To give up being Chancellor of the Exchequer in the circumstances in which I did is bound to be an uncomfortable experience. But I have also been a Treasury minister for almost seven years, a longer continuous period than anyone else this century. Indeed, I have been the only person ever to have held the three offices of Financial Secretary, Chief Secretary and Chancellor of the Exchequer.
I should like to pay tribute to the officials with whom I worked all those years. In my opinion, they are equal to the best in the world and I am astonished how, when things go wrong, how often it is civil servants that are blamed when it is we politicians who make the decisions and it is we politicians who should carry the blame.
When the Prime Minister told me two weeks ago that he wished to make changes in his government, I of course told him that I appreciated he had a very difficult task. He generously offered me another post in his Cabinet. But in my opinion it would not have been right either for him or for myself, if I had accepted. If he wished to change his Chancellor, it was surely right that I should leave the Cabinet.
Perhaps I can make it clear that I wish the Prime Minister well and hope that his changes will produce whatever advantage for him and the Government that he intended.
It has not been easy being Chancellor of the Exchequer in this recession, continually and wrongly described as the longest and deepest since the war, or even more inaccurately, since the Thirties. It is certainly not the deepest recession since the war and, when the figures are finally revised, it may turn out not even to have been the longest.
But it is a recession which has affected many areas which have not experienced such severe recession before and that was bound to have an adverse effect on the fortunes and popularity of the Government.
This recession was not caused by Britain's membership of the Exchange Rate Mechanism. The recession began before we joined the ERM and, incidentally, before I became Chancellor. And a large part of the fall in output occurred in late 1990 and early 1991, far too soon to be influenced by our membership of the ERM. No. This recession has its origins in the boom of 1988 and 1989. That boom made the recession inevitable.
But the recession is now behind us and so I am able with confidence to wish every success to the new Chancellor. He inherits, I believe, a fundamentally strong position.
As Mr Lloyd Bentsen the US Treasury Secretary, said in a generous letter to me last week, Britain is the only European country likely to experience any significant growth this year and inflation is at a 30-year low.
Since the war, only two Conservative Chancellors have been responsible for bringing inflation below 2 per cent. Both of them were sacked. In my view, that tells us a great deal about the difficulties of reducing inflation in a democracy as lively and disputatious as ours.
I am delighted to hear from the Prime Minister that policy is not going to alter. The Chancellor will understand if I say that he comes to the Treasury thus at a most favourable time.
Much of the hard work has been done and he should be able to enjoy increasingly encouraging trends for a long time to come. I am sure that my initiative in bringing the Autumn Statement and the Budget together into one December Budget is a reform that will last and I wish Mr Clarke well with what is a massive task.
I have been privileged to present three Budgets. All three achieved the objectives I set for them. The first drew the sting of the poll tax. The second, by introducing the 20p income tax band, helped us to win the election, and the third, unpopular though it undoubtedly was, made a significant step towards reducing our Budget deficit. That, as I have frequently observed, is the greatest threat to our long-term position.
Having put up some taxes, it is vital that the Government now turns its attention to public spending. Last year I set up a new system for patrolling public spending. I believe that it gives Mr Clarke the means to do what is necessary. I am sure that he has the will. We don't want more tax increases. We need tight control of public spending. Mr Clarke will have my full support if he is robust in tackling that problem.
I should like now to say a word about Britain's experience of membership of the Exchange Rate Mechanism. Although many people are either for or against membership of a fixed exchange rate system, there are many others, including for example Mr Alan Greenspan, the chairman of the US Federal Reserve Board, whose views about fixed versus floating exchange rates have never been theological. My own views are not theological either. I have always believed you could run an economy on either a fixed or floating rate basis, although at times one might be more appropriate than the other.
I tried to persuade Lord Lawson that it was not worth resigning over the ERM in 1988. Although I probably would not have joined in 1989, I did not believe then that a fixed rate system was doomed to break up. Those who hold that view presumably blame Lady Thatcher for committing us to a policy that was bound to fail, but I do not take that view now and I did not then.
When I accepted the office of Chancellor, I accepted the policy, believed that it could be made to work and did all I could to make it work. It certainly did enable us to get inflation down dramatically. Indeed, without the ERM, I doubt whether the Government would have had the courage and determination to get it down, a point to which I will return.
The reason our policy on the ERM ultimately broke down was that German policy developed in a way that in my view was mistaken and it was not anticipated, not least when German interest rates were put up last year. As members of the ERM, we were forced to respond in a way which meant that our own policy became increasingly over-tight.
I became increasingly concerned last summer that our policy was too restrictive and that our membership of the ERM was impeding recovery. I did raise with the Prime Minister the idea that we might suspend our membership temporarily at some future date if recovery were being prevented. He made it clear that he did not want to do that. Probably he was right. I accepted it. In any case, it would not have made any difference. We were talking about the distant future and we would have been overtaken by the same events in September that ultimately hit us. But I would not want the country to believe that these matters were never under consideration or that we were not aware of what was happening in the economy outside.
That perhaps explains why I did not do one thing that some have argued and urged might have enabled us to remain within the ERM. That was to put up interest rates in the summer of '92. Because of the position of the domestic economy, I did not believe that that was an option. Futhermore, I did not believe that it would have been credible and I am sure that I was right.
