rates should go up or down and by how much.

Mr. Dorrell : I accept that the Bank gives advice to my right hon. and learned Friend on that subject, but it is not the only source of advice on monetary policy.

When the right hon. Member for Berwick-upon-Tweed reads his speech in Hansard , he might pause for a second, because I do not believe that the doctrine that he included in it lies at the root of parliamentary democracy. He suggested that responsibility should lie with the party that gives advice. That is a very strange constitutional doctrine and it is not one which I would espouse. According to his argument, responsibility should always lie with civil servants, because we receive advice on monetary policy from those working at the Treasury, as well as advice from the Bank. I stand firmly by the description of responsibility which I gave--the Chancellor fixes the level of the interest rates and the Bank is responsible for the management of the changes to them.

Mr. Jenkin : Does my hon. Friend agree that if the Bank of England gave primacy to domestic monetary targets in its policy-setting agenda and the Government chose to give primacy to other targets, such as the exchange rate, that would lead to real conflict between the Treasury and the Bank of England?

Mr. Dorrell : It is undeniably true that if one institution looks at one set of indicators to govern monetary policy and another institution looks at another set, it is possible that they will come to different conclusions. The important point is that monetary policy in Britain today is conducted on the basis that the Government are responsible for setting out clearly the parameters of monetary policy. That is the responsibility of my right hon. and learned Friend the Chancellor, because he is responsible for fixing the rate of interest and the Bank is responsible for managing changes in that rate.

It is not part of my argument that it is inconceivable to move in the direction of greater independence, but, since we are considering a Bill which pushes us a long way down that path, we should also remember that arguments exist that should apply pressure to the brake on that process as well as to the accelerator.

I entirely agree with my hon. Friend the Member for East Lindsey and others who have emphasised that it would be dangerous for us to allow ourselves to believe that any institution responsible for managing monetary

Column 579

policy, or any set of institutional arrangements, are panaceas, which by themselves guarantee the delivery of price stability. Few difficult political problems lend themselves to an institutional solution alone. As my hon. Friend the Member for Stamford and Spalding (Mr. Davies) pointed out, the Japanese experience of price stability has been extremely good, despite the fact that its central bank is clearly subservient to the Ministry of Finance. I seldom agree with the hon. Member for Brent, East (Mr. Livingstone) about anything to do with economic policy, but he was right to say that one of the problems for Russia is the independence of its central bank. It is clear that institutional change is seldom a panacea.

When my hon. Friend considers his Bill, which would create new institutions to manage the day-to-day aspects of Government business, he must accept that it is important to ensure that those institutions are accepted not just in different parts of the House, but by the country, as legitimate in terms of the exercise of the power that they would be given. Institutional legitimacy, surely, is an important criterion in the testing of any such changes. [ Hon. Members-- : "Hear, hear."] Before my hon. Friends become too excited, let me draw an important distinction between the doctrine that institutions must earn legitimacy--which I whole-heartedly espouse--and the doctrine advanced in similar circumstances roughly 12 months ago, which states that independent central banks are in a sense inconsistent with democracy. I do not accept that argument. It would be absurd to argue that Switzerland, Germany and the United States are not democracies ; clearly they are. The difference between our arrangements and theirs is this : they have a separate set of arrangements for the conduct of monetary policy that have become legitimate--to which their populations have become accustomed, and which are accepted in their societies. It is not a question of which set of arrangements is more democratic ; it is a question of which set of arrangements is accepted, having earned legitimacy following a period of experience.

Mr. Darling : The Financial Secretary appears to be doing the relatively easy job that I did earlier--that is, criticising the Bill. What is his feeling on the principle ? Do the Government support moves towards an independent central bank ? I detect a distinct lack of enthusiasm on the Financial Secretary's part, and I assume that he is speaking for the Government rather than for himself.

Mr. Dorrell : I certainly seek to speak for the Government. The Government's view on the principle was set out by my right hon. and learned Friend the Chancellor when he described himself as an agnostic on the subject ; but neither of us is an agnostic when it comes to the proposition that any change must be justified. It must be shown that the change that is recommended would lead to an improvement in the performance of the institution, and to acceptance of that institution in the House and outside.

