mr. george discusses monetary policy, unemployment and economic growth in the united kingdom speech by the governor of the bank of england, mr. e. a. j. george, at the tuc congress in blackpool on 15 / 9 / 98. thank you, chairman. i ’ m actually very pleased to be here, and to have this opportunity to respond directly to some of the serious concerns that have been expressed recently by trade union leaders - among others - about monetary policy. let me start with what is perhaps your biggest concern. you think that the monetary policy committee, which i chair and which sets interest rates, is only interested in controlling inflation and takes little or no account of the effects of its decisions on real economic activity and jobs. some of you evidently think that ’ s because we ’ re a crowd of “ pointy - heads ” or “ inflation nutters ”, or even “ manufacturing hooligans ” - and i ’ m not sure these descriptions are intended as terms of endearment. more seriously some of you think that the problem lies with our remit from the government which is first, to maintain price stability - defined as an underlying inflation rate of 2½ %, and, subject to that, to support the economic policy of the government, including its objectives for growth and employment. whatever the reason, your concern is that we place too much emphasis on holding prices down and not enough on keeping growth and employment up. the implication is that you see a trade - off between inflation and the rate of economic growth, so that if only we ’ d let up a bit on controlling inflation then this country could enjoy higher activity and lower unemployment, which are the really good things in life - or at least we could avoid some of the worst damage that is currently being inflicted upon the whole of the agriculture, large parts of manufacturing industry and even some services sectors. and that might even be true for a time. the trouble is that, in anything other than the short term, it would be likely to mean more rather than less economic damage, and lower rather than higher growth and employment. often in the past in this country we behaved as if we thought that promoting higher growth and employment - which of course is what we all want to see - was largely a matter of pumping up demand. we paid too little attention to the structural, supply - side, constraints. all too often we tried to buy faster growth and higher employment even at the expense of a bit more inflation. in

effect we tried to squeeze a quart out of a pint pot. and you all know the result - rising inflation and a worsening balance of payments, which eventually could only be brought back under control by pushing up interest rates dramatically and forcing the economy into recession. i don ’ t need to remind you of the really miserable social as well as economic consequences - as right across the economy people lost their jobs, their businesses and their homes. more insidiously, repeated experience of boom and bust produced a pervasive short - termism in business behaviour which infected both industry and finance and - dare i say both employers and employees - however much we all like to blame everyone else. everyone was tempted to grab what they could while the going was good. but we have learned from that experience. we ’ ve learned that in anything other than the short term there really is no trade - off between growth and inflation. what we are trying to do now through monetary policy is to keep overall demand in the economy growing continuously broadly in line with the capacity of the economy - as a whole - to meet that demand. both the previous government and the present one set a low inflation target as the immediate objective of monetary policy, not as an end in itself, but in effect as a measure of our success in keeping demand in line with supply. so the real aim is to achieve stability across the economy as a whole in this much wider sense. now, there is not a lot, frankly, that we can do directly through monetary policy to affect the supply side - the underlying rate of growth that can be sustained without causing inflation to rise. that can be influenced by the whole raft of government policies, ranging from education and health to taxation and social security, and it depends ultimately on the ingenuity, the productivity, and the flexibility, of the economy. employers and employees, working together, clearly have a crucial role to play in this context, and i recognise the constructive and forward - looking role that many of you are now playing to improve the supply - side capacity of the economy. monetary policy operates on the demand side. and the best help that we can give is to keep overall demand consistently in line with that supply - side capacity - not letting it run above capacity but not letting it fall below capacity either - as reflected in consistently low inflation. that way we can moderate rather than aggravate the unavoidable ups and downs of the business cycle, enabling steadier growth, high