At times of crisis the assumptions that underpin political debate can change rapidly. For over a decade Bank of England independence was hailed as the greatest, perhaps only, achievement of Gordon Brown’s Chancellorship. Politicians of all parties sought to learn the lessons of this success and transfer the model of decision making by independent ‘experts’ to other areas of public policy, even beyond the sphere of economic policy. Now that the relationship between the Government, the Bank and the financial system has come under intense strain we are now beginning to see this supposed triumph in a new light.

In truth, Gordon Brown didn’t make the Bank of England fully independent in 1997. In some important respects he nationalised it for a second time, finishing the job Hugh Dalton begun in 1946. Then the Bank of England Act nationalised an institution which depended for its authority on its prior relationship with the City. As John Fforde outlines in his excellent history of the Bank of England, the Bank’s authority continued to rely on informal relationships for enforcement. While the Act increased the formal power of the Bank in the field of credit policy it reduced the self-regulatory authority that made credit policy effective in practice.

Brown’s reforms ended the system of self-regulation that had already been weakened by nationalisation. As Howard Flight outlines in a new CPS report, Brown stripped the Bank of its role in banking supervision and market regulation and gave it to the FSA, creating a tripartite regulatory structure which failed to avert the biggest banking crisis in 80 years. The bank was left with the power to set interest rates, but within strict criteria set by the Government. These changes have reversed the relationship that existed before 1997. Officials must now take responsibility for monetary policy decisions while it is the elected politicians who can work behind the scenes, applying pressure, and taking the credit when the outcome is favourable.

In truth, Bank of England independence was not successful because it was a great idea per se, but because so many people thought it was. It inspired confidence in the financial system at a time when people had lost faith in the ability of politicians to set interest rates. One of Keynes’ greatest insights was his understanding of the importance of what he termed ‘animal spirits’ in the economy. Once, the de-politicisation of economic policy inspired confidence, now if anything, the opposite is true. At a time when people are again turning to politicians for the answers they must also take responsibility for their actions.