I have been tackling some more significant glossary entries in between some heavier research and thinking which is going on in the day job right now . This is one on central banks, which is a matter of some significance in modern economics for the reasons I note in the post:
Central banks are created by governments to:
- Issue currency;
- Operate as a reserve bank i.e. to be the banker to the commercial banks operating within a jurisdiction;
- Regulate some or all of the financial sector within the jurisdiction, and at a minimum its commercial banks and other major financial institutions;
- Manage monetary policy (both conventional monetary policy and unconventional monetary policy).
Most central banks are structured to be institutionally independent of the government that appoints the members of its Board and key committees, but almost all governments also retain powers to overrule the central bank and its decision making if they deem it appropriate. This provision is included in The Bank of England Act 1998. The degree to which impendence is constrained as a result is always open to question. The existence of such rules does undoubtedly allow a government to exert pressure on supposedly independent central bankers.
Central banks have existed for hundreds of years. The Bank of England was created in 1694. Their usefulness cannot be doubted.
The idea that central banks should be independent is much more recent and is a neoliberal construct. The neoliberal arguments for independent central banks include:
- Elected governments cannot be trusted to control inflation because the measures required to do so are electorally unpopular and so will not be implemented. Independent central bankers have to implement such measures instead.
- Central bankers have to impose discipline government spending because elected politicians cannot be trusted to do so.
- Politicians cannot set interest rates reliably.
The argument is that democratically elected politicians fail markets to appease people and so must not be allowed to do so. The whole argument opposes democratic accountability in government.
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I would add that a Central Bank is also the Government’s banker.
Yes
I would add, the government’s Banker, wholly owned by Government; it was nationalised in 1946.
All I would add is what I’ve learnt from Mattei in that part of the depoliticisation of central banking (which you point out) is the use of so-called ‘experts’ and their portrayal as ‘independent’ and ‘objective’ persons free of any ideology – when in fact we know this not be the truth.
As an outcome this has also therefore de-coupled central banks from accountability and potentially undermined democracy/created a democratic deficit, which in itself has stymied any further development of the central bank role and does nothing but reinforce Richard your bete noire – orthodoxy.
You’ve named the Bank of England, is it worth naming some other countries’ central bank’s, especially the USA and Europe.
Noted
But the focus here is the U.K.
Yes… but there is a fairly substantial entry on the Bank of England so I think it makes sense to keep this one truly “generic”.
Oh, and that entry on BoE need “Government’s banker” added to it.
I will be adding that
I am presenting at a conference right now though
Could add something on the tensions between central banks and the government, and how central bank remits get interpreted. As illustration, Carney was challenging on the financial impact of climate change, which made the government uncomfortable. He saw a broader remit.
In contrast Bailey takes the narrowest view, which suits the government fine.
In the winter of 1962/3 I was taking a British Social and Economic history O level course.Someone mentioned the drive to raise money to build a swimming pool for the school. Mr Clarke, the teacher told us , ‘when I started teaching we raised money to repair shoes for the kids whose parents couldn’t afford it.’
There was a horrified silent.
“Why, sir?’
Because of the unemployment in the 1930s (Our course stopped at 1914)
‘Could it happen again, sir?’
‘No,’ he said, ‘we know how to prevent it now.’
He didn’t elaborate and I stored the question ‘how do we prevent it” for another time. We had learnt about Geddes Axe post WW1 so I had heard of governments slashing expenditure.
The answer was the Keynesian economics we adopted post war.
The Bankers got it wrong in the 1930s when faced with the Depression, and before that they wanted the pound back on the gold standard.
In the 00s of this sentry, the bankers thought we could lend vast sums on property with little regulation.
Following the economic crisis , some of the people who caused it said we had to follow a policy of austerity and if we did, we would be in balance by 2015 and could then grow the economy. The ECB and IMF said he same about Greece.
In the last twelve months we have seen the banks put up interest rates in a cost of living crisis.
Why do many still think the bankers know better?
I am afraid that the answer is that the political establishment do
Indeed
I just hope your twitter and blog can turn a few of them. At some point, we must hope, the Emperor’s lackof clothing will be observed.
Your point on being democratic is one we need to discuss more widely.
What we also need is proper scrutiny and challenge of politicians and journalists on economics. Too many are ignorant but believe they know. Public just assumes they know. Having them override BoE when they are named Brown or Darling is fine but Kwarting, Sunak or Hunt no way.
Having worked at Treasury or BoE doesn’t make you an expert. Too many inappropriate orthodoxies.
You challenge a lot but our journalists don’t seem to learn and don’t challenge.
How to make them smarter.
Thanks for great educational posts.
Thanks
And good points