In reaction to Labour's fourth successive election defeat, Gordon Brown recognised more than ever the need to change the Party's image - to publicly disavow old-style socialism and centralised bureaucracy - even though in private his emotional commitment to social justice still ran deep… a lifetime deep in fact.

He regarded John Smith, the new Labour leader, as too traditional, too entrenched, to make sufficient changes and win over the electorate. And yet in the two years that followed, it was Gordon Brown himself who was to face political crisis and struggle, as his credibility both in the party and in the country was put to the test. It began in the autumn of 1992 because of his dogmatic position on the Exchange Rate Mechanism.

The ERM fiasco was primarily an embarrassment for the Conservative government. By locking sterling into a fixed valuation against other currencies, an overvalued pound was dragging the economy down, with little room for manoeuvre. But because Gordon Brown had resisted the calls of many colleagues, and particularly the Labour left, to oppose the ERM, when it all collapsed for Britain, he was left facing huge embarrassment himself and accusations of economic incompetence. Worse still, as the crisis deepened, Brown was intractable, insistent that he was right, and unwilling to embrace any option except 'sticking it out'. As the crisis reached its calamitous peak, he became the focus of some serious criticism within his own party. Then on 16th September 1992, everything collapsed, the Government had to pull the pound out of the mechanism, and both they and Brown were left looking like fools. It was a critical mistake, a fundamental error, which threatened his whole political standing.

Using all his experience and media skills, Gordon Brown fought his way out of his corner. His get-out tactic was to use key phrases to attack the government, avoiding in-depth questioning of his own discredited position. These sound-bites he repeated like mantras, and the public mood did indeed focus its anger on the government, so that Labour was let largely off the hook. However, his own party, and particularly the Labour left, were disgruntled and disenchanted with their own shadow chancellor. It was a moment of serious vulnerability for the one-time 'golden boy' and 'rising star' of the Labour Party, and damaged any sense of invincibility, in his pursuit of the Labour leadership. His position had been weakened. Blair's continued to strengthen as a potential modernising leader.

The Labour Party conference that followed shortly afterwards was uncomfortable for him. He faced a critical reception from some sections of the Party. In response, he attempted to manoeuvre by putting his own spin on the debacle: he argued that his position had in fact distanced the Labour Party from its historical reputation as the party of devaluation. Any blame for the devaluation that actually followed would rest with the Conservatives. The fact that he had espoused the same failed policy as the Conservatives was selectively overlooked. Instead, he blamed the Tories, he blamed the currency speculators, he went on the attack - and it was true that Labour was largely overlooked by a public baying for the Government's blood - and he was able to salvage enough of his reputation to retain top place in the vote for the shadow cabinet.

Then he embarked on a detailed review of Labour Party policy, resolved to face up to the continuing need for modernisation, at least for electoral purposes. For public consumption, he wanted the party to avoid any reference to tax increases in the lead up to future elections. Labour's high-spending image had to be cast off, along with its reputation for subsidising lame-duck industries and being too soft on trade unions.

Inevitably he faced yet more criticism from the failed left-wing of the party, who portrayed him as a traitor to socialism. He continued trying to shore up his own powerbase, adjusting his speeches to satisfy different audiences. Meanwhile, with Peter Mandelson and Tony Blair, he started to work with renewed vigour on the concept of a new Labour Party that could break free from its failed past. He brought in new key staff to streamline his operations and help build policy: people like Sue Nye and Ed Balls. Balls in particular, along with Yvette Cooper, played a huge part in the challenge of developing economic policies that would prove that Labour was a party that could be entrusted with running the country.

This quest was furthered when Gordon Brown, Tony Blair and Ed Balls travelled to the United States in January 1993, to find out for themselves how Bill Clinton had wooed the middle classes of America and won the presidency. The Democrats had proposed a middle way that combined concern for the community with opportunities for the individual - but the key factor of their success had been the marketing of their ideas. For the emerging new Labour project, the key was for Labour to re-position itself as a party of low taxation and fiscal prudence. In addition, Labour would place an emphasis on skills and releasing people's potential. With almost evangelistic zeal, Gordon Brown embarked on a media blitz.

However, he failed to carry his leader along with his new message. John Smith was highly cautious, sceptical in particular of Mandelson, and resistant to the concept of lower taxation. He felt that the modernisers were pushing their agendas too hard and too fast. Gordon Brown for his part felt in private that John Smith was locked into the failed policies of the past and suffered from complacency. "The Tories are destroying themselves," Smith had said. "Labour can sleep-walk to victory." In fact, Smith had been an unwitting architect of Labour's demise at the previous general election and Brown knew it.

In his struggle to move Labour policy on, on the economic front, Gordon Brown was antagonising some of his colleagues. He could come across as dour and unsmiling and, in his determination to win arguments, he sometimes alienated people with his terse intensity and driven political ambition.

In contrast, Blair had a much easier remit as shadow home secretary, and came across to colleagues and the media as more communicative and genial. The media indeed was beginning to consider Blair more seriously as a future Labour leader, with the Evening Standard in March 1993 already suggesting that Blair was more likely to succeed than Brown.

