mervyn king : trusting in money – from kirkcaldy to the mpc speech by mr mervyn king, governor of the bank of england, delivering the adam smith lecture 2006, st bryce kirk, kirkcaldy, scotland, 29 october 2006. i am indebted to alex brazier, chris salmon, morten spange and tony yates who have worked closely with me and are effectively co - authors. i am also grateful to charlie bean, tim besley, iain mclean, mark cornelius, andrew hauser, james proudman and peter rodgers for their helpful comments and to kath begley for valuable research assistance. * * * my lord lieutenant, chancellor, my lords, ladies and gentlemen, in june 1767, adam smith wrote from kirkcaldy to his dear friend david hume : “ my business here is study in which i have been very deeply engaged for about a month past. my amusements are long, solitary walks by the sea side. you may judge how i spend my time. i feel myself, however, extremely happy, comfortable and contented. i never was, perhaps, more so in all my life ”. 1 there is more wisdom in that remark than most busy people would ever care to admit, and it was perhaps that contentment which allowed his mind to wander far and wide – across the sea by which he walked – to imagine a society and an economy very different from the one in which he lived. last year i was in the audience when alan greenspan delivered the adam smith lecture. now i too share the privilege of speaking in the kirk where gordon brown ’ s father used to preach to the people of kirkcaldy. double trouble, you might think. i am particularly mindful of the controversy which greenspan ’ s lecture stirred in the world of smith scholars : “ an unseemly battle is being fought over the soul of adam smith ”, as one remarked. it is a sign of the resurgence of interest in adam smith that at almost every point on the political spectrum one can find people who claim smith as their own. but, in a lecture in 1926 to commemorate the 150th anniversary of the publication of the wealth of nations, the economist jacob viner wrote, “ traces of every conceivable sort of doctrine are to be found in that most catholic book, and an economist must have peculiar theories indeed who cannot quote from the wealth of nations to support his special purposes ”. 2 my intention today is certainly not to

, the authorities reacted with more restrictive demand - side policies that set back any take - off in their economies. as these policies have eased, and as external financing conditions have improved and the increase in commodity prices firmed, the latin american economies have attained progressively higher growth rates, particularly as from the closing months of 2003. however, certain factors of vulnerability remain in the area. these relate to the high levels of public and foreign debt and to the high dependence on foreign capital, which advise perseverance in maintaining macroeconomic stability and in furthering structural reforms, especially those aimed at strengthening the institutional framework and the respect for property rights one salient aspect, in my view, which arises from the examination of the international situation is the fact that the firming of the economic recovery did not contribute to correcting the external imbalances between the main regions. on the contrary, despite the marked depreciation of the dollar, both the us external deficit end the surplus of japan and the rest of asia increased, while the slight surplus in the euro area hardly changed. possibly, the deprecation of the dollar may not yet have had a corrective effect on foreign trade flows since, as we know, this tends to come about with a considerable delay and, in the short term, the exchange rate deprecation may even lead the deficit to widen. but the scant impact of the dollar depreciation on the current - account balances of the main areas appears also to be related to the asymmetry in the reaction of the main currencies : while much of the nominal effective depreciation of the dollar in 2003 was bilaterally against the euro, the asian economies and, to a lesser extent, japan, checked the rising trend of their currencies by means of heavy intervention on the foreign - exchange markets which has contributed to increasing their already high levels of reserves even further. it is something of a paradox that the decline of the dollar has been concentrated against the currences of the least dynamic economies whose current accounts are relatively balanced, while it has held very stable against the currencies of the highest - growth countries which account for most of the us trade deficit. in any event, the contribution exchange - rate movements may be expected to make in correcting global external imbalances is limited ; what are needed are economic policy adjustments by the main countries. not only was no headway made in 2003 in this area, but economic policies remained oriented, in certain cases