Orders of the Day — Bank of England (Amendment) Bill

Part of the debate – in the House of Commons at 10:49 am on 28th January 1994.

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Photo of Peter Tapsell Peter Tapsell , Linsey East 10:49 am, 28th January 1994

From all accounts, although we have not yet had frank accounts of what happened on 15 and 16 September 1992, there was a panic. We do not know who said what to whom. The world realised that there was a financial crisis in Britain, set off by the president of the Bundesbank, Mr. Schlesinger, who gave an extremely unwise press conference a few days before.

There is nothing new about such crises, because a similar situation arose when we went off the gold standard in June 1931. As it happened, Montagu Norman was on a Cunard liner in the middle of the Atlantic. When all the experts at the Bank of England decided that they had to go off the gold standard they told poor Mr. Philip Snowden, the Labour Chancellor—no one had ever told him before that that could be done and he had not thought of it for himself. They wanted to know how to get that news to Governor Norman, in the middle of the Atlantic, without anyone knowing. They spent a lot of time concocting a telegram and eventually Mr. Cockayne, the deputy Governor of the Bank of England, sent a cable which read, "Old lady goes off on Monday."

Montagu Norman was sitting in a deck chair on the promenade deck of the liner when that telegram was handed to him. He had spent the whole of his central banking career trying to keep Britain on the gold standard, having ensured that it was put on it in the first place. He read the message and assumed that it referred to a change in the holiday plans of his mother.

That incident shows that the crisis of September 1992 had honourable predecessors in our history. Nothing very much changes in the practicality of the management of economic and financial affairs whether the Bank of England is nationalised or independent.

Most changes in interest rates in this country have, in practice, been driven by external factors, not by domestic ones. They are usually connected with the exchange rate of sterling, which will remain a Government responsibility under the proposals of the Bill. So far as I know, there have seldom been serious differences of opinion between the Treasury and the Bank of England about interest rate policy, despite what the right hon. Member for Berwick-upon-Tweed (Mr. Beith) said. Arguments have arisen about the timing of an announcement, but the main arguments have been between No. 10 and No. 11 Downing street. That has happened under all Governments.

The most serious blunder in monetary policy since an independent central bank persuaded Churchill to return to the gold standard at the wrong dollar parity in 1925 was our decision, strongly urged by the Bank of England at the time, to join the exchange rate mechanism in 1990. To join it at all was a mistake, to join it at the wrong parity to the deutschmark was a blunder and to remain within it throughout the first nine months of 1992 was a folly, as I said at the time. Nevertheless, that policy, as far as we know, was fully supported by the Bank of England and by the leaders of the Labour and Liberal parties. They had urged the Government to join the exchange rate mechanism for a long time before we did so in the autumn of 1990.

My hon. Friend the member for Wolverhampton, South-West warned against that decision at every stage of the proceedings. He was much wiser—