Mr. Forman : May I clarify that important point of policy ? The implication is that the Government could be persuaded of the wisdom of establishing a more autonomous central bank on a new statutory basis.

Mr. Dorrell : I do not think that we envisage that happening in the foreseeable future. When I was asked about the principle, I said that I thought we were agnostic.

Column 580

Surely, rather than becoming involved in a long argument about what new arrangements may be established, we should ask ourselves what, if anything, is wrong with the existing institutions, and how they can be improved. That strikes me as a more informative and interesting way of dealing with institutional change. It is better than starting with a blank sheet of paper, and asking how we would manage monetary policy if we were setting up a new polity.

Mr. Budgen : May I remind my hon. Friend that the Chancellor did not talk about democracy when he last spoke about the matter, on 16 December? He said then :

"I have an open mind on the subject, although people try to guess my opinion. I have a feeling that the Select Committee's proposal is becoming rather a fashionable cause. We should consider it with care, also taking into account such matters as parliamentary accountability for an increasingly more autonomous Bank of England."--[ Official Report, 16 December 1993 ; Vol. 234, c. 1257.]

There was no talk of democracy, whatever that may mean in a constitution with a sovereign Parliament ; the Chancellor is worried about accountability. How could a central bank in Europe be accountable to this place?

Mr. Dorrell : As my hon. Friend well knows, my right hon. and learned Friend the Chancellor was referring to possible developments in response to the Select Committee report in a domestic monetary context. He was not talking about any move in the European context. As I have said, we have debated that subject many times, and I do not wish to return to it today ; it is not germane to my hon. Friend's Bill.

Before we proceed to change arrangements on the conduct of monetary policy , we have to ask the difficult question : would the institution be accepted as legitimate in the House and outside when it made unpopular decisions, which those responsible for monetary policy occasionally have to make? Monetary policy, as we have all agreed, is a vital part of economic policy. I said that I accepted the importance of price stability as a vital precondition to economic success. If we are to deliver price stability, the institution in charge of monetary policy has to be able to take unpopular decisions and to have them accepted in the House and outside.

To put it in plain English, how would people outside the House regard what they perceived to be as an independent central bank putting up interest rates? In particular, how would they regard it if, when the issue was challenged in this place, the answer given was, "That's not a matter for me, but for Eddie"? That would not be accepted as a legitimate answer to that question, either in the House or outside. On that basis, it is important to remember the restriction on the pace at which we should allow ourselves to proceed in developing independent monetary policy institutions. It should remind us of the importance of going slowly--it is on that subject that I want to return to the Bill.

The question that the House should ask itself is whether my hon. Friend is right to characterise his Bill as a modest move in the direction of central bank independence. I think that he is understating the substantial change that would be introduced by his Bill. His argument that the Bill involves only a modest change is based on the argument, set out in his article in The Times yesterday that under his proposal

"the Chancellor remains the minister responsible for monetary policy."

That would be true only if the House were to accept a regime where the Chancellor sets objectives under the

Column 581

terms of clause 3, which involves policy targets. A regime that requires the Chancellor to set those policy targets allows him to answer the full range of monetary policy questions that might be posed either here or outside. It implies that the only political interest in monetary policy is in the objectives of monetary policy, rather than in the day-to-day judgments that are inherent in converting those objectives into actual interest rates and monetary policy decisions. My hon. Friend's argument is that the Government define inflation targets and the Bank interprets those monetary policy targets into a given level of interest rates.

According to the doctrine of the right hon. Member for Berwick-upon-Tweed, the Government are responsible for those targets. The Bank, in my hon. Friend's model, is responsible for the judgments in interpreting those targets into interest rates and is an independent entity which is not responsible to the House for those judgments. I do not accept the assumption that underlies the Bill, which is that there is no political interest or, indeed, scope for political argument about the judgments necessary to interpret an inflation target into interest rates. That is not the correct interpretation. There is plenty of scope for different people, believing that they share the same commitment to the same inflation objective, to come to different judgments about how that inflation objective should be converted into, primarily, interest rates and other monetary policy instruments given a particular set of circumstances. The importance of that question was underestimated by my hon. Friend when he presented his Bill.

