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Ms Abbott: Does the hon. Gentleman agree that, even though the Bank of England's current forecasts on inflation might be momentarily optimistic, the Bank's record as a forecaster is that it consistently shows a deflationary bias?
Sir Peter Tapsell: Yes, that is what I believe. I do not criticise the Bank of England for that--in fact, I have the greatest admiration for the Bank. After the protection of the currency in an international sense, it is the prime duty of a central bank to avoid inflation, and the Bill puts that duty into law; but I object to the Bank being free from political control in that respect. It is one thing to have the Bank advising the Chancellor of the Exchequer on the dangers of inflation, but it is better that the Chancellor, having weighed the advice, should if necessary be able to reject it and subsequently give his reasons for doing so, which was the practice under the Conservative Government.
I do not want anything I have said to be perceived as meaning that I do not regard the pursuit of stable prices as exceedingly important--of course I do. They are a necessary, but not sufficient, basis for steady growth and high and stable levels of employment, but if we are going to publish an annual inflation target each year, why should we not also have annual employment and growth targets?
In my time in the House of Commons, I have noticed that all Ministers have always refused to estimate future levels of employment. How is it possible to be confident that one has got the inflation target right 12 months ahead if one is not prepared to state one's employment target 12 months ahead? In Committee, we should try to amend the Bill so that the Chancellor of the Exchequer has to give employment and growth targets as well as an inflation target.
Incidentally, that would horrify the Bank of England. Whenever I have suggested it to Bank officials, they have always replied that they would not want to take on that responsibility.
Any fool--and the Bank of England is not staffed by fools--can produce stable prices by plunging an economy into the doldrums, as Montagu Norman demonstrated in the 1920s and 1930s, and as the current rulers of many of the continental European countries are demonstrating daily.
By far the best economic state paper published this century was the all-party 1944 White Paper on employment, which made a point of saying that four aims should be given equal significance: stable prices, high levels of employment, a healthy balance of payments and an expanding economy. Those are the four economic balls that a Chancellor should always be juggling, so that no one ball falls to the ground.
It is a great mistake to toss one of those balls--the monetary ball--across to the Bank of England and to leave the elected politicians to play with the other three. That might work for a time when unemployment is falling, but when unemployment starts to rise, this parliamentary democracy--as long as it is not abolished by our joining a single European currency--will not tolerate the key decisions affecting everyday life being taken by anyone other than Ministers answerable to the House.
I turn finally to more technical, but still vital, issues posed by the Bill. Having been stripped of its supervisory role and its responsibility for managing the public debt through the gilt-edged market, it is not at all clear in the Bill whether the Bank of England is to continue to act as the lender of last resort. That is a matter of vital importance on which we need complete clarity, so I hope that, when she replies to the debate, the Economic Secretary will make a point of explaining whether the Bank is still to be regarded as the lender of last resort.
The capacity to act effectively and in time as lender of last resort in a crisis such as the Barings crisis depends on the Bank's commercial intelligence system. The roles of prudential supervision and operational surveillance are closely linked, but they are not the same thing, and they are now to be separated, leaving the bank with responsibility for operational surveillance but stripped of its powers for supervising prudential banking.
Will the Bank continue to have the same day-to-day knowledge of everything that is happening in the banking world when its supervision staff are transferred to the new Financial Services Authority? I doubt it, although it will retain responsibility for the stability of the financial system as a whole. I therefore predict considerable buck-passing in the years ahead between the Financial Services Authority and the Bank of England when anything goes wrong. The Bank of England will say, "We
could not have known in advance that this would happen: we no longer supervise that institution, and the FSA never told us." That will be a source of great trouble, whichever political party is in power.
The fundamental truth about the Bill, however, is that, overall, it gives the Bank of England a greatly diminished institutional status. This aspect has been largely overlooked by commentators, who have concentrated on the Bank's enhanced independence in the setting of interest rates, but everyone in the Bank of England understands all too well the loss of power and prestige that will flow from the Government announcement of 6 May, which is why the Governor of the Bank of England very nearly resigned on that day, as he has said.
Ever since it was founded in the reign of King William III, the Bank of England has exercised authority over a wider range of matters than any other central bank. That has been one reason for its great prestige. The Bill strips the Bank of many of its most important powers. It will no longer exercise prudential supervision over the financial institutions. It will no longer manage the Government bond market and the public debt.
I can tell you, Mr. Deputy Speaker, from my experience as a stockbroker, that the Bank of England officials who operated in the Bank's supervision departments and in the gilt-edged departments enjoyed enormous prestige in the City of London. They were regarded as doing vital jobs and were treated with great respect, even by the most senior and successful of commercial bankers. When one takes those tasks away from the Bank of England, one is in fact, despite giving it enhanced powers over interest rates, transforming it into a quango, in which all but two of the new nine-man Monetary Policy Committee will be appointed by the Chancellor of the Exchequer--and the other two, appointed by the Governor, will also have to be approved by the Chancellor of the Exchequer.
