Every ten years or so, any capitalist democracy can expect to have its economic system and governing institutions severely tested. For Britain, the last such occasion was Black Wednesday, 15 years ago, and before then the Winter of Discontent in 1979 and the sterling devaluation of 1967.

In each of those episodes the test result was comprehensive failure leading to political and economic upheaval. It may be hard to believe that the near-collapse of Northern Rock was an event of comparable importance but that is only because, for the first time in two generations, our country’s economic and political institutions survived a severe test.

As things have turned out, this week’s events will merit no more than a footnote in tomorrow’s history books. But if Monday’s rescue had failed and millions of depositors had lost tens of billions in savings, Black Wednesday would have become just a brief introductory chapter to the learned monographs of the future on the long-term consequences of Northern Rock.

To say that this was the first time in 50 years that Britain’s institutions have survived a threat of such epic proportions is not to suggest that everyone has emerged with flying colours from this affair. However, you should disregard sensationalist headlines about collapsing consumer confidence, recriminations in Whitehall and heads rolling at the Bank of England. The reality is that all the most important actors in this drama have ended up with their positions solidified, if not with their reputations enhanced.

Let me begin with the most important actors of all – the millions of British homeowners, savers and consumers, whose economic future was briefly balanced on a knife-edge this weekend. Far from behaving over-emotionally, in a sort of economic re-enactment of the Princess Diana outburst, they merely took a rational economic analysis to its logical conclusion. But once the Government offered its unambiguous guarantee, the stampede to withdraw deposits ended. The British public’s surprisingly clear intuitive grasp of finance is reassuring in terms of the broader consequences of this affair.

Even before Northern Rock, the outlook for the British economy had deteriorated because the global financial turmoil that began in August. This was bound to shut down for a while the gusher of wealth from the City of London that fuels the British economy. A domestic bank run – with the consequent collapse of mortgage and consumer lending, even by the strongest banks – would have transformed growth slowdown into a disastrous recession.

Such a breakdown in the supply of credit has been averted, but the risk still remains that the demand for credit – the willingness of consumers and homeowners to keep borrowing – could be seriously reduced by the slowdown and the weakening of the property market that almost certainly now lies ahead. Luckily, the rational behaviour of British savers through the Northern Rock episode makes such a collapse of borrowing, and therefore consumer spending, less likely than it seemed a few days ago.

Despite all the vituperation in the media about the “madness” of a company such as Northern Rock aggressively increasing its mortgage lending, the British public seem to understand that there is nothing imprudent about mortgage lending. They also seem to understand that the housing market, while it may well fall slightly in the next year or two, is not going to collapse to a point where it endangers big financial institutions or seriously disrupts the national lifestyle – a lifestyle that is not “addicted to borrowing”, but simply takes advantage of the universal availability of new financial mechanisms.

When finance is viewed as an innovative, dynamic service industry, rather than a mysterious offshoot of psychiatry, then the levels of borrowing today in the British economy are no more evidence of “addiction” than the unprecedented levels of computer ownership. Until the Tories and the Liberal Democrats begin to understand this, they will remain disqualified from any serious role in modern British life – and that was the message that voters sent in the polls, which showed confidence in the Tories sharply falling this week.

So much for the big picture; but what about the institutional implications of these events? Surely the Bank of England’s reputation has been tainted, while our system of financial regulation, with its dizzying whirl of directives between the Bank, the Treasury and the Financial Services Authority, has been exposed as a Feydeau farce?

Some parts of the system will need to be reformed – and quickly. Britain needs a modern system of deposit insurance comparable to those in America and most of Europe. The nonsense of offering only 90 per cent insurance to deposits up to £35,000, with a repayment period stretching into months, must be replaced with a guarantee of instant repayment in full, with the limit raised to at least £100,000. This is a reform that the Bank of England has long demanded, because it understands that nothing less than a cast-iron full guarantee will work in a genuine crisis, as was demonstrated this week. The only serious opposition to such as scheme has come from the big clearing banks, which are known to be “too big to fail” and therefore benefit from the present half-baked arrangements. Now their self-interested lobbying will surely be overcome.

The urgent need for this reform was at the heart of the arcane argument between the Bank and the Treasury about what type of guarantee should be provided to Northern Rock and by whom.

The Bank anticipated that the line of credit announced on Friday might be insufficient to restore confidence and pressed from the start for a private commitment from the Treasury to offer its 100 per cent guarantee as a backstop, only to be announced if the first line of defence failed to work. The Treasury, naturally reluctant to sign blank cheques, argued the opposite: that the Bank should offer an implicit guarantee, in the form of its line of credit, not just to Northern Rock, but to any potential bidder for its business, such as Lloyds TSB.

The Bank refused to do this because it believed, probably correctly, that a forced takeover of a publicly quoted bank, never before attempted in Britain, would take weeks to consummate and could be resisted by lawsuits from dissident shareholders in either bank. During the period of uncertainty Northern Rock depositors would remain in limbo, knowing their savings were in danger and unable to rely on the takeover going ahead. Their most rational course would be to withdraw their deposits, making the takeover harder to complete.

In the worst case, a legally messy takeover without the all-important Treasury guarantee could even have set off the ultimate catastrophe – a run not only on Northern Rock but also on Britain’s biggest retail bank.

Why did other participants in the rescue talks resist this seemingly logical argument until Monday evening? Why do some still apparently believe that a takeover of Northern Rock could have gone ahead without the backstop of a 100 per cent Treasury guarantee? Furthermore, should there be some streamlining of institutional arrangements for future crises? And why did the Bank of England suddenly change its mechanism for dealing with the money market?

Luckily, these are second-order questions that can now be consigned to dull committees. They will be of little interest to historians of the future because this week Britain’s institutions were severely tested – and for once they passed.

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