Be careful what you wish for, warned a local newspaper editor as I set off last week to join the Hacked Off campaign for a public inquiry into phone hacking. His wisdom was soon confirmed. At the House of Lords, in the presence of Hugh Grant and Jemima Khan, was assembled a rabble of enraptured politicians. Desperate for revenge over MPs' expenses, they were panting to seize the moment. Formal regulation of the press has long appealed to some politicians in all parties. Now the prospect of a Britain denuded of raucous, trouble-making journalism loomed before my eyes.

The revelation that Milly Dowler's phone was hacked, transformed an issue that was of interest to a minority into a moral panic. Within days, egregious wrongdoing by a few moral invertebrates at the News of the World had killed a great national newspaper and spawned a plausible threat to press freedom. On Thursday David Cameron confirmed the new mood. "The Press Complaints commission has failed," he said. "It lacks public confidence."

The public hardly knew it existed, but the PM's first assertion is fair. Hacking has revealed that the PCC has the functionality of a chocolate fireguard. No public body has proved as unfit for purpose since Dennis Howell, Minister for Drought in the baking summer of 1976, failed to create rain. The PCC must be allowed to die quietly. But the principle it was created to embody should endure. Journalism in a democracy must be independently regulated. Only by retaining complete autonomy from government and legislature can it remain free of prior restraint and at liberty to hold the powerful to account.

This will remain true even if evidence emerges that other newspapers hacked telephones and bribed public officials. It will be the case whether or not News Corp is allowed to take complete control of BSkyB. The challenge for people who care about freedom of speech and media plurality is not simply to design a system that would have protected Milly Dowler's family, though that is crucial. The country needs a press watchdog that can keep police and politicians uncorrupted by their relations with journalists and media proprietors. It needs a press watchdog that takes seriously journalism's duty to inform the public sphere and understands that to perform that role it must also generate profit.

To have any chance of acquiring such a regulator, journalists, their employers and supporters must stop the panic that killed the News of the World and encouraged hostile politicians. One excellent way to calm the febrile atmosphere is to place recent events in their historical context. It is no insult to people who have been shocked and hurt by the News of the World to recognise that phone hacking is simply not the most appalling thing the British press has ever done. There are worse examples and the principle of independent regulation survived them.

Stanley Baldwin's 1931 speech condemning the abuse of "Power without responsibility, the prerogative of the harlot throughout the ages," was a howl of protest against two newspaper barons who exercised as much power in British public life as Rupert Murdoch wields today. Lords Beaverbrook and Rothermere, proprietors of the Daily Express and Daily Mail were not content to inform and influence political debate. They sought to dictate its outcomes. Above all they wanted Baldwin replaced as Conservative Party leader by someone amenable to their simplistic scheme for Empire Free Trade. Not content simply to argue their case, they created political parties, funded candidates and used their newspapers to deliver barrages of naked propaganda. Mr Murdoch at his worst has wisely eschewed such direct manipulation of the political process. But the megalomaniac press barons of the early Thirties did not plumb the pit of the abyss.

After Hitler became Chancellor of Germany in January 1933, most British newspapers supported appeasement. One, The Times, went further. Under the editorship of Geoffrey Dawson it promoted friendship with Germany and urged concessions to Hitler. Dawson was excessively close to ministers who considered partnership with Nazi Germany the proper course for British foreign policy. He encouraged the partition of Czechoslovakia to keep plans for Anglo-German cooperation alive. Worse, he distorted reports from Norman Ebbutt, The Times' Berlin correspondent, so as to disguise the brutality of Nazi rule. Ebbutt was anti-Nazi and he had excellent contacts, but his best work was excluded from The Times in favour of his editor's zeal for appeasement. Geoffrey Dawson's adulation of Neville Chamberlain made the relationship between David Cameron and Rebekah Brooks look remote. But, when post-war Royal Commissions on the Press considered media ownership and regulation, even such atrocious failures of editorial judgment could not justify political interference in press freedom. It would be appalling were modern politicians to conclude that the sleazy criminality of populist tabloids fighting for survival in an era of irreversible sales decline could justify what deference to Hitler did not.

There is little wrong with the existing code of practice for journalists. It covers admirably issues including privacy, harassment and intrusion. The problem is that the PCC cannot enforce it. It is a prisoner of the large newspaper groups that fund it and of the serving editors it invites to sit in judgment over their peers. A truly independent regulator might be funded by a compulsory levy. It should have power to initiate investigations of wrongdoing, to promote ethical reporting and to impose large fines. It should replace the PCC's serving industry insiders with former editors, media lawyers and journalism academics. Above all it should consult readers. Social networking and online polls make that easy.

The News of the World's criminal cruelty has created an opportunity to enhance and reinforce standards in British journalism. Our democracy will suffer if politicians exploit it as a Trojan horse to introduce statutory regulation. British democracy grew to maturity in partnership with a free press. It cannot thrive by muzzling journalists who must always be free to offend and humiliate the powerful.

The writer is Professor of journalism at the University of Kent. Stephen Glover returns next week.