Mervyn King: Monetary policy developments Speech by Mr Mervyn King, Governor of the Bank of England, at the Lord Mayor’s Banquet for Bankers and Merchants of the City of London, London, 20 June 2007. *  *  *  My Lord Mayor, Mr Chancellor, My Lords, Ministers, Aldermen, Mr Recorder, Sheriffs, Ladies and Gentlemen: Chancellor, this will be your last Mansion House Dinner with the Merchants and Bankers. And I want to start by warmly congratulating you on your record-breaking period in office, and on the imminent assumption of the leadership of your party and country. It has been a remarkable decade for the British economy. Your decision to grant independence to the Bank of England ten years ago is widely and rightly regarded as a fundamental improvement to the conduct of economic policy in this country, and we in the Bank are grateful to you for giving us the opportunity to demonstrate the benefits of an independent central bank. Your reform illustrates the key principle that institutions matter. Individuals, however talented, cannot consistently perform well if the institutional structure in which they operate is badly designed. For too long the UK economy lurched between success and failure rather in the way that the national cricket team has recently. Getting the institutions right was a crucial part of the 1997 reforms. Perhaps there is a lesson here for the ECB – the England and Wales Cricket Board.
There has been much, and in my view justified, criticism of their availability and condition. Over the past ten years, the value of Bank of England notes in circulation has doubled, from around £ billion to around £ billion. But none of that is accounted for by the £ note for which the value in circulation has remained constant for fifteen years at some £ billion. And the average lifetime of the note has doubled. As a result, many more notes are noticeably soiled and scruffy. ATMs account for over 60% of all cash obtained by the public. Few issue £ notes. It is more economical for banks to stock ATMs with £ and £ notes. The problem is not at the production end – we have an ample supply of new £ notes waiting to be used. We want to see them in circulation. There is a need for an adequate supply of low denomination notes that can be used for small transactions where cash is the predominant means of payment. Such mutual convenience is a public good, and may not correspond to the private interest of commercial banks. That is why we must not let this situation continue any longer. The public need £ notes. The solution may involve some alteration in the incentives for banks to obtain different denomination notes from the Bank of England, new arrangements to increase the availability of notes to retailers, and an improvement in the durability of the notes that we print.