##us were trusted because to renege on a promise endorsed by the priest would have very serious consequences, whether in this life or the next. it is sometimes tempting – as the examples of the jacobins, germany and argentina show – for issuers of money to issue too much of it : cheap money and plenty of it, as the saying goes. 18 a public monopoly of paper money raises the question of how can we prevent the institution managing that money from abusing its issuing power. we cannot commit future generations – or even ourselves – to a particular policy. so how can we design an institution to create the reasonable expectation that money will retain its value? in 1997 a new institution – the monetary policy committee of an independent bank of england – was set up. and for the past decade inflation has been low and stable and economic growth more stable than at any time in living memory. just as importantly, yields on government bonds indicate that inflation is expected to remain low over the next fifty years. gordon brown deserves great credit for taking the time to design the institutional arrangements so carefully in advance. this was not a traditional “ make it up as you go along ” approach to british economic policy. in fact, the design is a good example of how to overcome the fundamental constraint faced by social institutions. that constraint is that it is both impossible and undesirable to enforce binding commitments on the collective decisions of our successors. it is impossible because there can be no outside enforcer. it is undesirable because we cannot imagine or articulate every possible future development. as such, institutions must have, and be likely always to have, widespread support. their design must meet three principles. first, in order to maximise the breadth and permanency of support, the objective should be as clear as possible. second, the institution must have the appropriate tools and competence to meet those objectives and be held accountable for doing so. third, for the institution to command widespread support, the design must reflect history and experience. how do our current monetary arrangements meet these requirements? first, the objective – the inflation target – is clear. it is 2 % for cpi inflation. second, responsibility for setting interest rates has been delegated to a group of people – the monetary policy committee – with the appropriate technical competence and who face incentives focussed on meeting the target. expert judgment is needed because changes in the way the world hayek ( 1976 ) thought this temptation might be overcome by allowing competitive private banks to issue

), blinder and morgan ( 2000 ) and lombardelli, proudman and talbot ( 2005 ). reveal its new £20 note. and the figure celebrated on the new note will, of course, be adam smith the first economist and the first scotsman to appear on a bank of england note. from next spring, when visitors to our country look carefully at their new £20 notes, they will be able to see an engraving showing the division of labour in pin manufacturing with the words “ and the great increase in the quantity of work that results ”. i hope they will absorb the lesson that specialisation in production and trade across the world are the way to improve living standards in all countries – rich and poor alike. and perhaps when they return home they will press their own politicians to support the opening up of trade which has been at the heart of the british government ’ s efforts to reform the world economy. so you should be proud of your famous son who, despite being “ an absent - minded professor ” who led a “ quiet, uneventful life ”, influenced the way the whole world thinks about the route to economic prosperity. 20 let me conclude by returning to the words of jacob viner : “ in these days of contending schools, each of them with the deep, if momentary, conviction that it, and it alone, knows the one and only path to economic truth, how refreshing it is to return to the wealth of nations with its eclecticism, its good temper, its common sense, and its willingness to grant that those who saw things differently from itself were only partly wrong ”. 21 truly, adam smith was a man of the scottish enlightenment, and i am delighted that from next year his face will look out at us from our banknotes. references blinder, a and morgan, r ( 2000 ),'are two heads better than one? an experimental analysis of group vs individual decision making ', nber working paper no 7909, september. buchan, j ( 2006 ) adam smith and the pursuit of perfect liberty, london : profile books. coase, r ( 1991 ), ‘ the institutional structure of production ’, nobel lecture. hayek, f ( 1976 ) denationalization of money, london : institute of economic affairs. king, m ( 2002 ), ‘ the monetary policy committee : five years on ’, speech delivered to the society of business economists. king, m ( 2004 ), ‘ the institutions of monetary policy