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8.25 pm

Mr. Austin Mitchell (Great Grimsby): I want to try to give a good Labour speech, rather like that given earlier by the right hon. and learned Member for Rushcliffe (Mr. Clarke), the previous Chancellor of the Exchequer. I regret the fact that, while the first act of the Labour Government in 1945 was to nationalise the Bank of England, the first act of the Labour Government in 1997 was to give the Bank of England independent control over the most important lever of economic management.

I have no quarrel with the regulatory parts of the Bill, because the Bank of England had too many roles--none of which it performed well--to be an effective regulator. We have been reminded of its deplorable record on BCCI, Barings and Johnson Matthey. I read an article in The Sun a few years back and wondered how an organisation that could not stop its staff taking used bank notes home in their knickers until there were 14 cars parked outside the home of the used bank note taker could be an effective regulator. That is only an aside. Chaps regulating chaps did not work and does not work. It is as well that we are ending it--slightly too late for my preference, but it should be ended.

I want to concentrate on independent control of interest rates, based on criteria that deal only with inflation, taking no account of employment, growth and all the other important factors for the performance of a Government. Inflation is a dead enemy. It is not going to resume. We are using a nuclear weapon to destroy a phenomenon that is dead anyway. That is overkill.

The policy is justified by non sequiturs. The argument is that stability creates the conditions for growth. That is not true. There is no causal relationship between low inflation and growth, although it is clear that higher growth leads to a quickening of inflation, because inflation is a symptom of life. We need some inflation. If we got growth to 5 per cent.--which is not very high--inflation would go over the 2.5 per cent. target at which the Bank is instructed to aim. The Bank would therefore have to kill high growth, which seems disastrous.

The economy is being fitted into a monetarist corset, rather like those impregnable Spirella corsets that used to be advertised in newspapers when I was a teenager and noticed such things. After years of slow growth, the economy needs a substantial boost. It is easy to get stability and low inflation--they can be found in graveyards. The only two periods of stable prices that I know of in recent economic history were in Salazar's Portugal and during the five years up to 1929 before the great crash in the United States. Neither case suggests that price stability and low inflation are of any great benefit to the economy.

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There is no evidence on whether an independent central bank is better at dealing with inflation. That is a fad, not a fact. The best authority on the issue is a book by Eijffinger and de Haan. Their conclusions, which appear to be common sense, are that


which they never are--


    "have a lower rate of inflation than will a country where politicians can steer the central bank's policy."

However, the study compares a list of countries comprising the Philippines, Brazil and various south American economies with examples such as Germany where low inflation is inevitable because of its powerful industrial base, so it proves nothing.

The study continues:


The evidence from the best study of such matters shows that central banks overkill and clobber the economy, and that their management of the economy produces deeper recessions.

Television commentators and the Bank of England trot out the monetarist myth that a slight increase in interest rates now will produce lower inflation later, as if it were a scientific law--but that is not the case. Higher interest rates increase the value of the pound and make imports cheaper, thus dealing with inflation. They also make exports dearer and put people out of work, thus dealing with wage inflation. Essentially, they clobber the manufacturing economy and put people out of work as a means of restraining inflation. It is rather like trying to maintain an expensive car by bashing the carburettor with an enormous great hammer.

Bank of England management is the opposite of stable. In a world of floating exchange rates, any increase in interest affects the exchange rate. The uncertain prospects for monetary union in Europe, which may or may not happen--the position may be wide, narrow, soft or hard--affect conditions here. Investors are attracted to Britain by higher interest rates, but repelled by the uncertainties in Europe.

Giving the Bank of England--which has no higher wisdom in facing any problem than to put up interest rates--independent power over interest rates inevitably increases the value of the pound, and that has a damaging effect on the economy. Indeed, it will lead to a balance of payments problem, a fall in exports, an increase in imports and a loss of jobs. All that will happen next year, just when the new deal will be coming in to fight inflation and unemployment by micro-policies that will run contrary to the macro-policy enforced by the independent Bank of England.

If Britain is managed by interest rates--which is what the Bank of England is attempting to do--it will be inherently more unstable than most of its competitors, because interest rates are crucial in our economy and most people are on flexible rather than fixed-rate mortgages. Therefore, an increase in interest rates has automatic and substantial effects on the retail prices index and house prices.

One has only to recall what happened in the Lawson boom when interest rates were kept low because we were shadowing the deutschmark. There was an explosion of

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credit and economic activity that had to be damped down massively within two years. It was followed by the Major deflation, when interest rates rose too high, leading to deep recession. We have disproportionate fluctuations as a result of the importance of interest rates in our economy. Therefore, interest rate management that is designed to produce stability instead produces instability in the economy.

The Bank of England is not a repository of abstract wisdom and scientific knowledge about inflation. It is a vested interest in respect of finance, the City, housing and bankers, unleavened by the interests of manufacturing, which has been deeply damaged by the Bank's role in the economy, or the interests of the regions, which should be represented in the court and in our monetary policy.

We need a Monetary Policy Committee composed of diverse economic interests, but instead we have clapped-out monetarists, Keynesians turned monetarist and then turned halfway back again into budding new Keynesians, and foreigners with curious backgrounds, as I read in The Observer. We need a diversity of economic viewpoints--labour economists, Keynesian economists and expansionary economists--rather than just monetarists.

Finance is implicitly interested in dear money. The philosophy is to pile it high and sell it dear--quite unlike that of the supermarkets. Currently, the real interest rates are at record levels. In the 1970s and part of the 1980s, the real interest rate was actually negative, so people could afford to invest. Indeed, there was an incentive to do so. Now, with inflation at 2.8 per cent. and the interest rate at 7.5 per cent., the real interest rate is at a record level. That is a direct, damaging penalty on investment. The Bank of England and the banking community has an interest in high interest rates and a high, stable exchange rate. However, they do not represent the interests of manufacturers, which remain the drive motor of our economy and generate jobs.

A misguided decision based on myths and inaccurate information, carried out at the wrong time--just when it can do maximum damage to the economy--made the Bank of England independent on interest rate policy. That brings me to my basic argument against the entire Bill: it destroys democratic accountability.

All sides of the argument have been exaggerated today. Those in favour of the Bill have defended it, and exaggerated its benefits, saying that it will provide stability. People such as me might be inclined to exaggerate the penalties--although, frankly, I think not. Even if the Bill's effect in making interest rates and the exchange rate higher than they would otherwise have been and growth a little slower than it would otherwise have been is marginal, there will be damaging consequences for the British economy. We can argue about that, but the proof of the pudding will be in the eating. The people elect the Government to run the economy for their purposes--betterment, enrichment, jobs and growth. If those purposes are not achieved, the people can throw the Government out.

The Government are now giving up power to an oligarchy whose interests point in the opposite direction from those of the people. It will not remove blame from my right hon. Friend the Chancellor of the Exchequer. We

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saw that after the Budget, when he was blamed for not reducing demand by increasing taxes. It will not make him blameless--simply less powerful. We shall transform ourselves from one-club golfing, which was the approach of the right hon. and learned Member for Rushcliffe, to no-club golfing.

If the Government are committed to not increasing taxes and they do not control monetary policy, how will they manage the economy without the fiscal or the monetary weapon? Democratic, accountable government needs to have both those weapons and to use them for the purposes of the people, which are different from the purposes of bankers. The people want economic management to provide jobs, growth, a maximisation of living standards and betterment. Because it reduces our ability to achieve those objectives and follow the purposes of the people in economic policy, I cannot vote for the Bill.


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