Alistair Darling is considering printing more money in an attempt to ease the credit crunch.

As interest rates appear certain to fall to an historic low today, the Chancellor and Mervyn King, the Governor of the Bank of England, are looking at expanding the money supply by billions and using the extra cash to buy assets ranging from government or commercial debt to private equities.

The Bank’s Monetary Policy Committee began its two-day meeting to decide interest rates yesterday as the grim toll of job losses and closures continued. Viyella, the fashion business, went into administration, putting at risk 450 jobs at stores around the country. Marks & Spencer confirmed that it was cutting 1,200 jobs and closing 27 stores. Another 1,000 jobs are under threat at Cattles, the finance firm, and Barclays cut 400 jobs from its IT departments.

Today base rates are expected to fall to their lowest level since the Bank of England was founded in 1694. The markets expect a drop of at least 0.5 points to 1.5 per cent or even lower.

The policy of increasing the money supply to relax monetary conditions is being looked at as a “sensible contingency plan”, a senior government source told The Times last night.

Officials disclosed that the plan, adopted several years ago in Japan to try to stave off deflation — when prices generally fall rather than rise — was being studied because interest rates close to zero could not be used as a normal tool of economic management. Other ways had to be found of making more credit available, they said, and some of the ideas under consideration had already been adopted in the United States.

Mr Darling suggested this week that if the policy were adopted it would be done with the Treasury and Bank of England working “hand in hand, because the two responsibilities just become so close you would have to operate together”.

Officials denied that there was tension with the Bank over the issue, even though its independence to set monetary policy would be reduced once interest rates were so low. They said that, with the risk involved in purchasing debt and assets, the Government clearly had to be closely involved and the Bank accepted that.

Vince Cable, the Liberal Democrat economic spokesman, said that printing more money could cause inflation. “But if we get into the dire straits of deflation then governments have no choice but to take drastic measures. These are policies for truly knife-edge situations.”

George Osborne, the Shadow Chancellor, said: “The very fact that the Treasury is speculating about printing money shows that Gordon Brown has led Britain to the brink of bankruptcy.

“Printing money is the last resort of desperate governments when all other policies have failed. It can’t be ruled out as a last resort but risks losing control of inflation and all the economic problems that high inflation brings. And to float the idea carelessly is irresponsible in the extreme as it risks losing the confidence of international markets.”

Mr Darling also warned that Britain was “far from through” the recession, signalling that he may abandon his forecast that the recovery would start in the second half of this year.

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