, the lowest for a generation, and never deviated more than one percentage point from that average. unemployment fell from almost 10 % to around 3 % on the claimant count, its lowest level for almost three decades, and has now been virtually unchanged for twenty months, by far its longest period of stability. the terms of trade moved in britain ’ s favour, raising our national standard of living. and output has risen in every single quarter since the middle of 1992, something that is true of no other g7 economy. why were the 1990s so successful? and can that success continue? four features of our economy lie behind this improved performance. first, the new monetary framework - based on an explicit target for inflation, a high degree of transparency, and, since 1997, independence of the bank of england made it clear to everyone that monetary policy was, and would continue to be, targeted on maintaining low and stable inflation. second, a substantial fiscal consolidation turned a deficit of 8 % of gdp in 1993 into a sustainable position for the public finances based on a set of clear rules for government debt. third, a continuing programme of supply - side reforms, over a period of 20 years, made it possible to reduce unemployment without generating higher inflation. fourth, although the unexpected twists and turns of the world economy did pose real challenges to monetary policy, especially in the latter half of the decade, those shocks tended to average out over time rather than cumulate in either an upward or downward spiral. in other words, the economic surprises alternated between good one year and bad the next, rather than adding up to “ one damn thing after another ”. in that sense, lady luck smiled on us. of course, we were not alone in enjoying the 1990s. in the united states growth was so rapid that at least two authors wrote books entitled “ the roaring nineties ” and another chose the title “ the fabulous decade ”. in contrast, continental europe experienced slow growth and heart - searching over structural reforms. as with much else, our economic performance lay somewhere between the excited exuberance of the united states and the relative disappointment of continental europe. so the uk experienced a non - inflationary consistently expansionary - or “ nice ” - decade ; a decade in which growth was a little above trend, unemployment fell steadily, and, supported by the improved terms of trade, real take - home pay rose without adding to employers ’ costs, thus allowing consumption to grow at above trend rates without putting upward pressure on

from rates of around 15 % in surveys conducted in 1994 - but still well above the cost of financial capital. if uncertainty about inflation creates an option value to waiting, then it will reduce investment. and there is growing empirical evidence that inflation is a key explanatory variable for cross - country differences in investment to output ratios. ( ii ) redistribution of wealth between debtors and creditors. unexpected changes in the price level - the standard of value used to define contracts - produce arbitrary redistributions of wealth. as keynes wrote in his powerful advocacy of price stability in a tract on monetary reform, “ we leave saving to the private investor. we leave the responsibility for setting production to the business man. these arrangements have great advantages. but they cannot work properly if the money, which they assume as a stable measuring - rod, is undependable. unemployment, the precarious life of the worker, the disappointment of expectation, the sudden loss of savings, the profiteer - all proceed, in large measure, from the instability of the standard of value ”. or, as lenin remarked, the best way to destroy capitalism is to debauch the currency. it is arguable as to whether it is high inflation or serious deflation which results in the greater economic damage. in europe in the 1920s hyperinflation undermined economic and social arrangements, as it has done more recently in latin america. but deflation has proved just as unpopular as inflation. in 274 a. d. the roman emperor aurelian tried to restore the integrity of the coinage which had been adulterated by workmen in the mint. aurelian exchanged good money for bad, and ordered the destruction of accounts drawn up in the devalued currency. in the long run the operation restored the value of money. but in the short run it caused hardship. gibbon, in his decline and fall of the roman empire, observed that “ a temporary grievance of such a nature can scarcely excite and support a serious civil war ”. unfortunately, taking a different and more keynesian view that in the long run we are all dead, the population at the time rose in insurrection. many of them found that they were dead in the short run as well, with seven thousand soldiers and countless civilians perishing during the suppression of the uprising. so let us consider the costs of wealth redistributions arising from unanticipated deflation. such redistributions can lower aggregate demand. why? since