Can a central bank be independent in a democracy?

 

                  On Thursday I gave a lecture to a Cambridge University audience on the conduct of public policy. I chose to speak about UK economic policy over the last thirty years. Today I will share the summary of what I said about independence in Central banks, and tomorrow my conclusions on what has been good and bad in UK economic policy since 1981.

                 I do not see how you can have a truly independent Central Bank in a democracy. The elected officials and Parliament have the last say. They are accountable for the economic results, and they will override the Bank  when they think it is necssary or when the public complains about the Bank’s conduct.

                The UK is said to have an independent Central Bank following the Brown reforms of 1997. It is strange this piece of spin has stuck, given how far from reality it is. Mr Brown took away the power of the Bank to raise the government’s money, putting that task into the Treasury under Ministerial control through the Office of Budget Management. He stripped the Bank of its powers to regulate the commercial banks, giving those to the FSA. He said he strengthened the Bank’s independence over monetary policy.

                       However, he subsequently altered the aims of the Bank when he switched the requirement from keeping the RPI to 2.5% a year increases, to asking for 2% increases in the CPI. This represented a loosening of monetary policy, inviting the Bank to keep rates lower for longer at a crucial time in the build up of the credit boom. CPI usually goes up    by 1% less than RPI.

                       At the peak of  the Credit collapse Finance Ministers including the UK Chancellor met and agreed concerted interest rate reductions. They were right to do so. The Bank quickly convened a special unscheduled meeting and cut rates by the agreed amount. It is difficult to say this was anything other than political leadership on rates. When it came to decisions to increase bond buying and money printing all agreed that the senior elected official, the Chancellor had to authorise it. Some independence!

                                Some commentators say the German Central Bank is truly independent. It is the case that for many years  after 1945 the Bank was allowed to supervise rates and money policy  without material interference from politicians. This was because there was a political consensus about what the Bank was doing,and it was relatively successful.

                             When the politicians wished to amalgamate the DM with the Ostmark in East Germany, the Bank advised delay. They were overriden. The Bank advised a lower rate for the Ostmark. The politicians insisted on one DM to one Ostmark and forced it through. The Bank gave good economic advice. The politicans required they act on a political imperative.

                             Finally, the politicians decided to abolish the DM altogether. As the whole point of the Central Bank was to defend the external and internal value of the DM, who can say it was independent when it had its currency taken away from it?

                            There is no such thing as an independent Central Bank in a democracy. The elected polticians can always change its remit, its personnel, or even the currency it manages.

This entry was posted in Blog. Bookmark the permalink. Both comments and trackbacks are currently closed.

43 Comments

  1. Richard1
    Posted February 21, 2011 at 8:15 am | Permalink

    2 points to add: 1) It is also the case that Brown retained power to nominate and remove the members of the MPC & their appointment was subject to no external scrutiny – nor even to any stated criteria for appointment. No wonder it got packed with Brown-sympathisers like Mr Blanchflower: &
    2) It is not desirable to have an ‘independent’ central bank as long as we have a system where the central bank stands behind commercial banks when they are in trouble – if the taxpayer has unlimited liability for the banks then the elected government needs to control the lender of last resort.

  2. lifelogic
    Posted February 21, 2011 at 8:17 am | Permalink

    “There is no such thing as an independent Central Bank in a democracy. The elected politicians can always change its remit, its personnel, or even the currency it manages.”

    Yes and even if they don’t do any of this the “independent” people will be looking over their shoulders and behaving in a manor adjusted, just in case they do. A good rule of thumb is that anything that feels the need to claim it is independent is probably not.

    Now I see half a billion pounds is to be wasted on a census and about an hour of every household’s time wasted too. Just to create lots of pointless paper for other parasitic employees to push around and use trying to justify their jobs too. The government already has the information and anyway could get it (very accurately) by just a small sampling not a full expensive survey – as any mathematician could tell them.

    Tax, tip down the drain and inconvenience the wealth creators yet again from the coalition.

  3. Nick
    Posted February 21, 2011 at 9:22 am | Permalink

    I do not see how you can have a truly independent Central Bank in a democracy. The elected officials and Parliament have the last say. They are accountable for the economic results, and they will override the Bank when they think it is necssary or when the public complains about the Bank’s conduct.

    Stop pedling that old myth. Accountability.

    Lets say we want to remove a sitting MP for their economic failure. Two horse race, and the opponent is the BNP.

    Democratic control? Nope. Why do we have to vote for some (party you dislike-ed) to get rid of the incompetent.

    Time to give the electorate the final say. It’s the original meaning of democracy, not the distorted view the perpetuates the ruling class

    Reply: The public has just got rid of a government they no longer liked, without voting BNP. Whatever the failings of democracy, the fact remains that the elected officials can change the other institutions if they wish or if the people demand – save where the EU is concerned.

