Central Bank Independence – An undemocratic Paradox

Well… you can’t let politicians control it because they’ll just manipulate it. This is the most fundamentally undemocratic argument that can be applied to continuing non elected technocrats to run central banks, yet it is the most frequently argued.

The thinking goes that Central Banks, the institutions that implement monetary policy, are so crucial to the country that they cannot be entrusted to partisan politicians who are simply interested in re-election. It is believed, largely unquestioningly, that politicians on 4 year election cycles would simply implement pro cyclical policies (ones that increase fluctuations in the economic cycle). They would make economically illiterate decisions in the run up to elections that would enhance short term prosperity, but would be paid for by an economic crash further down the line (when they are safely in office). Central banking is, at its basic level, an attempt to keep inflation low and stable, whilst maintaining acceptably low rates of unemployment. Politicians would simply trade low inflation for high (short term) growth and low unemployment. But would they really….?

Monetary policy and fiscal policy (taxation, spending etc) are the two great pillars of economic policy, they are intertwined, one cannot be effective without the other. Therefore it seems a logical fallacy to point to one as simply too important to be left up to elected officials, without equally pointing to the other. Phillip Hammond is the first chancellor of the Exchequer to have a degree in economics since 1993, and why do we entrust spending and taxation to non qualified politicians? The answer is that it is because they are advised by people who are qualified, politicians set broad policy aims in motion and the experts who work in the exchequer work out the exact details. This is how government works. The question must then be asked, why then does the Bank of England have an unelected executive? Could the Chancellor of the Exchequer not equally cause short term growth with fiscal policy? Why must the crucial function of monetary policy direction be left to intellectual aristocracy?

The argument that politicians would abuse monetary policy for short term gain taps into the prevalent belief that politicians are inherently dishonest. Even if this is true, there is simply no evidence in developed nations to suggest that politicians would use monetary policy to cause short term booms. It is the same argument as; Politicians shouldn’t be allowed to decide taxes because they will always drop them before elections. The public, as politicians know, are far more perceptive than the proponents of independent central banking give them credit for. With a proud democratic history, stretching back to Magna Carta of 1215, the British public have seen every trick and would not be tricked by blatant political tricks.

The fact that monetary policy has such a direct impact on the voters of the UK should mandate accountability. It is frankly undemocratic to allow such a critical political role to be allocated in such an undemocratic manner. The British, American, and worse, the European voter, is starved of half of their ability to control their nations economic future. If half of law making was left up to an undemocratic entity, there would be uproar, calls off tyranny from across the political spectrum. Why then is this equally undemocratic measure simply allowed to persist unchallenged?


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