You can't bank on bluffness, Ken

The Chancellor's dispute with Eddie George will test more than the economic theory of Clarkeyism

It may be the biggest gamble of his political career: Kenneth Clarke has taken on the Bank of England. If the gamble pays off, then both Clarke and the Government will emerge with their prestige strengthened, and the speed of economic recovery may be accelerated. But if it goes wrong, the Chancellor and the Cabinet which has been egging him on will have made a terrible mistake.

You would not have gathered from his pugnacious, uncomplicated speech to the Scottish Tory conference yesterday that Clarke was facing such a test. It was full of the conventional stuff about the Tories and sound money. Yet by disagreeing with the Governor of the Bank about the need for an interest-rate rise, Clarke is testing his authority with the markets in a dramatic way. At worst, it could mean a sterling crisis, or a sharp rise in interest rates, or both.

There are two aspects to the Clarke gamble. The first is longer-term and is simply about whether the Bank is right to fear that looming inflationary pressures require action now. Time, as they say, will tell.

The second question is more political and more imminent. It is whether the standing of this Government is high enough for it to publicly disagree with the Bank and get away with it. If the markets decide that Clarke and his colleagues cannot be trusted on inflation, sterling will be dumped. That could happen today, when the Bank's latest inflation forecast comes out, but the risky period stretches ahead for a couple of months.

This is a particularly sensitive time in relations between the Treasury and the Bank. Last year, Clarke agreed to publish the minutes of his monthly meetings with the Governor, although this decision was made six weeks after the event as part of the Major administration's attempt to rebuild its credibility with the markets following "Black Wednesday" in 1992.

As to what the publication of the minutes actually means, opinion has been widely divided. Some senior people from the Bank think it is merely a small, but welcome advance for openness. Clarke himself takes this minimalist view of his changed relationship with the Bank.

He does so for the thoroughly Clarkey reason that, when it comes to disagreements, he, Clarke, will be proved right and the Governor and his bankerly experts will be proved wrong. The markets will notice this, so that in case of future disagreement, it is he who will be given the benefit of any doubt. Thus he has sounded a bit dismissive of the whole thing.

It is a theory with more chutzpah that a New York Jewish taxi-drivers' convention. Others, in the Treasury and the Bank itself, think this theory is wildly implausible. They reckon that the openness of the new system gives the Bank de facto independence because the markets, knowing a bit about British politicians, will always take the Bank's side, so ensuring that the Governor wins any argument.

Now we will find out who's right. My man with the tape-recorder under the table at the latest meeting between the Chancellor and the Governor tells me that the minutes, when eventually published in five weeks time, will not show the kind of sharp disagreement that has been rumoured in the City.

Even so, no one denies that there has been a disagreement, and this suggests that one side, Treasury or Bank, must emerge with a damaged reputation. If interest rates don't have to be jacked up and if sterling doesn't plummet, then the clear loser is Eddie George. The Bank will have lost a lot of authority. The idea of making it fully independent would be buried - at least as far as the Conservatives are concerned.

In those circumstances, Clarke would have relieved industry and the mortgaged middle classes of an unnecessary extra jolt of pain.

This would be a triumph of Clarkeyism, a political theory which can be defined as the belief that bluff chaps from the Midlands are righter about everything than expert opinion is about anything - righter about eggs, schools, hospitals, currencies.

Clarke has been the embodiment of bluff common sense to an extreme degree - indeed, to the point where common sense starts to seem a bit nutty. When he was Health Secretary, one could imagine him bowling into a operating theatre, grabbing a scalpel from the nearest grumbling surgeon and asserting loudly: "Lot of bloody fuss about nothing. Anyone could do it. Gimme that. See, just hoik it out, there we are ..."

To be proved right where the cautious monetary experts of the Bank of England had been wrong would thus be a huge fillip for him, just at the time he needs it most. For these have not been a happy few weeks for Bluff Ken. Even his political supporters in the party were muttering about sloppiness and lack of attention to detail.

Publicly, he has dismissed the criticisms as "yesterday's story", a flap about nothing. Privately, some friends say he has been unsettled, even chastened. "If it was anyone but Ken, I'd say he has been through a period of self-doubt," one MP told me.

The rumour-mongering among right-wing Tories who want John Major to sack Clarke is, thus far, merely silly trouble-making. It looks particularly odd just when Clarke is taking a risk which the anti-single currency "free- floaters" much approve of. Some colleagues, at least, are honest enough to admit it: Nicholas Budgen, who utterly abhors his views on Europe - to the extent of telling the Chancellor to his face that he must never lead the party - has been lauding Clarke's handling of the Treasury as a return to true monetarism.

But Budgen and friends won't be able to save Clarke if the market panics. Unlike them, both the Chancellor and the Bank believe that the level of sterling matters for inflation and for the prospect of tax cuts. It is already clear from the March minutes that George is more worried about the currency than Clarke is.

If the Governor has to come back to the Chancellor demanding a sudden hike in interest rates, then this Government will have suffered a political reverse more serious than last week's local elections. Interest rates will be higher than they would have had to be right up to the election; which would prove, for the Tories, the final blunder which turned their position from merely desperate to hopeless. The Chancellor will have lost a lot of authority. The ululations of the wild right for his head will grow louder.

And, somehow, the Bank will have to be given clearer and stronger authority over interest-rate decisions: the clearest lesson of the past few days may simply be that you can't have your cake and eat it. For the Bank, it has to be back to frank dependence on politicians or forward to the independence which so many of its people crave.

So the stakes are terribly high and the wheel is spinning. Knuckles are white throughout Westminster. Only the gambler himself, through a haze of cigar-smoke, seems completely relaxed. This is probably what they mean by a class act.