    • lifelogic
      Posted February 21, 2011 at 4:34 pm | Permalink

      UK “democracy” just about occasionally enables voters to get rid of a government the voters do not like and replace it with the only other one on offer. The replacement will probably not do what they promised before the election and may will be far worse than the one thus replaced.

      People want to vote on a range of issues with separate votes for separate issues and some confidence the vote will actually be acted upon. Not one vote for an MP on many issues who may be corrupt or (corruptible by industry consultancies or trade union payments expenses/pension) and is probably far more loyal to the party or consultancies than to the voters. Who will usually mislead in his pre-election promises.

      Accountable, in any real sense, it is not and organisations like the BBC, Local authorities and the EU are even less so.

      In general it is government by the state sector for the state sector with a bit of input from big industry – generally to stitch up the market with regulations to push out small business competition.

    • APL
      Posted February 21, 2011 at 4:41 pm | Permalink

      JR: “The public has just got rid of a government they no longer liked, ..”

      Yea and instead of Tweedledumb we get Tweedledee.

      There has been next to no substantive policy change under this government.

      Oh maybe a feint to make the administration look different, you know, privatisation of woodlands. But nothing substantive.

  4. Brian Tomkinson
    Posted February 21, 2011 at 9:26 am | Permalink

    JR: “There is no such thing as an independent Central Bank in a democracy.”
    Agreed, and by extension there can be no independent Central bank in existence, as dictatorships are no less inclined to demand their own way than elected governments.
    In our own case, and in support of that overused word “transparency”, how long before we can expect the government to stop the pretence? Unlikely, I think, as they would prefer the blame for their policies of devaluation and high inflation to be borne by their BoE lackeys.

  5. Conrad Jones (Cheam)
    Posted February 21, 2011 at 10:02 am | Permalink

    This is a difficult dilemma.

    Do we want to have a Central Bank who can manipulate the money supply at will without any control from Politicians who are elected?

    Is it really a good thing to have an independent Central Bank?

    Or are the arguments for Independence strengthened by Gordon Brown who obviously benefited from the Bank of England’s money printing and low interest rates prior to a general election – as it it appeared that the Housing Market had recovered. If he hadn’t have called that Northern Lady a “bigot”, he might have even won.

    If you are saying that we should have a totally independent Banking system – I couldn’t agree more.

    But if you are saying that the Bank of England should be given more power, more control over the economy and therefore, more ability to bail out failing Banks with tax powers money, maintaining a continual inflationary policy caused by dishonest money – which in itself creates instability and the cyclic Boom-Bust business cycle which only benefits the few, then I do not agree with your views and frankly – find it strange that a Politician would say that fellow Politicians are not trustworthy enough to control the money supply.

    From what you say, you believe that our economy – and therefore our lives; should be controlled by unelected officials – acting outside the Parliamentary system and beyond question. I have already been advised by my local MP that tabling questions about the Bank of England is outside the Parliamentary System.

    There is nothing wrong with democarcy when it is a true democracy. I for one – do not like the idea of Stalinist style – ask no questions; All Powerful Central Bank with the power to create money and manipulate a supposedly free market economy, because as soon as they do that – it is no longer a Free market. It’s communism. Not Capitalism.

    Reply: I did not express a view on which I wanted, just made it clear that you cannot have an independent Bank in a democracy

    • Denis Cooper
      Posted February 21, 2011 at 3:28 pm | Permalink

      How can tabling questions about the Bank of England possibly be “outside the Parliamentary System”?

      Apart from general considerations of the sovereignty of Parliament, in this specific case:

      http://www.bankofengland.co.uk/about/parliament/index.htm

      “As a public organisation, wholly-owned by Government, and with a significant public policy role, the Bank is accountable to Parliament. The Bank’s Annual Report and Accounts are laid before Parliament each year before they are made available publicly.

      The principal means of accountability for the Bank is via the House of Commons Treasury Committee …”

      It seems to me that your MP is just trying to fob you off, and I suggest you go back to him and ask him to explain what on earth he can mean.

  6. StrongholdBarricades
    Posted February 21, 2011 at 10:17 am | Permalink

    I agree with your last paragraph, but feel I must add;

    How can you have an independant body responsible (allegedly) for inflation control within respected boundaries when it is NOT tasked with maintaining control over asset inflation?

    As the last crash has demonstrated only too well, the overhang in the property asset bubble is still affecting many economies because the asset prices have been “unable” to fall.

  7. GJ Wyatt
    Posted February 21, 2011 at 10:21 am | Permalink

    The argument that the central bank needs to be independent is based on the credibility of a commitment not to allow inflation. When government sees scope to trade-off inflation against the level of economic activity, and people take that into account in forming their expectations of inflation, then a “lose-lose” game is played out leading to both higher inflation and lower economic activity. Now, as you have pointed out, the Bank has lost the anti-inflation credentials it was supposedly clothed in. The King has no clothes! H. C. Anderson’s fable could not be more apt.

