An independent Bank of England was seen as an alternative to entering the Exchange Rate Mechanism as an anti-inflation anchor almost a decade before Gordon Brown freed Threadneedle Street to set interest rates, according to Treasury documents released last night.
Papers published under the Freedom of Information Act showed that the Treasury considered independence for the Bank four times between 1988 and 1993 - under two separate Tory chancellors and before, during and after Britain's two-year membership of the ERM.
One of the papers, written in March 1991, six months after Britain joined the ERM, said an independent Bank would be needed if the UK joined monetary union but speculated that the same would apply if the mechanism foundered.
"Why not practise for the eventual demise of the ERM ... and recognise the need for a rigorous domestic monetary policymaking body, by setting up an independent Bank of England now?" the paper said.
The Treasury papers show that the advice was not taken, just as it had not been under Nigel Lawson in the autumn of 1988, and 18 months later, on Black Wednesday in September 1992 the pound left the ERM. Mr Brown granted the Bank independence five days after Labour's election victory in May 1997.
The paper prepared for Mr (now Lord) Lawson in 1988 used many of the arguments deployed by Labour nine years later. The aim, it said, would be take "anti-inflationary policies outside the realm of party politics and to give a degree of insurance against inflationary policies being pursued by future governments. Less ambitiously, the aim would be to reinforce the market credibility of anti-inflationary policies".
It added that such a move would have involved "transferring elsewhere a considerable element of the prime minister's and the chancellor's power base", a decisive factor in Margaret Thatcher's decision to reject Bank independence and to be wary of the ERM. The Bank's reputation was not especially high at the time, the paper said, and with inflation rising during the boom of 1988, there was a risk that the move "could be taken as a confession of failure".
The paper said that one of the objections to ERM entry would not apply to Bank independence. "There is no question of foreigners determining our economic policies."
