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'(1A) In sub-paragraph 1(a), "price" includes the price of houses and land.'.

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No. 2, in page 5, line 10, leave out 'both' and insert 'all'.

No. 33, in clause 19, page 8, line 40, leave out 'extreme'.

Mr. Mitchell: This is a Bill to bury Keynes, who was mentioned earlier in our debate. It would be better titled "The Coronation, Enthronement and Miscellaneous Provisions of Eddie George Bill". With my amendment, I want to provide a two-buttock throne--or two thrones, one for each buttock--so that he has objectives other than the single objective that the Government have given him.

I can see why the Government have introduced the Bill: they see it as a measure that will, first, win the confidence of finance and international money markets; and, secondly, commit the Government and the country to stability. The hope is that, if we kneel before finance, show that we are in awe of it and do its bidding, it will be nice and kind to us, and we shall not have to face the problems that we have faced in the past.

However, it is important that, rather than include only the objectives of bankers, we put in the Bill some of the objectives that are important to the people. Those objectives centre on full employment and economic growth, and it is those subjects I want to insert in the Bill as basic considerations for the Bank of England.

I feel that the decision to hand over control of the enormously powerful management lever of interest rates is a mistake. Interest rates control everything in the economy, and are the basic tool of management. They damp down or boost the economy, and control the rate of growth and the exchange rate. Changes in interest rates can lead either to deflation or to expansion. They are the basic, most essential weapon, yet here we are--a democratically elected Government--handing control of them to an appointed Governor of the Bank of England.

The Bank does not represent the interests of the mass of the people of this country--it represents the interests of finance, which have never been favourable to those of the people. I am suspicious of the priorities of finance, and those priorities are bound to be dominant in the Bank of England, which is located in the City and represents the City's views. Giving the Bank control of interest rates is a mistake, and it will not lead to stability, as is intended.

Indeed, the decision to give the Governor the power to raise interest rates has already led to instability, in that rates have been raised four or five times, people are beginning to complain about the rise in their mortgage repayments, and the pound is now overvalued. A move intended to bring stability has actually been destabilising.

6.45 pm

That is implicit in the whole operation: if we are going to manage the economy by means of interest rates and we give the Bank of England control over interest rates, its highest priority in any situation will be to raise interest rates, and it will deal with any problem by raising interest rates. In turn, interest rates affect the exchange rate, and, in the present circumstances, the exchange rate has risen. That effect has been amplified by events in Europe,

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because the instability and uncertainty there about what will happen in respect of monetary union, which I hope falls apart as quickly as possible--

Mr. Quentin Davies indicated dissent.

Mr. Mitchell: The hon. Gentleman laughs, but it almost certainly will fall apart. That is my prediction, and I will take a side bet from him on that.

Reaching monetary union has caused great instability in Europe--it is like the reign of virtue, in that it would be a nice thing to have, but is very difficult to get to. Those difficulties are bringing money out of Europe into sterling and forcing up the exchange rate. Sterling is a better bet when there are high interest rates.

In Germany, there is a deliberate policy to reduce the exchange rate and depreciate the currency, because that is the only way to expand the economy after the rigours of Maastricht's deflation. The Germans are going in for what might be called competitive devaluation--if we did it, it would certainly be called that. The result is that the pound is now grossly out of kilter with other European currencies.

Two nights ago, a major plastics manufacturer told the all-party group on manufacturing industry that his products were now 25 per cent. less competitive than they were a year ago. Last night, I discussed the employment situation in Grimsby with representatives of Birds Eye Foods Ltd., which is shedding 450 jobs in Grimsby. One of the reasons is the bovine spongiform encephalopathy crisis, but the other is that products produced in this country are now 25 per cent. less competitive in the Dutch and German markets than they were before the rise in the pound began.

We have the insanity of the economy being managed simply by interest rates and that power being given to the Bank of England, which has led to a destabilising deflation in the economy. It is as if our only weapon with which to manage the economy is to bash the engine of growth with a large heavy hammer--that is essentially what we are doing in bashing manufacturing.

That is why I want to put other objectives in the Bill. Amendment No. 26 would insert the effect on the level of the exchange rate as a factor to be taken into account when interest rate increases were being considered, because today's European uncertainties mean that such effects are disproportionate. I feel that we must introduce other objectives, because I do not trust the priorities or skills of financiers and those drawn from a financial background--the sort of people who sit on the Monetary Policy Committee of the Bank of England. I feel that distrust because bankers have never served the interests of the people, and I do not suppose that they will suddenly start to do so.

I recall the famous New Zealand poem that was penned when Sir Otto Niemeyer, from the Bank of England, went out to New Zealand in 1931 to tell the authorities how to deal with the depression. He said that they should act according to a simple formula, "Put up interest rates, fire people." The New Zealand poet, Ard Fairburn, wrote:


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    That is what always happens--interest rates are raised to pass the punishment on to the people.

