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Mr. Geraint Davies: Will the right hon. Gentleman give way?
Mr. Lilley: I will in a moment, if the hon. Gentleman will forgive me. I am not suggesting that members of the monetary policy committee will take instructions directly from the Chancellor, but we should recall what has happened elsewhere. Professor Gowland records in an interesting book published by Politeia that at the Federal Reserve in America the chairman appointed by Nixon was so anxious
- "to facilitate Richard Nixon's re-election in 1972"
- "took precedence over all other objectives. He was apparently prepared to manipulate interest rates at the President's request."
Ms Abbott: I know that consistency is an over-rated virtue, but if the right hon. Gentleman is against independence for the Bank of England in principle, he ought to be reassured that the Chancellor will ostensibly have so much power over the monetary committee.
Mr. Lilley: The worst of both worlds would be a bank that was influenced by the Chancellor, but for which he would not take responsibility to the House. That is precisely what he is creating through the Bill. I am grateful to the hon. Member for Hackney, North and Stoke Newington for giving me the opportunity to make that point, and for her considerable contributions on the subject, which I have read with great interest.
The very least that we will demand if the Bill is passed is the lengthening of terms of tenure and the ratification of all appointments by the Select Committee, as recommended in its excellent report. We believe that the Bank should have independence to offer advice, which the Chancellor would find it difficult to refuse. That independence should be clear, visible, laid down in law and enshrined in the terms of appointment and tenure of members of the court and the Bank. We do not believe, however, that the Chancellor should escape his ultimate responsibility for final decisions on interest rates.
Mr. Jim Murphy (Eastwood):
It is appropriate that the right hon. Gentleman should give way at the point when he is discussing short-term contracts and security of tenure. If his performance does not improve in this debate and others, perhaps that is what we will be talking about this afternoon.
You said earlier that it would be sensible not to rule anything out and not to give any commitments. Why then, on the single European currency, are the Opposition committing themselves not for one term of office, but for two? Is that sensible or senseless?
Mr. Deputy Speaker (Sir Alan Haselhurst):
Order. May I remind the hon. Gentleman that at all times he is addressing the Chair, not the Opposition?
Mr. Lilley:
The answer is that the Government have already begun to campaign for entry to the single European currency in the next Parliament, and we have begun to campaign against it. That is sensible in the circumstances. It has nothing to do with the repealing measures taken by the Government in this Parliament.
Mr. Malcolm Bruce:
Will the right hon. Gentleman give way on that?
Mr. Lilley:
On that, or on the subject of the debate?
Mr. Bruce:
The right hon. Gentleman said at the beginning of his speech that the Bill hands away the Chancellor's most important responsibility. If that is what he believes, should he not be taking it back, not seeking to create an independence that is irreversible?
Mr. Lilley:
We want the Bank to be independent, and those who are members of the court to be independent in offering advice, not in operational control of interest rates. That is the system which we had established in the previous Parliament, and it was working well. The question is whether it would work better as a result of the changes that the Government propose.
I agree with my right hon. and learned Friend the Member for Rushcliffe (Mr. Clarke) that the system manifestly was working well. It has given us the longest period of low inflation for half a century--almost 60 months below 4 per cent. By the end of the previous Parliament, it enabled the previous Chancellor to hit his inflationary target of 2.5 per cent. on the button. That is the key part of the golden economic legacy that the previous Government bequeathed to this one.
If a system works, after half a century of failure, we are reluctant to tear it up and make substantial changes. If it ain't broke, don't fix it.
Mr. Charles Clarke (Norwich, South):
The right hon. Gentleman was discussing the manipulation of interest rates a few moments ago. Does he concede that the former Chancellor, the right hon. and learned Member for Rushcliffe (Mr. Clarke), was involved in precisely such manipulation of interest rates before the general election, and that the system set in place by the Bill would prevent Chancellors from conducting such political manipulation?
Mr. Lilley:
I refer the hon. Gentleman to the speech by the hon. Member for Hackney, North and Stoke Newington, in which she said:
Mr. Lilley:
I entirely agree with my right hon. and learned Friend. It is alarming that the Government intend to make the Bank less independent, as well as giving it different responsibilities. That is a serious matter, which we shall continue to criticise during the passage of the Bill.
Mr. Clifton-Brown:
Is not the danger of the Government's proposals that a Chancellor such as my right hon. and learned Friend the Member for Rushcliffe (Mr. Clarke), who has good judgment, was able to prolong the economic cycle, whereas a Chancellor who has no judgment at all has to hand over weighty decisions to an independent governor? Bankers are always cautious. The proposal is therefore likely to be deflationary, and will have the effect of shortening the economic cycle. Is not that a considerable danger?
Mr. Lilley:
That fear is shared on both sides of the House, although evidently not on the Government Front Bench. I shall deal with that in due course.
