Brown’s tribulations mount, prompting amongst other things a reappraisal of his time at the Treasury, it is perhaps
not surprising that even his most widely celebrated policy innovation – the “independent” central bank -
should come under scrutiny. What is even more surprising, however, is why it
was almost universally believed to be such a good thing in the first place.
central bank was of course seen as an important weapon in the monetarist armoury. Monetarism is, after all, an expression
of an extreme belief in the infallibility of the market – an article of faith for New Labour. Governments cannot be allowed to intervene since any such intervention will frustrate the market’s
unfettered operation. What could be more natural, therefore, than to ensure that
elected politicians are excluded from the formulation of monetary policy?
not, of course, quite how the independent central bank is presented to the public. The
public have been sold on the idea that an independent bank is necessary if inflation is to be controlled, since politicians
cannot be trusted to take the hard decisions that are necessary. But a careful
study of the recent history of the battle against inflation suggests that it has very little to do with the independence or
otherwise of the central bank. Inflation in the 1970s was a world-wide phenomenon,
but by the mid-1980s – reflecting world conditions - it had largely been brought under control. The claim that an independent central bank is essential if inflation is to be controlled in any case looks
less convincing today, with inflation running at over 4%.
is really remarkable about an independent central bank is that it is a major step away from democratic government. The price we pay, in other words, is not just an economic one, but is a significant weakening of our democratic
institutions. What is identified as the over-riding issue in economic policy
is now the exclusive preserve, not of elected governments, but of unaccountable officials.
has been accepted is even more of a mystery when one considers that the “independent” central bank is in no sense
objective or neutral. It is a bank. Its
main clients are banks. It is staffed by bankers.
It can be relied upon always to put the interests of the financial establishment ahead of those operating in the rest
of the economy. Our economic policy is, in a very real sense, made in the interests
of the holders of existing assets rather than of those who live and work in the real economy where new wealth is created.
seems more extreme the longer one looks at it. Not only has the Monetary Policy
Committee ensured that the productive sector should bear the burden of its counter-inflationary measures. It seems also to have deliberately averted its gaze from the factor that really is the primary cause of
inflation – the huge rise in bank lending.
we arrived at this remarkable situation? It is not surprising that the bankers
themselves should support and welcome it. Economists, too, will naturally feel
that the authority and credibility of their profession have been underpinned by this recognition that it is only the high
priesthood that is competent to address these important issues.
have politicians so readily accepted this substantial diminution of their powers? The
answer is that it is very convenient for politicians to be able to contract out the most difficult decisions they are faced
with. How useful it has been for Ministers to be able to pin responsibility
on the Bank and to claim that the travails of the economy are caused by the mechanistic workings of the market and of essential
monetarist disciplines rather than actual policy decisions.
it not time that we reminded them of their responsibilities? If they want to
exercise power in a democratic society, they should not be allowed to pick and choose which responsibilities they accept.
is of course an important role for an effective central bank. A central bank
is essential to maintain a proper prudential supervision of banks and of the financial sector more generally – something
that has been sadly missing from the scene over recent years. A central bank
will regulate and enable the banks to interact in an efficient way that benefits the economy as a whole. The central bank will be an important source of advice on financial matters. But none of this requires the central bank to be immune from
challenge or that its actions should be free from debate and discussion, particularly when it is uniquely entrusted with the
power to give expression to a narrow and bank-dominated view of the true purpose of economic policy.
economic crisis demands that sacred cows should no longer be immune. Even in
New Zealand, where the modern fashion for an “independent” central bank first surfaced, the debate is being re-opened. If we want an economy that more faithfully serves the interests of all of us, and
not just those of a small self-interested minority, economic policy should be restored to the democratic arena.
article was published in the online Guardian on 6 September.