Anyone who believed the government’s spin that the Bank of England was independent needs to think again after the events of the last week. We saw the Bank set out a clear policy of keeping 3 month interest rates higher than its own Minimum Lending Rate, keeping the markets short of cash, and saying that any commercial bank that has made mistakes would have to bear its own losses.

We have now heard the Chancellor carry out an astonishing U turn, moving from this position to saying that all deposits in UK banks have some kind of government guarantee. At the same time,the Bank of England started to loosen conditions in money markets to make it easier for financial institutions. The Chancellor has taken control of the situation and has been making the important statements in the last few days.

I have gone hoarse trying to explain to people that Gordon Brown never made the Bank independent. On the contrary, in 1997 he took regulation of individual banks away from the Central Bank and gave it to FSA, and took managing the public debt away and gave it to the Debt Management Office under the Treasury. He also intervened with the Bank’s actions in foreign exchange markets, requiring them to sell substantial gold holdings at low prices.

His stated claim to fame that he made the Monetary Policy Committee more independent, and responsible for setting interest rates wasn’t the whole story either. He decided before the 2005 election to change the target he set them for inflation, which had the effect of keeping interest rates lower for longer, leading to a bigger build up of debt.

The truth is that in a democracy a Central Bank can only remain independent? for as long as the government think it is doing a good job. As soon as they disagree with it, or as soon as they want to achieve some new objective that the Bank hasn’t been asked to achieve or is failing to meet, the government overrules them. We saw this in Germany, which had a long period of an independent? Central Bank in the post war period. The politicians overruled it twice towards the end, once to effect a monetary union with east Germany on terms that made no banking sense, and once to order it to abolish the very currency it had been set up to uphold! The government won again!

I just hope that now the government has taken a lead on monetary issues, they will understand that they must ease conditions in money markets if they want to avoid a continuation of a very nasty credit crunch. Inflation was yesterday’s problem, created by easy money a couple of years ago. Today’s problem is a lack of money for all sorts of purposes. This government has lurched from boom to bust in its approach to allowing people and companies to borrow. They need to steady the ship.

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