Bigger Booms and Bigger Busts

One theory of Britain’s decline called the City Hegemony Thesis argues the City’s vast influence over the government prevented the UK from making effective economic policies. One hypothesis of why power was accumulated in the City—the UK’s financial services industry—is that the government relied on the financial sector to prop up Sterling since other countries held more in Sterling than the Bank of England could ever pay (a remnant of the British Empire). To prop up Sterling, the City needed to keep a high interest rate, thus harming industry at home.

One enabling factor for the City’s influence was organization of the UK government. As a part of the Westminster model, monetary and fiscal policy was determined by the Chancellor of the Exchequer. Much like fiscal policy is used in the US, this structure has led politicians to use monetary policy to give themselves a boost before an election. (Harold Macmillan set the precedent in 1959 when he used inflationary monetary policy to achieve a 21% swing in public opinion)

In 1997, then Chancellor of the Exchequer Gordon Brown took action against this trend by granting the Bank of England’s Monetary Policy Committee the power to set interest rates with little oversight. He declared, “For 40 years our economy has an unenviable history, under governments of both parties, of boom and bust…ten years ago and for decades before, Britain’s stop go economy was also held back by chronic underinvestment.” This phrase—the end of boom and bust—became Gordon Brown’s rallying call (one that will surely hurt him in the next election). The following is from a conservative blog:


Until recently, the “end of boom and bust” idea bought Brown enormous political capital. It was seen by many as a success because interest rates went down without increasing inflation.


Now, the idea seems ludicrous. Low rates, incredibly “light touch” regulation, and a giant financial sector can never mean the end of booms and busts, only bigger booms and bigger busts.