My hon. Friend says, "Oh well, do not worry about it because clause 5 allows the Government, if they do not like what the bank is doing, to move the goalposts." With respect to my hon. Friend, it is not as simple as that. Even if the Government move the goalposts under the terms of clause 5, the Bill still fixes them in terms of inflation objectives rather than specific interest rates. Even after the Government had secured the consent of the House, clause 5 would allow the goalposts to be moved. Clause 5 allows scope for different judgments about how the inflation objective is converted into interest rates.

My hon. Friend the Member for East Lindsey is right to stress that a statutory instrument calling for monetary policy to be changed contrary to the public advice of the Governor of the Bank of England, would lead to all kinds of financial stresses in the market. As more than one hon. Member has said, it would be a nuclear deterrent. The Government do not support the Bill in its present form, because its key provisions would not solve the problems that are inherent in trying to answer the questions that my hon. Friend has set himself. The Bill is a bigger step towards an independent central bank than he has suggested, but it is not part of our case that we have clearly decided that greater independence for the Bank is either impossible or undesirable.

I have agreed with several of the views expressed by my hon. Friend the Member for East Lindsey, but I do not agree with his view that it is necessary for fiscal and monetary policy to be the responsibility of the same institution. It is technically possible to resolve the problems, but whether we want to do so is a different question ; and if we do, how fast do we want to make the necessary changes?

Column 582

Mr. Duncan Smith : My hon. Friend says that the Government do not necessarily rule out greater independence, but have not the Government ruled it in? Their recent changes mean that they have already started on the route towards greater autonomy. Surely the question is how far the Government are prepared to go.

Mr. Dorrell : I said that this is a process on which the Government have already gently embarked, but that the way in which we intend to proceed is by starting with what we have and asking how it can be improved, not by starting with a clean sheet of paper and asking how it might be done in a perfect world. We always bear in mind the important constraint that whatever emerges from the process must be accepted as legitimate here and outside. In plain English, when interest rates go up, the arrangements must be such that people do not say that the Government are trying to get out from under or that the institutions are in some sense illegitimate.

My hon. Friend is to be congratulated on what he has described as a probing Bill. It deals with an interesting subject and has presented the House with a valuable opportunity to debate the issues. However, I cannot commend the Bill in its present form.

1.57 pm

Mr. Ken Livingstone (Brent, East) : If the Bill were to become law it would be one of the most pernicious attacks on the people of this country in many decades. That is because the Bill recommits the Tory party, which clearly sees the next election hoving into view, to fundamentalist Thatcherism and monetarism. The legislation would inevitably mean permanent, institutionalised higher unemployment throughout the length and breadth of this country. That is because it would reassert the primacy of price stability over every other social and economic objective.

The disaster of the past 15 years of politicians assuming that a couple of lines of economic theory could be turned into a religious creed to which everthing else was subordinated, shows that some Conservative Members have learnt nothing from the lost opportunity of the past decade and a half. Therefore, I am surprised that the Government Whips have instructed their Back Benchers to ensure that the Bill is talked out.

The reality is clearly spelt out in the Bill's introduction, which in a sense tries to capture the flavour of what is behind the measure and its attempt to win support in the city. The Bill's objectives are,

"to remove the general power of the Treasury to give directions to the Governor of the Bank ; to establish price stability as the primary objective of the Bank and to provide for policy targets for the carrying out of this objective ; ".

All the City interests, whose interests have dominated the past 15 years of Conservative Government, would be delighted for that to be enshrined in law, but what would it mean in practice?

We are asked to trust the bankers. I have nothing against bankers as a group. I am certain that they would make good neighbours if they lived next door. They probably would not play their reggae music in the middle of the night or kick one's cat, but what is distinguishing about bankers that makes their judgment any better than that of any other group in society? Is it simply the failure of successive Governments to regenerate the British economy and move us into the realms of the average modern European economy, with the levels of social and economic provision

Column 583

that others are able to afford, and the failure of British Governments to achieve that during the past 40 years, that leads some people to cast about desperately for some new institution or group--in this case bankers--who can be given power so that they will be able to create what successive British Governments have failed to create? It would be much better to analyse why British economic policy has failed during the past 40 years--of course, I do not include the post-war Attlee Government in that record of failure--rather than to thrash around, not considering policy but seeking some new institution that can do it all for us.

