Jobs and Growth

Steve Baker Excerpts

Wednesday 12th October 2011 Commons Chamber

[Steve Baker (Wycombe) (Con)]

It is a pleasure to follow the right hon. Member for Oldham West and Royton (Mr Meacher), and I share some of his concerns about the outright dominance of the City. I wish to draw the House’s attention to my declaration of interests in relation to Cobden Partners.

We are in the midst of this jobs and growth crisis, so I feel that we should ask ourselves where jobs and growth came from, where they have gone and where they will come from in future. We know that this is a debt crisis, so why did people borrow so much and save too little? It was because interest rates were too low for too long. Anybody who has a savings account or a mortgage will know that it is the Bank of England which in the UK determines the height of the interest rates market. The set-up of our monetary system means that money is loaned into existence. It has been an institutionally inflationary monetary system since the end of Bretton Woods.

My argument, which is one Hayek advanced in his Nobel lecture, is that when employment comes from an increase in the money supply, that employment lasts only as long as the money supply increases, or perhaps only as long as it continues to accelerate. My preferred measure of the money supply comes from Kaleidic Economics. If we look at it, we find that from 2002 the money supply not only increased, but accelerated in its increase—the level was above 10% from 2004 and in 2007 it went as high as 27% by that measure. The money supply is now contracting at a rate of about 5% a year.

I am delighted to see the previous Chancellor in his place, because had he accepted my intervention earlier I would have said to him that at the time he left power there did appear to be growth, but that it was simply quantitative easing washing through the system, distorting the overall GDP numbers and causing the impression of growth. In fact, we had further money entering the system, distorting the structure of relative prices and making the problem worse later.

If we examine the Office for National Statistics price index going back to 1750—at least one of my hon. Friends will remember—we find that we have had the most astonishing currency debasement since 1971. Indeed, in the 19th century prices experienced secular deflation, and had an ordinary person saved £1 in 1800, they would have been able to buy a larger basket of goods with it in 1900. Had that person saved £1 in 1971, they would be extremely disappointed today.

Inflation is not harmless. It widens wealth inequality and creates patterns of employment that are sustained only by increases in the money supply. For those of us who are sincerely concerned about jobs and growth, it is time to consider whether we should not expect to create employment simply by increasing the money supply. It seems to me that we are now boxed into a corner. We know that we have got into this mess through low interest rates, yet we cannot now afford to allow interest rates to rise—far too many people are far too indebted. That leaves the Government with something of a problem and I think they are right to think extremely carefully about how we can achieve deleveraging. The Chancellor is correct, and has been for some time, to call for an economy based on “save and invest” and on real productive savings. It does not do to expand the money supply in excess of real savings, by which I mean prior production and consumption that is less than that production. The accumulation of capital is the only sustainable way to raise real wages for normal people.

I encourage the Government to stick to their policy of encouraging save and invest, but I express misgivings about quantitative easing. I ask them to look at the theories of the monetary effects on the trade cycle and whether patterns of employment have been sustained by increases in the money supply. As we go forward, I ask them to consider extremely carefully whether we need to go somewhat further than Vickers in creating the right monetary system on which to build a sustainable economy.