Often in the past in this country we behaved as if we thought that promoting higher growth and employment – which I repeat is, of course, 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 at the expense of just a bit more inflation. But that was like trying to squeeze a quart out of a pint pot. And you all know the result: inflation accelerated, often accompanied by a worsening balance of payments, until it could only be brought back under control – as eventually it had to be brought back under control – by pushing up interest rates dramatically and forcing the economy into recession. We get uptight these days when interest rates rise by ¼%: it was only 14 years ago that we were driven to increase interest rates by 4% in the space of 17 days. I don’t need to remind you – or perhaps I do – of the really miserable social as well as economic consequences, as right across the economy people lost their jobs, their businesses and their homes. But even more insidiously, repeated experience of boom and bust produced a pervasive short-termism in business behaviour, which infected both industry and finance, and both employers and employees, however much we all like to blame everyone else.
The same may undoubtedly be said about the Central Bank. After all, useful and supportive as these institutions may be, they neither can nor should play a leading role. That role can only be performed by the financial companies themselves. Because they rely so heavily on open access to credit markets, it is crucial for them to enjoy the confidence of their creditors. In this respect like many others, credibility is a fragile thing and a very high price can be paid for losing it. Turbulence in global markets is sure to continue. Naturally people try to read the signs and foresee the most important parameters, in order to adapt to them in good time or respond sensibly. Important as it is to keep a close watch on developments and changes in global markets, what matters most of all is to be strong and well-positioned enough to withstand the most unexpected shocks. Global liquidity has been exceptionally abundant in recent years, and has been widely tapped on good terms. The benefits of resourcefulness and bold, quick action can be realised to the full in such circumstances. It is impossible to rule out that such a climate will persist for a long while, but this is by no means certain. And when a change does take place, it may be caused by unexpected circumstances and strike quickly. It is then that caution and prudence prove most effective.