I do not think that bankers are impartial. All the history, in this country and other countries, suggests that bankers, as a group, are characterised overwhelmingly by a cautious and narrow approach to their sector of responsibility. Occasionally, there is a slightly more radical or progressive banker, but overwhelmingly it is a cautious little group and, frankly, they do not balance the competing interests of society, and that is not their job.

The job of bankers is primarily to try to maximise the return on the money that has been entrusted to them. Increasingly in Britain that has been perceived as a short-term role. They have not taken on board any national responsibility and our law enshrines that they cannot do that. They simply have to think in terms of the quickest possible return for the investors to whom they are responsible and accountable.

Let us consider the idea that is creeping forward of the independent central bank. I was amazed to hear the Financial Secretary speak about the Government's open mind. A treaty has just passed through the House which commits us to making the Bank independent. They have signed the thing. Now I am not surprised that people are backing off, in the tatters of the Maastricht treaty, but night after night we witnessed the Government Whips dragooning Conservative Members through the Lobbies to win support for a treaty which, by law, forced the British Government to denationalise the Bank of England. It is rubbish for the Government to say, "We are giving the matter some thought" or, "We are open-minded" or, "a bit agnostic" when they have spent virtually the whole of this Parliament so far trying to carry into law a treaty that forced them to create an independent central bank.

No doubt the prime force is that Members of the House consider other nations that have had more successful economic policies and say, "There is an independent central bank element to their success. If we could have an independent central bank we could be the same." My hon. Friend the Member for Hackney, North and Stoke Newington (Ms Abbott) pointed out the success of Japan. Japan consistently ran very high inflation until it established the basis of its growth. The Japanese central bank is independent. There is a much more collective form of policy-making and task-setting in terms of Japanese political leadership.

Increasingly, though, people have tended to point to the Bundesbank or the Federal Reserve bank in the United States. The example of the Federal Reserve in the United States should be a warning to Opposition Members. If one considers recent history, the Federal bank in the United States became truly independent during the Truman presidency. Before that, right up to Roosevelt's time, the bank did pretty much as it was told by the President. It was only when the cost of funding the Korean war became so inordinate that the American Government could no longer

Column 584

obtain funding from the markets for the cost of the deficit that was built up by the Korean war, that suddenly the balance of power shifted and the Federal Reserve bank started to assert some independence, on which it has built since.

People on the left of the political spectrum should consider recent history. When President Carter was faced with a severe and persistent recession and wished to relax the Federal Reserve's policy and reduce interest rates, the bank's board of governors refused to co-operate. Jimmy Carter went into an election that he was doomed to lose because of the economic constraints. A decade later, George Bush was equally stuck with a long and persistent recession but the Federal Reserve was happy to cut interest rates in the most manic way. It clearly did everything possible to ensure the re-election of a Republican President. I am not surprised that a group of bankers in any society is going to be broadly sympathetic to parties of the right, and the case I have just cited is the clearest demonstration of that in recent times.

The Bill is the first step towards the creation of an independent central bank. If we were to create such a bank, how would it be governed? The Opposition parties would demand to be able to nominate a proportion of the members of the bank's governing body. That would be very different from the current situation. We read in the newspapers that Lady Thatcher had appointed Robin Leigh-Pemberton as Governor of the Bank of England and no one else had a say. The reality of Lady Thatcher's premiership was good, clear accountability : Robin Leigh-Pemberton was appointed because he would do what he was told. He was completely and utterly a creature of the Government or, to be precise, of the Tory party. In the run-up to the 1992 general election, he virtually gave a free party political election broadcast for the Tories, telling the people that the recession was over. I did not object when Mrs. Thatcher appointed Robin Leigh-Pemberton. She wished to appoint as Governor someone who was clearly her creature and it was her right to do so because, at the end of the day, if the Bank got the policy wrong she would lose her job. That is what political accountability is all about. I believe that Governments try to do far too much. Many of the things for which Governments have responsibility should be devolved to regional parliaments and local authorities. We all agree that Parliament and the Government should be responsible for foreign policy and for defence, but how can anyone deny that macro-economic policy should be the preserve of the Government and Parliament of the day? I am all in favour of more transparency in how such decisions are taken, but, rather than have the Bank present a banal report every few months on what it is doing, it would aid accountability and transparency on questions of how interest rate policy was evolving if the Chancellor came to the House when the Bank wished to change the interest rates. Why should not the proposed new rates be announced to the House? We could then debate the issue and all hon. Members could have some influence.

