When monetary policy fails people lose their homes and their savings. And we don’t have to travel back very far in British history for a lesson in what can happen when the people who set interest rates get it wrong.
In 1986 the Thatcher Government looked like it had presided over a British economic miracle. The sick man of Europe had become its enterprising centre. Inflation had been brought under control and employment was increasing. But, with the hard work done, the Chancellor, Nigel Lawson, embarked upon a controversial monetary experiment. He manipulated the money supply to try and keep the pound at an exchange rate of three deutschmarks. The results were disastrous.
Between 1986 and 1988 interest rates were allowed to drift too low. There was an unsustainable credit fuelled boom — the Lawson Boom. When it burst, as inevitably it did, the result was the most severe recession since the end of the Second World War, crippling interest rates that destroyed the finances of many families and a sharp rise in both unemployment and welfare spending. Much of the good work of the Thatcher decade was undone and all because the authority responsible for controlling inflation had focused on the wrong goal.