The United Kingdom's 'humiliating withdrawal' from the European exchange rate mechanism had been forced on the Government because of its weakness and incompetence, Mr Smith said.
'In the course of a few weeks, the one policy with which the Prime Minister was uniquely and personally associated - the contribution to policies of which he appears to have been most proud - has been blown apart.'
Mr Smith laid waste Tory backbenchers who intervened on his speech and was rewarded with prolonged cheers and waving of order papers from his own side when he closed.
Recalled for two days to discuss the crisis in the currency markets and the mayhem in Bosnia, the chamber was packed and the sense of occasion palpable. The Prime Minister tried to check Mr Smith's assault, intervening to say that the Government had been forced to withdraw from the ERM, not because it wished to, but because it was inevitable in the face of speculation of the size which not even the Labour leader could have foreseen.
'So that's the defence. Overcome by unforeseen events,' Mr Smith rejoined. There had not been a hint of apology from a government whose most noted characteristic was that no one took responsibility, he said. 'No one resigns - at least, not yet - and no one takes the blame. A not-me-guv government.'
In a similarly aggressive performance, Gordon Brown, the Shadow Chancellor, said the party that had run a general election campaign on the slogan 'You can't trust Labour' had shown its to be completely unworthy of trust. 'They may hold office for five years, but after five months they have lost all authority to govern. They have failed the country and they will never be trusted again.'
Mr Brown said there would always be a 'credibility premium' to be paid either in interest rates or elsewhere as long as Mr Major was Prime Minister and Mr Lamont was his Chancellor.
Winding up the debate for Labour, Mr Brown predicted the removal vans would soon be arriving at the Chancellor's residence. There was no point Mr Lamont setting monetary targets other than in negotiations with the publishers of his memoirs, he said. 'There is no point now in worrying about money supply unless, that is, in the negotiations he is having about the salary with the City board he is about to join.'
Earlier, Mr Smith said Mr Major had suffered from 'delusions of grandeur' ever since he became involved in economic affairs, claiming first, in 1988, that the German economic miracle had been surpassed and then, this summer, wanting to topple the deutschmark as the hardest currency in the EC. 'To go on to foresee the pound replacing the deutschmark takes a certain detachment from reality, of which Walter Mitty himself would have been proud.'
The real lesson to be drawn from a comparison of the British and German economies was that before a country could have a strong currency it needed a strong economy. That needed consistent investment, a recognition of the importance of manufacturing as the basic wealth creator, and a strategy for training, for innovation, for technology and for regional development - 'in short, an industrial strategy'.
Britain had been relegated to the second division of Europe because the Government had for years followed policies which had thrown the economy into a deep and damaging recession. Then, faced with a crisis, the Government's chaotic mismanagement and sheer incompetence had forced it to abandon all it stood for in a matter of a few hours.
Pressed from the Tory backbenches on whether he would rejoin the ERM, Mr Smith said there were advantages to having a system of managed exchange rates. 'One advantage is that you are less likely to resort to curbing public expenditure as the anchor of your economic policy which is one of the difficulties which we are now going to face. But the circumstances, of course, in which we would rejoin it, have to be judged according to the state of our economy, and sadly that is regrettably weak.'
The genesis of the crisis was that Tory election promises of immediate recovery proved totally false, he said. Since April all the main economic indicators had deteriorated. Markets, consumers and industry increasingly lost confidence.
When the predictable pressure on the currency arose, with uncertainty over the French referendum and higher German interest rates, Britain, holding the EC presidency, should have taken prompt action to initiate an EC-wide response, Mr Smith argued. But the Government had done nothing.
'We could have had an orderly realignment, not a rout; a co-operative change, not a crisis. Britain would not have been forced to leave the ERM, we would not have had to use billions of pounds of reserves which involved damaging real losses which some have estimated at over pounds 1bn and interest rates would have been lower throughout the Community.'
Mr Major intervened, saying Mr Smith had announced that Labour policy was that whenever there was speculative attack on the pound, it would 'pre- emptively devalue. That would encourage every speculator on every occasion to attack the pound if that policy were to be followed.'
But Mr Smith said that if the Prime Minister would never be in favour of a realignment, he might just as well be in a single currency. Faced with the likelihood of being scuppered by the speculators, Mr Major had 'walked blindly on'.
Mr Smith said he feared that in the months ahead pledge after Tory election pledge would be betrayed as cuts in public expenditure intensified the recession, weakened the country's infrastructure and eroded the quality of public services.
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