How independent are central banks?
The free market’s price mechanism is the only system capable of ordering and stabilising the convoluted and ever-undulating mass of information immanent in today’s financial sector. But then it works precisely because it isn’t actually a system at all, relying not on rigid, top-down domination, but rather, in the words of F. A. Hayek, on ‘a process in which the individual plays a part which he can never fully understand.’ And the introduction of the centralising principle embodied in central banking disrupts the gesticulations of economic information that are signals to buyers and sellers acting within the market.
The conventional notion of governments’ central banks as independent, apolitical bodies – as staid organisations of detached expertise – is contradicted both by their emergence historically and by their conspicuous role in recent economic episodes. Though they may indeed be apolitical in the sense that they are not beholden to any single political party, they are no less impelled by self-aggrandisement or by what would normally be regarded as political considerations. Only in the more recent modern age, beguiled by the chimera of government of, by, and for ‘the people’, would we place credence in the idea that any government-created body can be abstracted out of all the standard biases and maneuverings of politics. Regardless, were it true, central bank ‘independence’ from politics could only ever mean, as Murray Rothbard teaches, that the ‘sphere of government becomes an absolute self-perpetuating oligarchy, accountable to no one and never subject to the public’s ability to change its personnel.’ And this is supposed to be a desideratum.
The relationship between central banking and government growth is plainly traceable in both British and American history. Proponents of big government policies in both countries consistently endorsed the idea of a powerful central bank, as did the entrenched special interests lingering about the levers of state power. Central banks were the easy route to fulfilling two of the political class’s central goals – unbridled, simultaneous inflation for a cartel of well-connected commercial banks, and the dramatic expansion of government debt. The incipient Bank of England furnishes a telling example, decidedly political from the start. As economist and leading free banking advocate Lawrence H. White has observed, the Bank of England was inaugurated ‘purely as a conduit for government borrowing’ at a time when wild spending had impaired the state’s creditworthiness. Even before Bank of England notes had officially become legal tender, they served as money for a profligately spending state. Given that the new Bank of England had little more than government debt as an ‘asset’, which itself ought to disenchant devotees to the central bank ‘independence’ school of thought, it should come as no surprise that it was insolvent within a few short years.
The birth of the Federal Reserve System is not so very different from that of the Bank of England, at least in its fundamentals. As the last and obviously most successful in a string of attempts to create a US central bank, the Fed represents the culmination of a dream for a particular brand of American statist. From the debates between the Federalists and Antifederalists, the question presented by a national bank was at the forefront of political discourse. Campaigners for a national bank promoted a strong, centralised government, aggressive and active government participation in building infrastructure, and a collaborative symbiosis between favoured business interests and the state. Healthy scepticism towards an institution of such terrible power and influence led to many failed attempts, even in spite of the uninterrupted support of big business. At last with the Federal Reserve Act of 1913, the banking elite got what it wanted, a lender of last resort capable of completely destroying any vestige of competition – if indeed any remained – by a potent combination of regulatory protectionism and the implicit guarantee of bailout should the need arise. As is too often the case historically, the balance and discipline of a genuine free market were damned in favour of enlarging the power of the government and special interests.
Today’s despisers of free markets are wont to trumpet that a one-reserve system of government monopoly on currency is the natural and inevitable result of economic forces. In point of fact, however, a cursory glance at modern central banks’ development demonstrates that, in the words of Walter Bagehot, government’s monopoly position in banking is the ‘consequence of many singular events’, of ‘an accumulation of legal privileges’. The chief commercial banks have naturally favoured the growth of central bank power as a source of easy (and in truth imaginary) money that they can turn around and take interest on at zero cost to themselves – quite a serviceable programme.
The beneficiaries of the status quo are governments and the handful of large banks always looking to use legal and regulatory privilege to limit competition in their favour. Without fully developed, unrestricted competition to check the germination of speculative booms and busts, we will continue to see crisis after crisis. It is time to reconsider the accepted fallacy of central bank independence and to reconcile ourselves to the truth of these monster banks as a core feature of the big government control we observe all around. In that light, abolishing the Bank of England and the Fed may not seem such a mad idea.