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11.42 a.m.
Lord Taverne: My Lords, I hope to be brief. I shall say little about the detailed provisions of the Bill, and at Committee stage perhaps return to some of the questions discussed in another place; for example, about making the appointment confirmation procedure for members of the Monetary Policy Committee a matter for the Treasury Select Committee. Again, there may be points that we want to raise about the cash ratio deposits and the more detailed provisions of Part III.
We regard this as a good Bill. It is very much in line with the Liberal Democrat manifesto. We think it right to give operational control for short-term interest rates to the Bank. We think it right to isolate decisions on short-term interest rates from political considerations. Yet the Bill still maintains a degree of accountability. The Chancellor sets the target and there is a prominent role for the Treasury Select Committee. So, in general, we support the Bill.
However, I wish to examine some of the implications. I turn first to the benefits. The introduction of the Bill has had, and is likely to have, a beneficial effect on long-term interest rates. That is extremely important to business and investment, and one has to bear in mind that a 1 per cent. reduction in long-term interest rates is equivalent to something like £3½ billion a year lower expenditure to the Exchequer.
The second benefit--arguable, no doubt, on the Opposition Benches--is that the Bill paves the way for our entry into monetary union. If and when we do enter monetary union, it will require a relatively small change to the Bill. Again, the longer-term stability in inflation that is likely to be promoted will help to make the economy converge. But the issue I wish to raise is the implication of the Bill for fiscal policy.
The Monetary Policy Committee's sole task is its concern with inflation--although it can take into account external shocks. The Monetary Policy Committee is not concerned with exchange rate policy. Yet the level of the exchange rate is of vital importance to the economic future of this country, and indeed our relations with the European Union. We cannot say that we will simply leave inflation to be controlled by the Bank and not take account of the impact that will have on the exchange rate.
First, if the control of inflation is left entirely to the Bank, the only way of lowering the exchange rate is by squeezing inflation down through a recession, which will eventually enable the Bank to lower interest rates. But if consumption is high, ever higher interest rates in the shorter term will keep the exchange rate higher as well. We do not wish to see a situation whereby only through recession will the Bank be in a position where it can lower interest rates again.
Secondly, if we are to join a monetary union, as the Government seem to wish, then we shall need two years of a stable pound in relation to the euro. Whether that means joining the exchange rate mechanism is perhaps a matter for argument. What cannot be disputed is that very important criterion of a two-year period of stable relationship between the pound and the euro. But if
interest rates are high, it will be a relationship with a high pound against the euro, which in the long term could do considerable damage to this country.Once there is a firm commitment--perhaps following a "yes" vote in a referendum--no doubt the market will ensure stability. That is what has happened to the other likely entrants into EMU. The reason the lira is stable in its relationship with the other currencies is that the market expects, very reasonably, that Italy will be one of the founder members. Once the pound is committed to becoming a member of the euro, then it is likely that the market will ensure stability. However, it would be a serious consequence, as I said, if that were to be stability at a high rate.
We could, I suppose, rejoin the European exchange rate mechanism at a central rate, 15 per cent. lower than the present rate of the pound; and, combined with the clear intention then to join, it might for a while stay there--but only if we keep interest rates lower, and that is something which the Bank may not be able to do because it has a remit to control inflation.
There are only two ways in which the exchange rate can be brought down. The first would be through recession--I have already referred to that. The second would be through a more restrictive fiscal policy. To my mind there is no doubt which course the Chancellor should choose. He should create circumstances through his fiscal policy in which the Bank of England can lower interest rates. That of course means that the Chancellor would have to consider tax increases. There is a great deal of talk about the Chancellor's "war chest". That is irrelevant for this purpose.
If we need lower exchange rates and therefore lower interest rates, the only way to achieve that is through fiscal policy. I ask the Minister not necessarily to deal with the problem straight away but to make representations to the Chancellor and ask him, or someone else, to explain, if the analysis is wrong, why it is wrong. If it is right, is it really the intention of the Chancellor of the Exchequer to let interest rates rise until there is a recession, keeping the exchange rate high as a result, with all the consequent adverse effects on manufacturing? Will he leave it all to interest rates or is he ready to control consumption by fiscal means?
The Bill does not free the Chancellor of the Exchequer from responsibility for inflation. Fiscal and monetary policy must work together. What the Bill does is to remove political temptations to follow an irresponsible interest rate policy. But if the control of exchange rate policy is not a matter for the Monetary Policy Committee, in the end it is still a matter for the Chancellor himself and for fiscal policy.
11.50 a.m.
Lord Roll of Ipsden: My Lords, I may not be able to stay to the end of the debate and if so I apologise to your Lordships now. I served on the court of the Bank of England for 10 years but I do not think that that creates an obligation to declare an interest in the parliamentary sense of the word. It has added considerably to my interest in these matters which started way back in the late 1920s and 1930s when
I studied and taught economics. I believe that no one who lived through those years or who has studied their history can possibly underestimate the importance of monetary matters and the arrangement for managing monetary policy in our country, including the role of the central banks.Perhaps I may remind your Lordships that that was a period which proved that errors are not the monopoly of any one party and that politicians can be as much subject to error as can central bankers. I remind the House that it was a Conservative Chancellor who took us back to the gold standard at the old rate in 1925 with the most baleful consequences, not only for our economy but for the whole of society.
I wonder whether new Labour remember that as well as what I might call "antique" Labour: it was a Labour Chancellor, the great iron Chancellor, Philip Snowden, who showed that by an unthinking and too close embrace of what was then called "sound finance" one could inflict enormous havoc on the economy and on our society.
Thus I approach the subject in a somewhat relaxed manner. Unlike the three previous speakers, I cannot refer to an election manifesto. Therefore, I have to refer entirely to my own experience as an economist, as a public official and, in the past 30 years or so, as a banker.
