I am old fashioned enough to believe that my first comment on recent events should be made to this House. This is not an easy speech for me to make, and I am sure that the House will understand that. I shall do my best to be brief, and I hope that the House will assist me in this.
I am most grateful for what my right honourable Friend the new Chancellor of the Exchequer John Major has said about me, and I wish to take this further opportunity to wish him every success in the task that lies ahead of him. As he reminded the House, we worked closely together for just over two years, and he has my full and unstinting support.
As for my own record, I have no doubt that I have made my share of mistakes; but I am content to be judged when the passage of time has provided a greater sense of perspective than is possible today.
No-one, however long he has held the post, lightly gives up the great office of Chancellor of the Exchequer. Certainly, I did not. As the resignation letter that I wrote to my right honourable Friend the Prime Minister clearly implies, it was not the outcome I sought. But it is one that I accept without rancour – despite what might be described as the hard landing involved. I would only add that the article written by my right honourable Friend's former economic adviser Alan Walters was of significance only inasmuch as it represented the tip of a singularly ill-concealed iceberg, with all the destructive potential that icebergs possess.
I have long been convinced that the only successful basis for the conduct of economic policy is to seek the greatest practicable degree of market freedom within an over-arching framework of financial discipline [end p1] to bear down on inflation. That being so, a key question is where the exchange rate fits in. Is it to be part of the maximum practicable market freedom, or is it to be part – indeed, a central part – of the necessary financial discipline?
I recognize that a case can be made for either approach. No case can be made for seeming confusion or for apparent vacillation between these two positions. Moreover, for our system of Cabinet government to work effectively, the Prime Minister of the day must appoint Ministers whom he or she trusts and then leave them to carry out the policy. When differences of view emerge, as they are bound to do from time to time, they should be resolved privately and, whenever appropriate, collectively.
But to return to the exchange rate. Faced with the question that I posed a moment ago, my answer is, unhesitatingly, that it should be seen as an essential element of financial discipline, with the rider, incidentally, that exchange rate stability is itself an economic benefit.
There is nothing novel, of course, in any of this. The House will recall the classical period of the gold standard, before the First World War; the Bretton Woods system after the Second World War; and, of course, over the past ten years, within the European context, the EMS.
None of these systems were or are panaceas or soft options. Tough decisions still have to be made. None of them were or are without difficulties. But those difficulties, in my judgement, are very much less than the practical difficulties and disadvantages which the world has experienced during periods of freely floating exchange rates. Nor, incidentally, can there be any doubt that the less credible the exchange rate discipline is, the greater the weight that interest rates will have to bear, and the higher they need to be to maintain the necessary anti-inflationary pressure.
Full United Kingdom membership of the EMS – I was glad to hear much of what my right honourable Friend the Chancellor said – to which, again, as my right honourable Friend the Prime Minister made clear at Madrid, this Government are committed, would signally enhance the credibility of our anti-inflationary resolve in general and the role of the exchange rate discipline in particular, and thus underpin the medium-term financial strategy. Indeed, given the existence of the EMS, our continuing non-participation in the exchange rate mechanism cannot fail to cast practical doubt on that resolve, however ill-founded such doubt may be.
There is, I believe, one other way in which anti-inflationary credibility might be enhanced in the eyes of the market. That is why, a year ago, I proposed to my right honourable Friend the Prime Minister a fully worked-out scheme for the independence of the Bank of England. But that would be a buttress; it would not be a substitute for what I was saying earlier.
But if full United Kingdom membership of the EMS, although not indispensable, would facilitate the conduct of economic policy in general [end p2] and the battle against inflation in particular, as those already participating have demonstrated, there is also a vital political dimension.
As my right honourable Friend the Prime Minister made clear in her Bruges speech, Britain's destiny lies in Europe as a member of the European Community—and let me be clear that I am speaking, as she speaks, of a Europe of nation states. Within that context, it is vital that we maximize Britain's influence in the Community so as to ensure that it becomes the liberal free-market Europe in which we on the Conservative Benches so firmly believe. I have little doubt that we will not be able to exert that influence effectively, and successfully provide the leadership, as long as we remain largely outside the EMS. So, for economic and political reasons alike, it is important that we seek the earliest practicable time to join, rather than the latest for which a colourable case can be made.
Finally, a word about the short-term prospects for the British economy. There always has been, and there always will be, an economic cycle. During our period of office so far, we experienced a sharp downturn between 1979 and 1981, followed by a remarkably vigorous and prolonged upswing which lasted from 1981 right through to 1988. We are now once again on the downswing, and I see no need for a further policy tightening. While this downswing will not be as sharp as the previous downturn, not least given the very much lower level of inflation that we now have, a dull 1989 is bound to be followed by a difficult 1990.
But from then on, I have every confidence that, with the policies that the Government have been pursuing and will continue to pursue, as we heard from the Chancellor today, the long-term upswing will continue, based on lower inflation and on the unprecedented underlying strength that the British economy now possesses.
I have every confidence, too, that this will lead at the end of the day to a fourth election victory under the leadership of my right honourable Friend the Prime Minister, whose outstanding contribution to the renaissance of Britain over these past ten years I am proud to have been able to assist.