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12.43 p.m.

Lord Cockfield: My Lords, I felt it singularly appropriate that this debate should have been preceded immediately by Prayers. This is a subject that requires more than the degree of wisdom that is usually vouchsafed to man, let alone politicians. I am also greatly touched that during Prayers we had the presence on the Government Front Bench of the Government Chief Whip, which shows a degree of humility in the face of difficult issues rarely shown by the present Government.

It is now over 50 years since the control of monetary policy was seized by the Labour Government of 1945. The result has been absolutely disastrous. Monetary policy is simply the upmarket description of manipulating the value of money. During a period of over 50 years the value of the pound has fallen to four pence. This is a matter in which governments of all descriptions have participated.

The Earl of Longford: My Lords, I thank the noble Lord for allowing me to intervene. Does the noble Lord agree that over the past 50 years the standard of living in this country, more particularly that of the working class, has doubled? It is not a bad record when you think of it.

Lord Cockfield: My Lords, it is a splendid record, but one good record does not in any way justify a very bad one in another field of activity. In this particular field of activity the record is extremely bad. It can be

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fairly said that many of the problems in this country in both the social and economic fields are due to the failure of monetary policy. The relatively poor performance of the British economy--I accept that it has improved in recent years--is due in considerable measure to the way in which monetary policy has been used. Among other things, monetary policy has been responsible for inflation which has destroyed people's savings, particularly those on modest incomes. I do not know whether the noble Earl regards that as good or bad. I believe that it is one of the matters that has contributed to poverty in old age.

The way in which monetary policy has operated has resulted not only in a relatively poor performance in output but, in large part, it has been responsible for the boom-and-bust characteristic, or what used to be referred to as stop-go. We merely alter the names of exactly the same phenomena. Monetary policy and the way in which it has operated has been responsible for that and many of the other failings of the British economy. The poor performance of the British economy relative to other leading economies is due ultimately to poor education, training and management, indifferent investment and other factors of that kind. These matters must be tackled in themselves. No magic wand described as monetary policy can be waved to cure these problems. It does nothing of the sort. If anything, it does precisely the opposite.

Against that long background of failure in this field, one wonders why politicians have persisted with such an approach over a period exceeding half a century. There are various explanations of this. One of the simplest, and a very odd one, is that politicians show a singular inability to learn from experience. They fear that if they change their policies or show any tendency to learn as things go along, they will be accused of inconsistency or of changing their minds.

The Earl of Longford: My Lords, I thank the noble Lord for allowing me to intervene again. Is it true to describe the noble Lord as a distinguished politician who has served at the highest levels in government?

Lord Cockfield: My Lords, if the noble Earl wishes to be complimentary I am only too glad to accept his compliment. If he is accusing me of having changed my mind--which I have not--I also regard that as a compliment. Sometimes I regard that fact as a criticism. I quite welcome the intervention of the noble Earl on these matters. One of the factors is politicians' fear of being accused of changing their minds and reneging on policies.

There is another aspect. I refer to what is claimed to be the democratic legitimacy of governments. This is an argument that is used against your Lordships' House. It is said that the other place is elected. I believe that the other place, or indeed any politician, is elected to get things right, not to get things wrong. If politicians get things wrong, they do not have democratic legitimacy. One has only to look at what has happened over the past 50 years--of course the noble Earl's memory on these matters goes back much further even than mine--and

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one can see the way monetary policy has been used to further aims which are not entirely creditable. There it is.

The question that one immediately has to ask is, if politicians cannot and ought not to be entrusted with this particular function, why is it better to delegate it to bankers? That I regard as an open question. The only points that one can make are these: while the conduct of monetary policy in this and many other countries has never produced the results that were claimed for it, nevertheless, in some other countries, the independence of a central bank has produced greater stability in the value of money, and, on the whole, greater economic progress. That is one argument.