But in fact the first half of 1993 did not go well for either man. John Smith was not ready to keep pace with them and Labour's left felt that the modernisers were being sidelined. Gordon Brown's instincts initially tempted him to renege on part of the modernising project to regain support in the party. But towards the end of July he counter-attacked with a powerful speech that re-asserted the modernisers' project, stating that Labour was not against wealth. In a pamphlet in August entitled 'The New Economic Agenda', he committed Labour to cutting taxes if elected. "From now on, Labour believes in creating the necessary wealth to fund the social benefits we demand," he wrote.

He was finally breaking into the open with his new politics, and he faced real personal hostility from union leaders and MPs on the left of the party. The battle for the future of Labour was intensifying. Things got worse at the National Executive meeting on 26th September. He came under serious attack and felt dismay and frustration. In the shadow cabinet elections that followed, he fell from top to fourth place, with Blair in sixth, while his rival Robin Cook moved up to first position.

Late in 1993, he hired Charlie Whelan to be his press spokesman. It was to be the start of a powerful political combination. Whelan had some of the flair and street confidence that Brown lacked, and along with Ed Balls and Sue Nye was now part of a formidable team.

The years 1992 and 1993 had been years of crisis and difficulty for Gordon Brown's political career. This crisis continued into 1994. The bruising struggle that he had fought within his party for a more acceptable economic policy had cost him popularity. While Blair was recognised as more detached from the left, it was Brown who seemed at times surly and beleaguered. Blair, in contrast, seemed to be more genial, seemed to travel more lightly, and gradually it was Blair, not Brown, who was emerging as the most likely person to lead Labour in a new direction. If there was to be an alternative to Smith's caution and traditionalism, and a break with the past, it was Blair who was becoming the front-runner… and ironically, this was something that John Smith himself recognised (though he preferred Brown to Blair). And then the unthinkable… John Smith died.

On 12th May 1994, the Labour leader had suffered another heart attack, and had not survived. Whatever their political differences, this was sad and shocking news for Gordon Brown. But while genuinely grief-struck and dismayed, his political instincts kicked into action. Brown was in London at the time, but phoned Tony Blair who was in Aberdeen, and Blair agreed to fly south for a meeting in the evening. For the modernisers, the future of Labour was now at stake. Meanwhile Peter Mandelson paid a visit to check out Brown's intentions about the leadership, but was almost certainly briefing the press on behalf of Blair. By the afternoon, political analysts were already suggesting that Tony Blair was the most likely leader, and the Evening Standard came out strongly in his support.

Gordon Brown convened a team meeting at 6 that evening, and the feedback he received was not good. Colleagues informed him that Peter Mandelson had been backing Blair strongly, and this was probably true. Mandelson had come to the conclusion that Brown was too linked to old Labour and the provinces and lacked Blair's personal appeal and amenable style. He had concluded that Blair was more likely to attract floating voters, was more distinctively different from Labour's past. When Blair arrived back in London he was briefed first by Mandelson, who must have conveyed to him that the tide of support was flowing in his direction.

Later that evening Gordon Brown met Tony Blair in Islington. They agreed that as modernisers they would not compete against one another. Meanwhile on television, it was Blair who was being named as likely successor. The next morning the newspapers made discouraging reading for Gordon Brown, and by the weekend opinion polls were showing Tony Blair ahead both among Labour voters and the nation at large. After John Smith's funeral, the two of them met in Edinburgh and - knowing that a bandwagon was rolling in his favour - Blair made it clear that he was standing for election as leader.

Brown's support was ebbing away. In contrast, Tony Blair's preparation had been more organised, more ruthless and - pivotally - he had the backing of Mandelson and the press. Blair came across as less provincial, more telegenic, a family man who would appeal to Middle England, particularly in the south. Brown seemed less in touch with these English voters and, not married, had to endure false rumours about his sexuality. A BBC poll of labour members on 29th May showed Blair had 47% support, while Brown had only 11%. Even John Prescott had more than that.

Two and a half weeks after John Smith's death, Gordon Brown knew that his leadership bid was dead. So on 31st May he met Tony Blair at the Granita Restaurant in Islington to negotiate terms of surrender. He knew that Blair would deal, to avoid the risk of a divided vote between two modernisers: and the deal was that Gordon Brown would be Chancellor in a future Blair administration, and would be given wide areas of power and responsibility over domestic and social policy making - a virtual autonomy over some parts of government.

A face-saving and somewhat hilarious statement was issued to the press the next day. It pretended that 'unifying the party' was more important than personal ambition to both men. As another face-saving solace, Brown told some of his friends that there was a further agreement that Blair would stand down after serving two terms in office.

But in reality, it was a huge political defeat. Blair was ascendant. Gordon Brown's power and influence were hugely diminished. On 21st July 1994 Tony Blair was elected leader of the Labour Party.

In the years that followed, myths would emerge that Blair had promised that Brown - as the older and more experienced of the two - would have the first choice of running for the leadership. The other suggestion put about - that Blair would stand down in favour of Brown after his second term as Prime Minister - was to colour the tense (and sometimes explosive) relationship between the two politicians.

But Tony Blair had won. Now Gordon Brown had to work with him to make sure that Labour won as well at the next election. For a politician with Brown's ambitions, the way ahead seemed long and challenging. There were opportunities but also huge frustrations, as he faced years of having to defer to a leader who in some ways seemed intellectually lightweight and ideologically far removed from Brown's own Labour roots and deep convictions.