Many hon. Members on both sides argue that several other countries, which have a longer track record of low inflation than we do, have independent central banks, but I believe that independent banks are as much a symptom as a cause of low inflation.
The German Bundesbank is independent and able to take tough action without losing its independence because Germany has experienced two periods of hyper-inflation. That has created an inflationary culture. It is worth remembering that the Reichsbank had independence in the early 1920s, but that did not prevent the hyper-inflation then.
Britain has now developed an anti-inflationary culture. That is partly a reaction to the near-hyper-inflation under the previous Government, when money lost a quarter of its value in a single year--[Interruption.] I am sorry; I mean the previous Labour Government. I am grateful to the Chancellor for reminding me that we achieved the best inflationary record in half a century.
The anti-inflationary culture in Britain is also the result of the demise of the Keynesian illusion that was prevalent among the opinion-forming class in Britain--the belief
that monetary demand was the cause of economic growth. Even the Labour party leadership--the last group to learn--now accepts that inflationary demand brings no extra growth in the long term, and may even damage the underlying potential.
The more the detailed proposals set out in the Bill have been examined, the more are the concerns that have been expressed--concerns which many of my right hon. and hon. Friends share. Alas, few of these concerns were addressed by the Chief Secretary. I hope that the Economic Secretary, if the hon. Lady is to reply, will valiantly cover these matters.
A key concern is whether an independent bank, even a quasi-independent one as is proposed, will have a deflationary bias, as my hon. Friend hon. Friend the Member for Cotswold (Mr. Clifton-Brown) suggested. We are all agreed that inflationary finance cannot generate sustainable jobs and growth; indeed, it may even undermine them. A deflationary bias, however, would be even more destructive of jobs.
The primary duty of the Bank in the terms of the Bill is to meet its inflationary target. It is my understanding that that overrides its secondary responsibility to support the Government's economic policy, including their objectives for growth and employment. The Chief Secretary seemed muddled on that, and tried to obfuscate the issue. The Bill is clear, however, as the hon. Member for Gordon (Mr. Bruce), the Liberal Democrat spokesman, said.
Will the Chief Secretary confirm that, if there is a conflict between the inflationary target and the Government's other policies, the inflationary target will take precedence? The right hon. Gentleman cannot confirm that, but it is set out in the Bill. In those circumstances, the Bank is bound to start by trying to demonstrate its anti-inflationary machismo. We have considerable faith in Eddie George--that is not because I discovered recently that we both went to the same direct grant school--because he seems to be aware that there is a real economy as well as a financial system. I am sure, therefore, that he would not deliberately drive the economy into a slump.
It is worth remembering, however, that the blame for the slump in the 1930s has been laid at the door of the then newly independent Federal Reserve Board. Robert Chote, the economic correspondent of the Financial Times, in an excellent Social Market Foundation booklet, quotes a study that shows that countries with independent banks have suffered deeper recessions than those without them.
Central banks with the same independence as the Bank of England has before the Bill comes into force have suffered output losses averaging about 5 per cent. of national output in each recession. Those banks with the independence that the Bank will have as a result of the Bill have suffered output losses averaging at least 10 per cent. of national output.
The hon. Member for Hackney, North and Stoke Newington (Ms Abbott) made a most thought-provoking speech in a recent debate. She reminded us that the reason Labour gave for nationalising the Bank of England in 1945 was that it allegedly played a deflationary role in the inter-war years. I hope that such historic episodes will prove irrelevant. It is just possible, however, that we are approaching a more deflationary era.
It is said that generals are always busy preparing for the previous war, and it would be tragic if our economic leaders were trying to create a solution to the problems of the past 50 years of inflation when the risks may lie in the opposite direction. The Government should give much thought to that before they finalise the Bill.
The Bill separates off the Bank from the Treasury, and strips out a number of functions from the Bank, with no clear evidence that the consequences have been thought through.
"In May 1995,"
the
"then Chancellor refused to accept the Governor's advice . . . Two years later, we know that the former Chancellor's judgment was correct . . . he consistently called the economy right more times than Eddie George."
11 Nov 1997 : Column 729
The hon. Lady is right. Over that period, we had the opportunity to see that my right hon. and learned Friend was right. His judgment has proved impeccable, and it is clear that the present Chancellor does not believe that he could emulate the success of my right hon. and learned Friend.
Mr. Kenneth Clarke:
I am grateful to my right hon. Friend for that tribute on the policies on which we agreed before the election. Is he aware that his clear description of the desirability of a monetary committee being entirely independent to give advice to the Chancellor is Labour party policy from the last general election? Its 1997 business manifesto stated:
"For the Bank of England, we propose a new monetary policy committee to decide on the advice which the Bank of England should give to the Chancellor."
How could a reputable Opposition change their mind so dramatically four days after the election, and now attack the shadow Chancellor for adhering to their former views?
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