Monetary genius? I beg to differ

Amid the growing mutterings over his suitability to be prime minister, Gordon Brown has managed to preserve his reputation in at least one quarter. It has become received wisdom that the Chancellor played a blinder on his first day in the job in 1997 by making the Bank of England independent, giving us perpetually low interest rates and bringing an end to boom and bust. Indeed, this is one Labour ‘success’ that David Cameron has promised to leave intact.

It is not hard to see why Gordon Brown has managed to portray himself as the genius who brought low, stable interest rates to Britain. To anyone over 40, the Brown years must seem a golden age of stable money. For 160 out of the 285 months between the end of the Barber boom in August 1973 and 1 May 1997, the Bank of England’s minimum lending rate stood above 10 per cent. Since May 1997 it has never been higher than 7.5 per cent. To attribute this to Gordon Brown and his decision to cede rate-setting powers to the Bank is not merely disingenuous, however; it masks the reality — that the manner in which interest rate decisions are now made actually threatens to bring an end to the era of stable money.

UK interest rates would have remained low over the past decade with or without Gordon Brown; the entire developed world has enjoyed a period of low inflation and low rates. For most of the past 40 years UK interest rates have largely followed an international pattern: US rates, which spent 38 consecutive months above 10 per cent in the early 1980s, have never been higher than 6 per cent since 1997. The only real aberration, when our rates were much higher than those elsewhere, was during the failed three-year ERM experiment between 1990 and 1992, when sterling was kept at an artificially high rate by means of high interest rates — in the middle of a recession.