I do not know why I have driven from the Chamber the Front-Bench spokesmen of both parties. I wonder whether a coalition Government is even now being formed because of the horrifyng prospect of what I am saying. This is one of those rare times when I am in complete agreement with my party's Front- Bench spokesman, and such occasions

Column 585

give me great pleasure. Like many of the best pleasures in life, it is becoming increasingly infrequent as the years roll by. We should be aware of what the Bill would mean for the people whom we represent. There is not the slightest doubt that it would be bad news. I was delighted to find that my reminding the House of what happened in Russia pleased the Financial Secretary. The truth is-- [Interruption.] I do not know what is going on, but I am beginning to wonder whether I might be in a state of dishevelment.

We have only to consider what is happening in Russia today to realise the problems arising from split accountability for the management of the economy. The governor of the central bank there is pursuing a policy that is completely at variance with the elected President's economic policy, and it has been disastrous.

It is all very well for the Bill to say that the Government of the day could, in effect, issue an edict that will run for six months, but what would be the impact on the money market while that was being debated in Parliament? What would it cost the British Government in a possible drain on the pound if it were known that, while the independent Bank of England was favouring one policy, the Government of the day were having a public debate and a vote in the Chamber one or two or three days hence to impose a policy to which the Bank was opposed? It would mean a collapse in confidence.

That is the pernicious sting in the tail of the Bill. While it gives the illusion of accountability, it transfers power. How many Governments would have the nerve to run the risk of one, two or three days of a haemorrhaging of resources from Britain, as the international money markets panicked at seeing the central bank and the Government locked into disagreement and conflict? That would be a disaster. I want to see greater accountability on the Floor of the House--that means clarifying how political accountability works. I had a vivid example of such accountability when I was leader of the Greater London council. As elected council members, we inherited a transport arrangement with an appointed London Transport Executive, which had responsibility for the day-to-day running of the transport system. Often we were in agreement and often we were not. When the first Labour administration after the new arrangements took office in 1973, there were horrendous rows, conflicts and sackings. It always seemed as if there was no reason for an elected council and a full-time executive of London Transport to run London transport. There was a tremendous overlap in that capacity and there was confusion and dissent. Londoners were the losers in the end because of that blurred accountability.

I was impressed by a book that I read about 30 years ago--an autobiography by senator William Norris, who was the senator for Nebraska in the first half of the century. His theory was that it was in the interests of voters to have the clearest lines of political accountability. He campaigned and eventually won a change in the Nebraska state constitution to abolish its system of a Nebraska house of representatives and a Nebraska senate and introduced a unicameral legislature. That meant that if something was not going right, everyone could see where the political responsibility lay.

Column 586

I have not the slightest interest in taking even one step towards an independent central bank, which will lead to a blurring of accountability and a blurring of where blame lies. As my hon. Friend the Member for Edinburgh, Central (Mr. Darling) has said--it may have been said by a Government Member ; the parties are rather close on that issue--it would be no valid excuse to say to people "Go and see Eddie". Imagine a difficult financial position, with mounting unemployment and 100,000 or more workers marching up to Trafalgar square demanding action, and someone from the Government of the day says "Don't blame me you have to go and see the Bank of England". It is an absolute travesty.

The House is filled with 651 people who, in the main, have drooled over the idea of becoming a Member of Parliament. In some cases, they have lusted for political power since they were little boys and girls and were photographed outside No. 10 Downing street. They devoted their lives to getting here because they wanted political power. They arrive in the House and decide to give the key decision to the bankers. Why not go off and become a banker in that case? I did not come here to say, "That is a difficult decision. Let some other poor sod take it". I am happy to take those difficult decisions. Part of the problem is that there are too many bankers on the Conservative Benches.

