New Labour is copying the economic policies of right wing 1980's US President Ronald Reagan. Giving control over interest rates to the Bank of England encourages high rates. But New Labour's sloppy attempts at encouraging demand will lead the bank to increase interest rates.
The Labour government is wrong to give up control of fiscal policy. Even in today's global economy, namonal governments have a significant room for manoeuvre. The former Chancellor, Kenneth Clarke, kept interest rates lower than the bank of England wanted.
Under capitalism lower interest rates help people to spend and invest. Higher interest rates encourage saving and gambling on currencies and shares. They put up housing costs and slow down the The Bank Of England is even less likely to keep interest rates down than the Tories. Physically and politically, the bank is part of the speculative casino economy of the City of London. Economically it is cautious even by capitalist standards. That's why there has been a real questioning of labour's granting of bank independence by Clarke and many economists.
New Labour is adapting the economic policy known as monetarism. Monetarism grew up in the late 1960s and 1970s when prices inflated rapidly.
The economic recession that started then cut down the profits of capitalists. In response, bosses put up their prices in order to defend their profits. Price rises led to higher wage claims and to more militant trade unions. The bosses needed a way forward.
Monetarist Monetarism was their answer. Monetarists argued that inflation was caused by too much money chasing too few goods.
Bringing down the supply of money would reduce inflation and stabilise the economy. There are two ways to do that: to reduce the amount of money in existence, and to take money out of circulation by using high interest rates to discourage inflation, imports, spending and investment. They led to The 1945 Labour government nationalised the Bank of England From 1964 onwards Harold Wilson's government, which had denounced the "Gnomes of Zurich", bowed to the British and international bankers, scrapped his election promises and devalued the pound. In 1976 Labour Chancellor Denis Healey caved in to the International Monetary Fund and imposed swingeing cuts on public spending.
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