Amendment No. 27 calls for a proper measure of inflation, because, if the economy is run on the basis of the inflation rate, it must be properly calculated. The retail prices index is an inadequate, unsatisfactory measure of inflation. Harold Macmillan once said that managing the economy with the information available to him was like trying to catch a train with a 19th-century edition of Bradshaw. Managing the economy according to the RPI is rather like trying to navigate the M25 with a 1936 RAC map of the road system. It is not a relevant measure. I believe that it is entirely wrong to make it the dominant consideration for the Bank of England.

One of the essential problems with inflation is that it is driven by assets as well as those factors that feature in the RPI. That is why amendment No. 27 would include house prices in any consideration of price stability. Inflation is usually caused by loose credit, such as the credit explosion that Nigel Lawson produced in the late 1980s when he was Chancellor. That leads to an enormous asset explosion, particularly in house prices. Such a factor should be included in the measurement of inflation that the Bank of England must take into account.

I object to managing the economy according to keeping the rate of inflation down on the basis of interest rates. Any fool can defeat inflation. The previous Conservative Government managed that pretty well, and qualified for that description as well. All one has to do to reduce inflation is to put people out of work. Unemployment went from 1.4 million in 1979 to more than 3 million in the early 1980s, and reached that level again in the early 1990s. That is why the inflation rate was reduced. It was simply a question of producing a graveyard of workers. Once that happens, inflation falls. That is what the Conservatives duly did.

There is no reason why an obsession with inflation should be the target for the Bank of England; nor should it dominate policy. One cannot have a decent rate of growth and keep inflation at 2.5 per cent. If one had growth at 5 per cent., inflation would inevitably rise above 2.5 per cent., because inflation is associated with growth. It is not true that a reduction in inflation leads to growth. There is no causal connection. Inflation is a characteristic of growth.

For practical purposes, inflation is dead. If one seeks to question that claim, consider the impact of the financial crisis that has hit the far eastern economies. Most of those economies have already devalued their currencies, and the others will follow suit. Their manufactured goods will come pouring into our country at low prices. That will aid our struggle with inflation, because it is won by putting people out of work and making imports cheap, so that people do not buy domestic products. That is ruinous for the domestic economy.

We have suffered from such problems in the past, and they are beginning to re-occur. Closures and unemployment in manufacturing are already being announced, and the situation will become worse in the coming year. We have already had warnings about that from British Steel. A delegation from the Inter-Parliamentary Union that visited Japan was also warned about the impact of the current financial crisis on Japanese and Korean investment in this country. Our manufacturers are already complaining about the problems that they are suffering.

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The emphasis throughout the economy is on the coming deflation, which will hit it soon. It is the consequence of one-club golfing, with interest rates as the only method of economic management, carried out on the basis of an inflation-defeating agenda. That policy is not carried out according to any scientific fashion; it is not as though the people in charge know what they are doing. All they are doing is hitting the economy with a heavy hammer.

Other objectives need to be included in the management of the economy. The economic management requirements of the Bank of England should not be tied simply to the level of inflation, as measured by the faulty mechanism of the RPI. The Labour party's objectives must be, are and always will be jobs and growth, in order to maximise the living standards of our people. Those are essential parts of Labour policy. We can achieve nothing unless we achieve economic growth and full employment. That means that other considerations must guide the Bank of England.

I concede reluctantly that, by force majeure, control of economic policy will be handed to the Bank of England. I am opposed to that, but it would be better if it was set a dual target relating not only to the level of inflation, but to the level of employment. Growth should also be included in the second part of the equation. For that reason, amendment No. 25 states that the objectives of the Bank of England in relation to monetary policy should be geared to the


I do not believe that that is a dangerously revolutionary or radical step. That consideration should be included. The Government have mentioned it in clause 11(b), but inflation is the dominant consideration. I want employment to be an equal consideration.

Other central banks have made employment one of their objectives. It is only in New Zealand that inflation is the exclusive obsession, as it is in this country. According to the New Zealand experiment, a written agreement was drawn up between the Reserve bank of New Zealand and the Government to maintain a fixed inflation target, but that has proved disastrous. The experiment has been conducted according to the policy followed in Britain--interest rates have been put up, with the result that the value of the dollar has gone up. Unemployment is therefore rising, and the New Zealand economy is suffering. That will always be the case as long as we opt for such an automatic mechanism of interest rate increases.

I therefore want to require the Bank of England to study other considerations, particularly the maximum level of employment, and to bear in mind the effects of its decisions on the exchange rate. The amendments would guarantee that. That would be a valuable experience for the Bank, because, instead of the easy automatic reflex of putting up interest rates to combat every possible problem, it would be forced to calculate the consequences. It would be forced to work out the effects on the real economy--that of jobs, growth and a competitive industry which can compete in an international market.

That would be a valuable learning process for the Bank of England, but it can happen only if the Bill makes employment and growth, as well as the rate of inflation, matters which it must consider.


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