I shall wind up so that another hon. Member may make a brief speech before the Division. I want to outline why the British economy has failed and why the aims of the Bill will not work. The British economy has not failed because it has suffered too much inflation. Inflation has not helped and the economy would have been a lot better if the British rate of inflation had been closer to that of Germany. The economy has not failed because British workers have earned too much money, as they have been almost the poorest paid workers in northern Europe. It has certainly not failed because successive Governments have almost got things right but lost their nerve. The underlying cause of our economic problems is lack of investment. When the Government came to power, they made a great song and dance about the state of the motor industry, comparing the productivity of Japanese workers in the motor industry with those of their British counterparts. But, for every £1,000-worth of equipment with which British workers in the motor industry were working, Japanese workers had £11,000-worth of equipment at their disposal--a ratio of more than 10 : 1.

The reason why British Governments have failed to turn round the British economy and replicate the success of Japan or Germany is that we have under -invested in Britain. Through the 1950s, 1960s, 1970s and 1980s, British investment limped along at about 14 or 15 per cent., whereas German investment often stood at 25 per cent. and Japanese investment at 33 per cent. Nothing in the Bill will lead to an extra pound of investment in the British economy.

Mr. Forman : Does not the hon. Gentleman realise that the climate for investment over that long period would have been much better had we had lower inflation and less volatile interest rates, and that both would have been helped by the existence of a more autonomous central bank on a new statutory basis ?

Mr. Livingstone : I ask the hon. Gentleman to examine the success stories. Japan has not had low inflation until

Column 587

recently. It established its economic predominance, often with massive deficits and high inflation, by creating the right climate of opinion. It made itself into a nation that was going somewhere--which was growing and investing. It is largely a matter of psychology. We have created a different climate of opinion : we are a nation obsessed by what is happening in the City of London which sits and watches bankers clawing their 0.5 per cent. off the value of someone else's productive labour. The best and brightest minds come out of our universities and go into the City--into stockbroking and accountancy-- rather than into industry, engineering and scientific research. We must change that climate of opinion, and no independent central bank will do it.

If the Bill became law, the message would go out that Britain's financial interests had reinforced their predominance over industry in the British economy. That is why this is a pernicious Bill. I find it amazing that an hon. Member who has earned a lot of respect and who, with good humour, has spent much of the past 18 months trying to prevent the British people from being enslaved by a European cartel of bankers is now happy to truss up his constituents and deliver them bound hand and foot into the power of British bankers. I do not like bankers, whether they are British bankers or foreign bankers, because bankers are not interested in the sort of people I was sent here to represent.

2.13 pm

Lady Olga Maitland (Sutton and Cheam) : I never imagined that I would admit to the House that I agreed with the spirit--if not with the content--of a speech made by the hon. Member for Brent, East (Mr. Livingstone). Clearly, pigs sometimes fly.

I welcome this important debate and congratulate my hon. Friend the Member for Wolverhampton, South-West (Mr. Budgen). It is appropriate that he should have introduced the Bill to give us the chance to discuss a very important issue which has been rattling around for years. The opportunity that my hon. Friend has given us to debate the issues is both timely and welcome.

My hon. Friend described his Bill as a tiny step. I would put it in a different way. My hon. Friend the Member for East Lindsey (Sir P. Tapsell) described the Bill as a lever. Could it not also be regarded as a big step for mankind, but not always to everyone's advantage? I note that the Treasury Committee, of which my hon. Friend the Member for Wolverhampton, South-West is a member, admitted that it had no intention of seeking an independent Bank of England, and my hon. Friend emphasised that in his speech. I think that we would all agree that the issue goes wider than the Bill. Should we set the Old Lady free? Perhaps, but perhaps not just yet. I agree with my hon. Friend the Minister that we should examine the existing institution and consider how it could be improved.

It is not unreasonable to liberalise the ties between the Treasury and the Bank. I believe that accountability is important and that transparency is vital. However, it is a matter of degree. We all agree that it must be a priority to keep inflation down, and for good. Perhaps the best way to look at the effect is to consider how the lives of our constituents would be affected.

My constituents in Sutton are very concerned about the cost of living. Their lives could be shattered if things go

Column 588

wrong. They do not want shocks or sudden price rises which can throw a family budget, particularly if mortgage payments are tight. Pensioners do not want to see their hard-earned savings swallowed up by a rampant rise in the cost of living. Small business men do not want to see resources gobbled up. They all want steady, sustainable growth.