I referred to the experiences of the late 1920s and 1930s because I suspect that one way or another they have left their mark on the thinking of many people. I suspect that some of the anxieties about the Bill, to which I shall refer shortly and which may well be expressed in the debate, go back to the experiences of those days.
In its 300 years of history the Bank of England has undergone many changes. Even in the 10 years that I served on the court and certainly since, a lot of the ritual and ceremonial has been greatly eased. The court now meets once a month instead of once a week. The committee of the Treasury has been abolished and so on. But, oddly enough, the Bank of England has undergone few basic changes in that period and those changes have been at long intervals.
The first change after its foundation came 150 years later in the great Bank Charter Act of Robert Peel. That stamped its image on the Bank, the image of the bullion committee and the Ricardian economics and made the Bank what it was for almost the whole of the 19th century and the early years of this century. The Bank, allowing for the circumstances of the time, was the equivalent in economic matters of the British Navy. In the 19th century the British Navy was responsible for safeguarding the pax Britannica and the Bank of England was responsible for virtually preserving the world economic and financial equilibrium, the equilibrium Britannicum.
One hundred years later came the great change in 1946, the Bank of England Act of 1946 and the Bank Charter also of 1946. I remind your Lordships--if that is necessary--that it was just after the war in the days of the Labour government. That Act did two important things. First, it nationalised the Bank; it put the stock of
the Bank in the Treasury. Secondly, it imposed upon the Bank the control, as regards policy, of the Chancellor by stipulating that the Treasury might give directions to the Bank. It has taken almost another 50 years for the next big change to occur. It is embodied in the Bill.In the past few years there has been a great deal of debate. So far as I am aware, the question of the nationalisation or de-nationalisation of the Bank of England has not been seriously considered. There may be extremists of the Hayekian school who might wish to privatise the Bank, as they might wish to privatise money altogether. But I do not think that that is seriously considered.
However, the other matter, the control by the Treasury of the policy of the Bank has been debated a great deal under the heading: should the Bank be independent? The stimulus was perhaps what was happening elsewhere--in the Fed, the Bundesbank, and, more recently, the Bank of France, the Reserve Bank of New Zealand, the Bank of Italy, and so on.
Noble Lords may recall that when one of our number, the noble Lord, Lord Lawson, was Chancellor of the Exchequer, he came out in favour of the independence of the Bank of England. His cogently argued proposals are reproduced in his highly interesting memoirs, if noble Lords wish to refer to them. About four years ago I had the pleasure and privilege of chairing an independent panel of former high civil servants, former central bankers, economic academic experts, industrialists and legal experts from this country and elsewhere. I am gratified to say that the report produced at that time, which I have here, contains almost entirely the provisions of the Bill in broad outline and essence. We came out in favour of what we called an independent and accountable Bank of England which would have considerable control over monetary policy.
If I may refer to a non-central point of the debate, we raised the question of supervision to which the noble Lord, Lord McIntosh, devoted much attention. We did not make an absolute recommendation as regards supervision but we raised the question of whether it was right for an institution which was the lender of last resort also to be the supervisor of the very institutions for which it might have to provide succour in times of difficulty.
Of course, since then, the Government have decided--broadly speaking, rightly--to unify financial supervision and naturally the supervision of the banking system. The decision was not welcome in the Bank of England, although I suspect that that was largely due to the timing and the manner of the decision and its announcement rather than its substance. At any rate, once the decision to unify regulation and supervision is taken, it is difficult to see how banking supervision can be left out.
I come to the central point of the debate and the provisions of the Bill: the control of monetary policy. I believe that there is a good deal of misconception about this. It is somehow thought in many circles that monetary policy by itself can be controlled by one entity or another--whether it is the Governor of the Bank of
England, the monetary policy committee of the Bank or the Chancellor of the Exchequer himself. Monetary policy is only one aspect of a whole arsenal of economic policies. Fiscal policy has been mentioned a great deal today. It is difficult to base any kind of judgment on the institutional arrangements by looking exclusively at one instrument of economic policy alone.In the foreword to the report of the panel which I had the honour to chair, I make the point that monetary policy by itself cannot be guaranteed to achieve the objectives of stable economic policy. It can do a great deal to stabilise prices in certain circumstances, but even that it cannot entirely guarantee. That depends on many other things, including fiscal policy and micro and macro economic policies of all kinds. Therefore, to isolate one among the whole arsenal of economic policies is wrong.
Nevertheless, it is right that monetary policy in the strict sense of the word should be firmly placed upon the shoulders of the Bank of England, subject to the Chancellor fixing once a year the general objective of monetary policy. That is in line with the recommendations made in the report to which I referred and I have every reason to believe that it will work properly. Of course, it cannot be entirely separated from fiscal policy or indeed from any other government policy. As has been pointed out by the noble Lord, Lord Mackay of Ardbrecknish, it will be extremely important to see how it is fashioned when we know the Chancellor's Budget and the arrangements to be made within it which must somehow or other complement or supplement what is being done in regard to monetary policy now.
It is impossible to find a single means of ensuring monetary, fiscal, let alone economic, stability. It is a subject which requires the co-operation of a great many institutions. A great many policies must link together. In my view, the Bill before us--which I hope will not be delayed too long in its passage through the House--does a great deal to clarify those matters. It is right that the Bank of England should be given operational responsibility in relation to monetary policy, as defined in the Bill, subject to the annual decisions or the overriding decisions of the Chancellor which may occur in certain circumstances, as provided for in the Bill. The Bank can be called to account, and I am sure that if it fails in its task it will be.
The Bill deserves support. I hope that it will have a quick and easy passage and that it will contribute greatly to the better ordering of our affairs.
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