In September 1976 the Labour government, headed by James Callaghan, approached the IMF for a $3.9bn loan. Among the conditions insisted upon by the IMF were that the Bank of England move to control the growth in the money supply. In May 1979 Margaret Thatcher became prime minister promising to end the inflation that had plagued the country for nearly a decade, by imposing heavy restrictions on the growth of the money supply.

Over the next five years, monetarist policies succeeded in plunging the British economy into the deepest recession it had seen since the great depression. Large sections of British industry disappeared overnight and unemployment soared. Inflation began to subside, not because the money supply stopped growing – it didn't – but rather because wage growth was contained through high rates of unemployment and the demolition of trade unions.

Fast forward to March 2014, and the Bank of England has begun to bury its monetarist legacy. In a quarterly report released last week, the Bank admitted it had no ability to control the money supply. Rather, it sets the rate of interest, and increases or decreases the supply of money in response to the demand by the government and the general public. It is spending and investment decisions that drive the level of money in the economy.

A revolution in how we understand economic policy is now visible – but the question remains as to whether the Bank will seize the moment. Monetarism, you see, has two components. The first is that the central bank should try to control the money supply. In light of the Bank's report that part of the monetarist doctrine is now a dinosaur fit only to be displayed in the museum of failed economic ideas.

The second component, however, is alive and well. That is the idea that the central bank should use unemployment to control inflation. Although the central banks of the world rarely say it in public, since the monetarist era they have used interest rate hikes to generate recessions and increase unemployment any time they fear an uptick in inflation. The environment of wage suppression that this tactic has engendered is one of the primary reasons that households have had to borrow so much money in recent times. Indeed, this second component of monetarism is one of the primary culprits behind the economic crisis that we have been living through for the past five years.

The Bank's report continues to insist that it should use the interest rate to manage the level of economic activity. This is despite the fact that even the extraordinarily low interest rates of the past five years have failed to produce a sustained recovery. But its recent admission has pointed to a very different conception of what a central bank should do: namely, that the central bank's primary goal is to provide funding for the government.

Indeed, this is precisely why the Bank of England was set up 1690. William III needed a powerful navy to defeat the French and so he incorporated the Bank. This conception of what a central bank should be implies that it is the government, not the central bank, that is responsible for managing the level of economic activity. It does this through its spending and taxation policies. In an upturn it raises taxes to dampen inflation, and in a downturn it increases spending to generate economic activity.

The central bank, in such a view, takes a back seat. It merely provides the funds for the government at a set rate of interest and provides ministers with neutral advice on what they should be doing. In this view, unemployment is not to be seen as desirable at all. In a period of inflation the government sucks money out of the system by taxing it away – and if wages and prices continue to rise the government imposes a tax on companies and workers that are not complying.

Obviously the current government is not competent enough to spearhead this revolution, so tied are they to their archaic economic theories and failed policies. But innovative economists at the Bank of England are showing that they could be the ones to lead the way. Last week they put a final nail in monetarism's coffin. If they want to finish the job they might unseal the lid and drive a stake through its heart lest it arise from the dead.