For all that, I do not believe that we should be fearful of examining new ideas which ultimately make for better and perhaps more accountable systems and which need not cause a revolution. That did not happen in 1946 when the Bank of England was nationalised. According to the Bank's official history, that aroused little interest among historians and caused precious little public debate or controversy.

The Bank's history may already have been evolving into the brave new post- war world. Nationalisation may have occurred as a legacy of wartime controls and was given a push by the radical socialist Government, free of any parliamentary constraints. The argument then was that nationalisation was simply a move to regulate existing procedures and that, despite the change in ownership, the Bank would maintain independence in day-to-day management of banking operations.

Even when the Bank was in private hands, the practical relationship between the Bank and the Treasury was complex, with the Treasury generally having the last word. The Bank's directors would consult the Chancellor before deciding on changes in bank rates, even though such changes were formally not undertaken until the directors held their Thursday meeting.

The relationship between the Bank and the Treasury today is, of necessity, something of a delicate quadrille. In the 1960s, the earlier consensus was replaced by a suspicion of the Bank by a Labour Government who disliked criticism of their tax policies and spending plans.

The balance tilted the other way in the 1980s and reached its high-water point of Treasury domination of the Bank. The former Chancellor of the Exchequer, Nigel Lawson, was quoted in The Economist in 1990 as saying in 1987

"I make the decisions and the Bank carries them out."

A turnabout in mood, which surprised commentators, came when Lord Lawson, when giving evidence to the Treasury Select Committee in an investigation into the independent role of the Bank of England, said :

"I became convinced in my own mind that it would be a better institutional arrangement for the battle against inflation It was not because I was suddenly struck with the feeling that central bankers were supermen it was simply that I felt as an institutional arrangement it would work better."

Those who work in the Bank may be flattered to be called supermen. However, I do not sense any arrogance judging from the evidence given by the Governor, Eddie George, to the Treasury Select Committee. He did not give the impression of empire building. If that was in his heart, he did not let it be known. He was quite clear when he said that there has to be

"an accountability mechanism. And it has to be effective." He added that the Bank's euphemism for independence is

"statutory accountability, precisely to try to remind ourselves all the time of the point and to try to get rid of this idea that independence, which is the popular name for the debate, is about a lot of appointed bureaucrats exercising powers."

He favoured a mandate from Parliament, giving price stability as the objective.

Column 589

On accountability, it is interesting that the Select Committee report noted that the Prime Minister, commenting on the then Chancellor's support for an independent central bank, said : "The very real concern that I have always faced is one that I believe is spread widely across the House : the need for accountability to Parliament for decisions on monetary policy matters. Were a way to be found to get the benefits of an independent central bank without the loss of parliamentary accountability, my views would be very close to those of my right hon. Friend." Are we ready for the Old Lady to cut the apron strings? Is that necessary? Evolution means that it is common sense to operate on a more open basis. Why not allow the public, the press and Parliament to know what the Government's monetary policy is and the extent to which the Bank is given freedom to achieve the Government's stated objectives? It is welcome news that Mr. Pennant-Rea, the deputy Governor, a former journalist and editor of The Economist , will take personal control of the Bank's relationship with the public, Parliament and the press.

Would a lurch to total independence turn into a perfect world? Some say that we should look overseas to Germany and Switzerland--America even-- which have good or excellent inflation records. Are we so certain that autonomy means low inflation, or are there other factors? Could it be the management style? After all, the independent Bank of New Zealand brought inflation down, but, at the same time, that country went into recession. Is independence such a conclusive indicator of low inflation? Analysis of the world's leading economies shows that there is hardly any evidence that real growth rates or unemployment performance were superior in countries with more independently constituted banks. The flip side, as pointed out by Edward Balls in the Financial Times in 1991 is that

"Countries where the fear of inflation is greatest may be those that give the most independence to a central bank thus denying governments the ability to use monetary policy to stabilise the economic cycle which may actually lead to more variable output and higher unemployment."

Surely what count are the decision makers. Clearly, it is more desirable that the Government should take responsibility, if not the rap, if things go wrong. At least we should know how and why they have gone wrong. By the same token, we could give them a good cheer for getting things right. Ultimately, the buck stops with the Government. They decide and co-ordinate tax and

Next Section

  Home Page