The second argument is of course that bankers are less subject to what are politely described as political pressures. In that respect, I do not agree with the noble Lord, Lord Peston, that there should be a hire-and-fire mentality as regards the Bank of England monetary committee, because the moment one brings that in, one subjects those people, once again, to political pressures. At any rate, I believe that there is a much better case, if one takes the view, as I do--I agree that it is not universally accepted--that a function of monetary policy is essentially to control the value of money. That is a function much better exercised not by governments who have a political interest--in the worst sense of that term--in this matter; it is something much better entrusted to someone who is independent.

That is where my criticism of the Bill comes. I give the Bill a cautious, if hesitant, welcome, but of course it is only one step in the right direction, because it creates a Bank of England which is not entirely independent. It is still far too much under the influence of politicians. That comes out particularly if one looks at Clause 12. It is not just that the so-called inflation target is to be fixed by the Chancellor of the Exchequer; it is that when one comes to Clause 12 it will be the Chancellor of the Exchequer who says what stability in prices means. We saw that in Alice Through the Looking Glass, and that is not a very good precedent for this sort of thing. We also find of course that it is the Chancellor of the Exchequer who will say what the economic policy of the Government is. That might strain his imagination from time to time, but, nevertheless, it is another area in which the parameters can be moved, in which the goalposts can be shifted, and in general matters can be fudged.

I do not agree with my noble friend Lord Mackay of Ardbrecknish in criticising the present Chancellor of the Exchequer for having got rid of this somewhat unwanted baby by handing it over to the Bank of England. I do not know what Mr. Brown's motives would have been, but I have always taken the view that, if government are doing a job which they should not be doing, and if government are doing a job which not only they ought not to be doing but which they are doing badly, then the right answer to that problem is to give it to someone else whose job it is to do it and, it is hoped, will do it well.

That was the argument that I always used in the case of privatisation: that it was absurd for governments to be trying to run industries, and running them badly,

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when they should not be running them at all, and should pass them over to someone who might do the job a great deal better. That view has been borne out by the experience of the past 10 years, or so, except for one or two blips recently into which it is, perhaps politest, not to go in any detail. Nevertheless, that is a main point.

I want to draw a clear distinction between monetary policy and fiscal policy. There is the big difference that fiscal policy deals with matters that the Government themselves are doing; it relates to the level of government expenditure; it relates to the level of taxation; it relates to the form of taxation. Those are all matters within the core responsibility of government, where they themselves can decide what happens. In the case of monetary policy, they are trying to alter part of the environment in the hope that people will react in a particular way. However, experience over the past half century shows that people, unfortunately no doubt from the Government's point of view, regrettably do not react in the way that the Government themselves hope.

I shall say merely that I have reservations about the Bill, essentially because, in my view, it does not go far enough; but, apart from that, it is a step forward, even if a hesitant and incomplete one.

12.55 p.m.

Lord Shore of Stepney: My Lords, it is tempting to follow the noble Lord's observations on our experience in the post-war years. He has given an account of them which I do not think that everyone in the House is prepared to accept. Surely we have all to accept with some humility that the great aim of the post-war period of using economic policy to enhance prosperity, and, above all, to conquer the scourge of unemployment, has been extraordinarily difficult to reconcile with stable prices and an acceptable level of inflation.

I have to say straightaway, as I turn to the Bill itself, that I do not believe that it will make any great contribution to that end. Is the idea that Chancellors of the Exchequer are so--what?--feeble in their moral character that they cannot resist the short-term pressures of an approaching election? One or two have succumbed to that temptation, but, for the most part, they have been entirely honourable men who have sought to serve the country and to serve, in particular, those two objectives which I mentioned at the beginning of my remarks.

I am not therefore in favour of Chancellors, including the present one, down-sizing their job, abandoning very important controls over the economy. I use the word "down-sizing" because I am conscious that it is not just a matter of giving up direct control over interest rates, which is one of the crucial determinants of economic growth and prosperity in this country; it goes much further than that. My right honourable friend's aims are to strip the chancellorship completely. He wants to join, as we know--he has said it; he advocates it--an arrangement in Europe in which we have for ever abandoned any control over interest rate policy, any control over exchange rate policy, because we are part of a single market, even to accept serious and penalty-laden parameters on his own right to borrow.

