Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 98-99)


20 MARCH 2007

  Q98 Chairman: Lord George, welcome to our inquiry into the Monetary Policy Committee of the Bank of England 10 years on. We are privileged that you have come along this morning since you were very much part of that. We would like to look at the next 10 years and take the lessons from the previous 10 years. I start with 1997. How much of a watershed was the establishment of the MPC?

  Lord George: It is a great pleasure to be here. I always enjoyed coming before the Treasury Committee. How much of a watershed was it? I saw it very much as the culmination, not necessarily the end point, of changes that had been happening in the approach to the management of the UK economy over very many years. On the supply side we had a shift from a great deal of central control where people told the public at large what it could and could not do. My early years at the bank were involved with exchange and credit controls, rationing of access to capital markets and that kind of thing, but in the wider economy one had prices and incomes policies, public ownership of large parts of productive industry, powerful trade unions that knew they could not lose their jobs because the owner could not go bust, incredible rates of income tax which reached 83% at one time on earned income—it was even more on unearned income—and gradually over time on the supply side there was a movement towards a much more market-based economy. That is important because it is the supply side which determines the rate of growth, level of employment and all the good things in life that we can hope to sustain. It had very little to do with the Bank of England which was very much involved in the demand management side of the economy. As to demand management, equally we saw fundamental changes. We had lived with boom and bust but policy aggravated rather than mitigated that cycle. Fiscal and monetary policy operated together without any real distinction. When the economy was weakening the levers were pushed forward until inflation took off and the balance of payments became a problem. Then both levers were pulled back in conjunction. One had a boom and bust cycle. It was worse than that because it was explosive. Every peak of inflation was higher than the previous one and at each trough of unemployment was lower than the previous one. We were really looking over a precipice. On the demand side we learned from the experience that we could not go on down that road. Government identified that fiscal policy was quite a cumbersome instrument to control demand certainly in the short term, and that opened the way to a specific role for monetary policy. We moved gradually not just to recognition of the role of the different elements of demand management but that fiscal policy needed to focus on the medium to longer term and the level of debt in relation to income—it was not a short-term instrument—and that in monetary policy the aim could not be to trade off growth versus inflation in the short run. The mantra of central banks everywhere these days is that stability is a necessary condition of sustainable growth. The target was to keep aggregate demand growing approximately in line with the underlying supply capacity of the economy to meet that demand. I am sorry that you have started me off. As an old man who has retired I reflect on this a great deal. What was terribly important was that they all came together across a broad part of the political spectrum. There was common political and, I think, public support for these directions which happened gradually over time. I believe that the establishment of the MPC and the devolution of operational control over monetary policy to that committee must be seen in that broader context. If all those other things had not happened it could have been a disaster. One would have had the central bank in public conflict with government every five minutes, but it took place in the overall context where it became a technical job to manage monetary policy to keep demand growing in line with supply. That was epitomised in the symmetrical inflation target which had been adopted years before. That target was adopted in 1992, five years before the MPC came into effect in 1997.

  Q99  Chairman: I must ask this question for the public record. A number of experts have written in to say that the success of the MPC over the past 10 years has been due more to luck than judgment.

  Lord George: I have heard that. Frankly, I do not care too much whether it was luck or judgment. The great thing has been the result. Surprisingly, in this Committee I was often called an inflation nut as if inflation was the only thing about which I cared. What I found really satisfying and encouraging was the increase in employment to an all-time high, and it is still there. There has been a steady decline in unemployment from double digits and very low rates of unemployment compared with most of the rest of the industrial world and certainly Europe. I do not mind whether people believe that is luck or judgment; it is the outcome that is important. I believe that we had tremendously good luck in that all these things came together at a political level which meant that there was a broadly accepted clear understanding of what the bank and the Government were trying to do. That was certainly fortuitous. I really do not believe it could have been done by just focusing on one little bit of the big picture. On the other side, at the beginning of the MPC we had the Asian crisis which spread around the world and recession in the industrial world. We narrowly avoided it, but most of the rest of the industrial world went into recession at the beginning of the current decade. It was not pure luck. There were quite difficult circumstances to deal with, as there always are. Indeed, we had to take action that on the whole we would have preferred not to, for example stimulating consumer demand because all the other elements of demand had fallen away. We were very conscious of the fact that that could give rise to problems in future. We tried very hard not to do more than we felt we needed to do in order to keep within the inflation target limits, but we knew that later on it would cause problems, which are still with us.

previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2007
Prepared 18 September 2007