Furthermore, anyone with acquaintances in the lower echelons of the Bank of England will know of the crisis in morale that is gripping the whole staff of the Bank of England. Previously, Bank of England technical professionals wielded great power and influence--I have mentioned two of the spheres in which they did so. Although there has always been a court of directors, it was composed of non-executive directors who used to meet for lunch once a month and were usually grandees from other walks of life. In the career structure of the Bank, the objective of most Bank of England staff was to become an executive director; that was what motivated them.
There will not now be many jobs for executive directors, so the career structure of the Bank of England has been largely destroyed by the proposals in the Bill. That will have a significant effect because, when I was at university, it was a matter of great prestige to get into the Bank of England on leaving university. Only getting into the Treasury or the Foreign Office ranked higher in prestige if one was seeking a career in public service.
Under these proposals, few high fliers will want to join the Bank of England at the age of 23 and make a career. There will be no career for them. Only comparative mediocrities will join the Bank of England from now on. That is what my friends in the Bank of England, of whom I have several, tell me. It is the almost universal view of the junior and middle ranks of the Bank of England.
Mr. Deputy Speaker, you may say that this is a matter of personalities and that it does not matter, but part of the prestige enjoyed worldwide by the City of London has
flowed from the immense respect in which its prime institution, the Bank of England, has been held by commercial, as well as central, bankers throughout the world. By diminishing the role of the Bank of England, as he is doing in the Bill, the Chancellor is reducing the standing of the City.
The Chancellor and many others in the modern world dislike deference in all its forms, but deference to the Bank of England has been an important economic asset for the United Kingdom. Probably this will not worry the Chancellor, as he hopes to subsume the Bank of England into a European central bank run by foreigners over whom the British electorate and their representatives in this House will have no control, as I have shown by my quotations from the Maastricht treaty.
Ms Diane Abbott (Hackney, North and Stoke Newington):
There is no more powerful thing in the realm of economic ideas than fashion, and it is with some timidity that I stand up against the prevailing tide of fashion, which says that the answer for the British economy is an independent central bank; none the less, faced with the facts, I must do so.
It was remarkable to see a Labour Government, elected in triumph with the biggest majority since the war, within days--not even weeks, but days--hand over one of the most important levers of economic power to an unelected quango. Of course, as my hon. Friends will remind me, at the time it was greeted with tremendous acclaim by the popular press. We must thank for that the--until recently unsung--labours of Charlie Whelan, who span it to political journalists in such a way that the coverage of the decision made it seem comparable to Moses parting the Red sea. Interestingly, the Government chose to announce the decision, not on the Floor of the House, where they might have been challenged and questioned, but in the press, via spin doctors.
Even in the clamour of the acclaim and the triumph, however, I was reminded of nothing so much as a quotation from Horace Walpole:
I really cannot accept the attempts of Ministers to wrap this policy decision up in the mantra of modernity. A bad idea is a bad idea, regardless of whether one calls it "modern". And the idea that there is anything modern in going backwards in monetary policy to a set-up that was discredited before most Members of the House were
born--the idea that we are modernising monetary policy by going backwards to the set-up of the 1930s--does not bear examination.
I remind hon. Members that an independent central bank is not a new idea: Britain had experience of an independent central bank until 1945. I shall quote from the 1945 Labour manifesto--I know that it will embarrass some of my hon. Friends who do not like to remember that Labour has a past--which contained a commitment to bring the Bank of England under the control of the Government.
Referring to the 1930s, the manifesto said:
A fundamental problem with the Bill and the proposal is that they create a democratic deficit. My hon. Friends who support the proposal go on about monetary policy as though it were a mere technical matter that is best left to technicians with oily rags--politicians should not bother their heads about it. The hon. Member for Gordon (Mr. Bruce) said that, if the Government leave monetary policy to the independent central bank, they can concentrate on things that really shape the long-term economy. What a fatuous thing to say. What shapes the long-term economy more than the level of interest rates?
"They now ring the bells, but they will soon wring their hands."
Everyone in the House wants low inflation. It is relatively easy to bring down inflation by simply slowing down activity; the trick is to achieve growth and low inflation. The argument that I have consistently advanced in my eight years on the Treasury Select Committee, and which I advance tonight in the Chamber, is that an independent central bank is not the best way to combine low inflation with growth.
"Great economic blizzards swept the world in those years. The great inter-war slumps were not acts of God or of blind forces. They were the sure and certain result of the concentration of too much economic power in the hands of too few men. These men had only learned how to act in the interests of their own bureaucratically-run private monopolies which may be likened to totalitarian oligarchies within our democratic state. They had and they felt no responsibility to the nation."
The issue of democratic accountability caused the 1945 Labour Government--I think everyone will concede that it was one of the greatest Labour Governments--to bring the Bank of England under democratic control. I argue that, far from being outmoded and swept aside by the triumphal progress of new Labour, the democratic accountability issue is as relevant today as it ever was.
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