risked overheating, particularly in the labour market, where reports of shortages not just of skilled but even of unskilled workers, were becoming widespread. the situation was seriously complicated by an increasing imbalance between the domestic and the internationally exposed sectors of the economy. domestic demand for goods, and particularly for services, was unsustainably strong, and large parts of the economy were doing very well on the back of that - though they didn ’ t make too much of a song and dance about it. but other sectors, those most exposed to international competition - most of agriculture, large parts of manufacturing and some service sectors - were already then having a much more difficult time. understandably, they were more vociferous. they had been hit, initially, by the exaggerated strength of sterling against the major european currencies in the run up to decisions about the euro. and they were hit, subsequently, by the successive waves of turmoil spreading through the world economy which saw exchange rates fall and demand dry up in asia and elsewhere. so, faced with this dilemma, what were we to do? it is true that the external factors - unhelpful as they were in a more fundamental sense, in terms of the imbalance in the economy - did act as a restraining influence on overall aggregate demand and on inflation, and that meant we had somewhat more time than we would otherwise have had to moderate the growth of domestic demand. but even allowing for that we in fact had no choice but to tighten policy. it wasn ’ t that we didn ’ t know that the internationally - exposed sectors were under the hammer we ’ d have had to be blind as well as deaf not to have known. our problem was that if we had held back more than we did, in order to shelter the exposed sectors, we would have put the whole economy - including the sectors we were trying to protect - at risk of accelerating inflation. and that would have meant eventually having to tighten policy more abruptly, which would much more certainly have plunged the economy into serious recession, a bit further down the road. the harsh reality is that monetary policy can only target the economy as a whole - it cannot realistically seek to shelter particular businesses or particular sectors or particular regions, however much we might all wish it were otherwise. and, in relation to the economy as a whole, the effective choice in the situation we faced was not whether or not to tighten, but whether to tighten sooner, and by less, or

enable markets to function more effectively. but even then there are questions of degree. and other forms of intervention may be more likely to reduce the wealth - creating capacity of the private sector by, for example, blunting incentives either to provide or to take up employment. that is not, of course, to say that they are in any sense necessarily wrong, merely to point out that here again choices to be made, the difficulty often being to know where to strike the balance between conflicting objectives. the question of relieving poverty needs to be addressed within this framework. our social conscience may say that we should lean more towards redistribution in favour of the poorer sectors of our community generally, or in favour of those who are particularly disadvantaged in one way or another and goodness knows there are endless causes that in themselves are worthy of our collective support. but it is important to recognise that in doing so, we could reduce the wealth and income generating capacity of the economy as a whole, and so reduce our ability to provide rising living standards to all sectors of society, including rising absolute living standards of the poorer sectors we were seeking to help. in other words, in trying to divide up the cake more equally we could, if we are not careful, end up reducing its overall size. the trick it seems to me is to find ways of having our cake and eating it which some forms of government intervention can, as i say, achieve. but that ’ s a great deal easier said than done. i only thank my lucky stars that i am not a politician! where then do the financial institutions of the city fit in to all of this? well, money changers have never been exactly popular. that is partly because of a perception that while the rest of the community earn their living making things, bankers simply make money - and what ’ s more they make money by using “ our ” money. but it is partly because of a perception that people who work in the financial services industry are pretty heartless people anyway. in fact financial intermediation is a critically important component of a market economy. behind the popular - or perhaps unpopular - image of erratic and speculative, short - term, financial market trading, which is in fact an important element in the process of price discovery - the essential role of financial intermediation is to gather together our collective financial resources - our savings if you like - and to direct their investment into those activities in which they can be most productivity employed. that underlying activity - based upon expert