People have frequently asked me why we did not devalue within the system. I did not devalue, because it would have meant higher interest rates at a time when we needed lower interest rates. One solution might have been a revaluation of the Mark against all other currencies in the ERM, thus making room for lower German interest rates.
I was not opposed to that. But unfortunately, my friend and colleague, the late Pierre Beregovoy, the French finance minister, was, despite my efforts at persuasion, implacably opposed to such a move.
I do not believe that any question of rejoining the ERM should remotely be on the agenda during this Parliament. Fortunately, Mr Clarke has already announced his policy.
I am only thankful that, despite the residual doubts of some of my colleagues, I insisted on getting my own way and on keeping the ERM out of Maastricht as a treaty obligation. I need hardly remind the House how difficult our position would be today if the Maastricht treaty obliged us to rejoin the ERM.
Some argue that the credibility of the Government was destroyed on 16 September. But once I had reconstructed our policy, it was not the view of the markets, not of the Stock Exchange - which touched an all- time high not so long ago - nor the foreign exchange markets, where the pound's recovery has been strong enough to worry some businessmen. Nor was it supported by that crucial indicator, long-bond yields, lower than for some time and lower today than in September.
Markets and businessmen are cynical. They know that in a fixed exchange rate system there are certain things that finance ministers have to say. Credibility and confidence depend not on words, but on objective conditions. I'm glad to say that those objective conditions today are better than they have been for many years.
On this crucial point of credibility, I want to take this opportunity to give the Prime Minister and the Chancellor some advice. Nothing would be more effective in establishing the Government's credibility than if my Right Honourable Friend would have the courage to establish an independent central bank in this country.
The time has come to make the Bank of England independent. It is my greatest regret that after two-and-a-half years of trying, I have failed to persuade the Prime Minister of this essential reform.
Now that we are outside the ERM, the need is even more urgent. Britain is one of the few countries where monetary policy remains firmly in political hands and the pressures on politicians to take policy decisions for political reasons can be quite irresistible. With an independent bank we could have lower interest rates for a given exchange rate. Policy would be more credible and it would give us the necessary discipline for keeping inflation down on a permanent basis.
While My Right Honourable Friend and I have been in general agreement on interest rate policy, I do not believe that even the timing of interest rate changes should ever be affected by political considerations. Interest rate changes should never be used to offset some unfavourable political event. To do so undermines the credibility of policy and the credibility of the Chancellor.
When my resignation was announced 10 days ago, the reaction of many was that this was a delayed resignation, a resignation that should have happened on 16 September. On that day and during the subsequent days, I did of course consider my position carefully with friends and colleagues.
I was anxious to do what was right for the country and for the Government. Sir Stafford Cripps, who is rightly regarded as an honourable man, did not resign after devaluing the pound. On the other hand, Lord Callaghan, also an honourable man, did.
There are three principle reasons why I decided to stay in office. First, the events of last September were very different from those of 1967. They affected not just this country, but most of Europe. The finance ministers of no fewer than nine countries were forced to eat their words and either devalue or float. Five floated, four devalued, one both devalued and floated.
In none did the finance minister resign, or to the best of my knowledge come under any pressure to resign. Indeed, in one country, the governor of the central bank was actually promoted. He became prime minister.
Second, membership of the ERM was the policy of the whole Government, and, as the Prime Minister said, I was implementing government policy. Our entry was not a decision in which I myself played any part.
It was, however, a decision made after a whole decade of fierce public and private argument, a decision made by the previous Prime Minister, the present Prime Minister and the present Foreign Secretary (Douglas Hurd).
Third, I did not resign, because that was not what the Prime Minister wanted. When the Prime Minister reappointed me after the general election, I told him two things: firstly, that I did not wish to remain Chancellor for very long and secondly, that he did not owe me any debt or any obligation.
On 16 September, he made it clear to me in writing that he had no intention of resigning himself and that I should not do so either. Of course, I discussed the question further with the Prime Minister subsequently. In all those discussions, he emphasised that he regarded the attacks on me as coded attacks on himself.
So, I decided that my duty and loyalty was to the Prime Minister and that I should remain in office. Two-and-a-half years ago, I did play some part in helping the Prime Minister into the position which he occupies today.
I have always believed, and still believe, that in supporting him then, I made the right choice, and I now wish to say one thing to him. It goes to the heart of the way this Government conducts itself.
There is something wrong with the way we make our decisions. The Government listens too much to the pollsters and the party managers. The trouble is that they're not even very good at politics and they are entering too much into policy decisions.
As a result, there is too much short-termism, too much reacting to events, not enough shaping of events. We give the impression of being in office, but not in power. Far too many important decisions are made for 36 hours' publicity. Yes, we are politicians as well as policy-makers, but we are also the trustees of the nation and I believe that in politics you should decide what is right and then decide the presentation, not the other way around. Unless this approach is changed, the Government will not survive and will not deserve to survive.
It is a great change to return to the backbenches after 14 years in government, but I have always been proud to be a member of this House and not just a minister. And today when I walked through Westminster Hall and up the stairs into the lobby, I felt exactly the same pride and excitement as when I first entered this House 21 years ago.
I look forward with anticipation to the great parliamentary events and battles that lie ahead.
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