“The Treasury…may by order give the Bank directions with respect to monetary policy if they are satisfied that the directions are required in the public interest and by extreme economic circumstances” – Section 19, Bank of England Act 1998.
Theresa May is getting nervous. She’s seen the polls slip away from her. She’s seen the abject rejection of conservative politics first in Scotland and now in England too. She has just admitted that she jumped into her personal snap election whilst her party was completely unprepared to fight it. She is far from “strong and stable.
And now she’s getting worried by the growing pull towards the more interventionist economic policy advocated by Jeremy Corbyn and has responded with a speech defending Austerity and celebrating free market economics on the day of the 20th anniversary of the independence of the Bank of England. And so has begun fairly vapid tirades warning against the “dangers” of nationalism and populism.
Now, to be sure, there are significant advantages to having an independent central bank. If your finance minister is the one who sets interest rates then they can do so according to the whims of political flux rather than economic needs. It’s possible that they can drop rates shortly before an election and then raising them again once their reign was secure (remember that, until recently, UK elections were not fixed terms and were called on the whim of the PM whenever they saw advantage to doing so…oh wait…).
Governments which control the levers of money flow also have a tendency to pull them, pull them hard and keep pulling them. So keeping them out of reach and having an objective observer control them helps moderate against such excess.
This said, the history of central bank independence is one of shifts and cycles. The governor of the Bank of England in the 1920s, Montagu Norman, stated that while he valued his “unique right” to lend advice to the government he was “always of course subject to the supreme authority of the government”.
By the 1950’s, the pendulum had swung firmly to the opposite extreme with the West German Chancellor attacking the Bundesbank’s independence saying in 1956 “Here we have a body that is not accountable to anyone, neither to parliament nor to the government.” although it should be noted that public reaction to the speech was such that it was later withdrawn and the bank’s independence protected. Germany has long had a fear – a paranoia, even – of returning to the hyperinflation of the 1920’s despite that hyperinflation coming around for reasons substantially larger than just the government printing too much money.
Mind you, it was no “free market” Conservative who let the Bank of England slip from their fetters – not to the government of Thatcher nor to Major goes that honour – but to Gordon Brown who signed the Bank of England Act in 1997 in an attempt to allow the UK to catch up to other countries in Europe and to sign up to the Maastricht Treaty’s Article 107 requirement that a central bank should be independent. Of course, as the opening quote points out, the government still reserves the right to overrule the bank should it be convenient to do so. Power devolved is power retained.
Maastricht is most strict about what central banks can do. They are absolutely prohibited from providing deficit financing to their host governments. But the 2008 Financial Crisis showed that even “prudent” Germany could find it useful to bend such a rule in extremis. So was invented the tool of Quantitative Easing whereby the central bank doesn’t fund the government. It just lets the government issue bonds to the private sector then buys them back so that the government ends up owing money to itself. It’s a bit of a roundabout way of doing things but since even the ECB is doing it to the point where there are almost no more bonds left to buy, then few could complain too loudly.
As with 1950’s Germany, we also must call into question just what it means for democracy to have a very powerful yet unaccountable body such as an “independent” central bank within it. And what it means for that independence if the Governor and board are appointed by the PM (technically, in the UK, the Crown appoints the Governor but they promise to never go against the humble recommendation of the PM…who usually considers it wise to accede to the recommendation of the rest of the board of the bank…UK political “traditions” are a bit strange that way). Combine that with the fact that the world of central banking often draws talent from a fairly limited pool of bankers and academic economists and there can be a risk of limited groupthink and false consensus.
It’s not for nothing that some central bankers have decried the habit formed for some governors to limit their communication to the public to mere “Delphic utterances” so that nothing of what they say could possibly be held against them at a later date which, of course, often leads to BOTH sides of any debate claiming these statements for their own…
It’s a dilemma. For all the lack of trust the public generally has for appointed technocrats and “experts”, there remains a similar or greater lack of trust in the ability and motives of even elected politicians. Perhaps we should start a debate about another option such as a “stakeholder” model whereby a central bank’s board is made up of people from other areas of the public sphere such as trade union representatives, members of agricultural groups or social bodies. Such things are not unprecedented in the world although said bodies rarely hold more than purely advisory status. Even at that though, it gives an opportunity for an unelected body to better represent the demos of the country.
Central banking stands on a precipice of change at the moment. The 2008 Financial Crisis showed up the final failure of neoliberal “Free Market” economics just as surely as the 1978 “Winter of Discontent” was the final death knell of post-war Keynesianism. It would be a short-sighted politician who attempted to restore or return to either of these regimes without accounting for the changed real world we now live in.
We’re living in an age of new ideas from “narrow banking” and “full-reserve” currencies (although both of these ideas come with very significant detractors) to greater use of new tools like QE to remove the effects debt in an age where we can no longer expect growth, abide inflation or endure further Austerity.
To fix the problems caused by the mistakes of yesterday’s ideology, it’s going to take a politician brave enough to start stepping forward and say that we cannot afford to repeat them. May doesn’t have the answer to this. I’m not sure Corbyn really does either; he’s perhaps closer than most but still wedded to the idea that we must “close the deficit” and “grow the economy”. Nicola Sturgeon is too, if we’re being honest about that. Though my experience at the Economic Data Inquiry this week was that when I mentioned that the Scottish Government’s target for “inclusive growth” was perhaps misguided (“If the growth is not going to come because we’re hitting the limits of that economic model then ‘Inclusive Growth’ really just means inequality”), there was no dissent from the room, not even from the Conservatives, so perhaps the Scottish Parliament will be more amenable to this kind of discussion than Westminster would be.
Time will tell on this debate, but it’s time to start having it.