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The aim--I put it in a simple way--is to give up the whole idea of macro-economic policy as being a responsibility of the Chancellor; and for the Chancellor, as it were, to transform himself into a Chief Secretary. That does not seem to me to be a satisfactory aim either for this Government or for the present Chancellor.

I have a major criticism of the measures in the Bill. I am not referring to what are, to my mind, rather minor measures about openness, greater supervision and supervising the very many different activities of the City. No, it is not that. I am concerned about the central abandonment of control over interest rates. Clause 10 sets out in terms the abdication by the Treasury of control over Bank of England interest rates. Clause 11 gives the Bank of England, hardly surprisingly, the duty to enforce an inflation policy laid down by the Chancellor of not exceeding 2.5 per cent.

What on earth does anyone believe will happen as a result of that? The weight of controlling inflation will inevitably fall upon the Bank of England. As we know, it has raised interest rates--in my view, given its terms of reference, perfectly sensibly--on five separate occasions. Moreover, in spite of the good results of recent economic indicators, it believes that it may have to raise them again. That is a proper reflection of its anxieties about inflation.

What has happened as a result and what was happening before the Government changed on 1st May? The exchange rate was rising rapidly and most disadvantageously for this country. In terms of the deutschmark and European currencies, we have managed to return to the level from which we fled, or were expelled, in total confusion on that famous day in 1992. We have not quite reached that stage yet and I hope that we will not.

The point was properly raised, almost surprisingly, by the noble Lord, Lord Taverne, of the implications of the rise in the exchange rate for fiscal policy. They must be spelt out. One cannot ignore what is undoubtedly the biggest threat to the ongoing prosperity of this country, which is the massive increase in the exchange rate as against the European currencies. That is not to mention the further undermining of our own competitiveness which follows from the appalling events in South-East Asia and the great devaluation crisis there.

Perhaps for a moment I may dwell on the effects which the exchange rate has already had. There is a mass of statistics and information, but for the sake of simplicity I frequently refer to the CBI's quarterly survey. It is up to date and covers about 1,000 firms of varying sizes throughout the British economy. It sends a regular questionnaire to its member firms. There is one question which it always asks and it is included in the January 1998 report. Firms are asked about their optimism about export prospects for the year ahead. The balance is given between those who are positive and those who are negative. The figure for January 1998 stands at minus 22 points. That is the present estimate of British industry of its export prospects in the years ahead. Two additional points are worth reporting. It is not just a snapshot at this moment in time, but what has been the volume of export deliveries during the past four

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months? The process is under way. The figure is minus 15 points in the balance between those whose exports had risen and those whose exports had fallen. Finally, there is a volume of export orders for the year ahead. Again, the figure is down on the balance between the positive and the negative at minus 21 points.

That is serious and it has provoked public concern. Incidentally, it has provoked the TUC and the CBI to lament and point to the dangers to employment and the future of our manufacturing industry. They are entitled to do that, but I am a little surprised, particularly at the TUC. Indeed, there is a certain irony. The TUC is complaining about high exchange rates when it and the CBI are committed to the European project of a single currency. Let them complain when that happens and who will listen to them? It is an extraordinary demonstration of what could well happen in the future.

I should also mention the dangers and penalties which this country has experienced as a result of exchange rate policy or the abandonment or temporary surrender of it. The noble Lord, Lord Roll, in his admirable history of this century, rightly pointed to the disastrous decision of a then Conservative Chancellor of the Exchequer in putting us back on the gold standard in 1924. He mentioned the other disastrous decision of the Labour Chancellor of the Exchequer, Lord Snowden, to return to the gold standard in 1931.

I would add two more recent decisions. Have we forgotten the disaster which occurred when we joined the exchange rate mechanism and found ourselves unable to control interest rates in the effort to maintain an exchange rate? What do we believe will happen if we as a country are so foolish--I do not believe that we shall be--to join the single currency and to abandon forever any possibility of controlling our own fortunes. I said "controlling" but I like the metaphor "navigating", used by my noble friend Lord Desai. Economic policy is not about control, it is about steering and navigation. If we give up the instruments of navigation, as we would be doing, we shall have no influence on our own future.

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