  8. oldtimer
    Posted February 21, 2011 at 10:53 am | Permalink

    Exactly!

  9. Conrad Jones (Cheam)
    Posted February 21, 2011 at 11:01 am | Permalink

    I think the question should be:

    “Do we want the Central Bank to be Independent, given that we are in a democarcy?”

  10. Conrad Jones (Cheam)
    Posted February 21, 2011 at 11:34 am | Permalink

    “Finally, the politicians decided to abolish the DM altogether. As the whole point of the Central Bank was to defend the external and internal value of the DM, who can say it was independent when it had its currency taken away from it?”

    There is an easier way to “Defend the Currency” – the Gold Standard provided that defence. Since 1971 – the World has become far more economically unstable.

    Gordon Brown’s “No more Boom and Bust” speech was hilarious.

    Unfortuantely, Politicians will always argue that the Gold Standard would not work and point to the Great Depression as an example, despite the fact that the Great Depression happened despite the Gold Standard, not because of it. It was caused by inflating the money supplies, not through the inability to inflate money supplies after the event. This ability to inflate the money supply alows Governments to be profligate.

    And why do Poiticians argue against the Gold Standard? – because it would make inflating the money supply far more difficult, thereby preventing the Government and the Banks from getting the Stealth Tax from Inlfation. This mechanism by which Governments extract Tax covertly as well as through Income, VAT and CGT is the reason why we were lied to in the eighties about how taxes were reducing.

    Lastly, Interest Rates should be set by individual Banks – not by a Central Bank.

    The biggest crime comitted by Central Banks is that of Moral Hazzard. Providing free insurance paid for by tax payers not from “Government Money” and not even from the Banks themselves.

    The Banking System is completely crazy – a massive Casino where all the Gamblers know that if they win they keep their winnings, if they lose, Tax payers pay their losses.

    And here you are arguing the case for a more “Independent” Central Bank.

    Do Politicians have no regard for peoples savings?

    George Osborne is now not going ahead with his Tax the Bankers policy.
    “Osborne promises big bonuses but smaller corporation tax rate”
    http://www.guardian.co.uk/business/2011/feb/18/big-bonuses-smaller-corporation-tax

    Have the pirates finally taken charge of the Ship?

    Reply: One of the main problems with a gold standard, as Keynes pointed out, is it only works well if by accident the rate of increase in the world supply of gold is the same as the rate of increase in the world economy.

    • Stuart Fairney
      Posted February 21, 2011 at 3:15 pm | Permalink

      John Redwood quoting Keynes (sic Keynes!) as an authoritative source? I am amazed.

      Okay, David Ricardo explained two hundred years ago that the quantity of gold or silver is more or less irrelevant save for price variation relative to the absolute amount of it.

      Indeed why should gold supply need to keep up with the growth in business? It would simply be inflationary if it did; this is gold’s great strength, not a weakness. As output increases money would simply gain purchasing power and remember, investment (i.e. real capital) comes from deferred consumption and therefore un-used resources, not from printing paper (i.e. flexibility) which creates mal-investment and boom/bust. Otherwise how can we explain what Von Mises called cluster failures from otherwise competent businessmen?

      I would strongly recommend a look at Tom Woods book “Meltdown” which explains the case for Gold in detail

      • Gary
        Posted February 22, 2011 at 10:40 am | Permalink

        You are correct, Stuart. Insufficient gold is a myth. As the economy grows a unit of gold can lay claim to more goods and services and smaller units will spontaneously be demanded. The money supply grows by dividing the units down post gdp growth, not multiplied up pre gdp growth as in a fractioned fiat system. That is why gold has a slight deflationary bias which is no bad thing. Savers are rewarded and credit bubbles are almost impossible. There is practically no limit to the amount of times you can divide a unit of gold. With technology the unit can be conveniently tested.

    • Conrad Jones (Cheam)
      Posted February 21, 2011 at 5:43 pm | Permalink

      Keynesian economics is a contradiction in terms:

      “John Maynard Keynes, who had argued against such a gold standard, proposed to put the power to print money in the hands of the privately owned Bank of England. Keynes, in warning about the menaces of inflation, said “By a continuous process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method, they not only confiscate, but they confiscate arbitrarily; and while the process impoverishes many, it actually enriches some””

      Note: Keynes warned about the menaces of inflation and the fact that it CONFISCATES the wealth of a Nations Citizens, ” impoverishes many, it actually enriches some”.

      It was inflation that created the Stock Market bubble which caused the Great Depression. It was War that encouraged the Federal Reserve to Print more money, but at least they had some means of limiting the money supply with the Gold Standard, now there is no limit to the amount of credit that can be created. Credit and Debt can expand unchecked – if Q2 fails in the United States – there will be calls for Q3. This is great for people who are invested in Gold and Silver – but for anyone who has large savings in Cash Accounts – like the German Middle classes in the 1920s, they will get wiped out. Keynsian economics is biased against savers and wants all money in the economy being spent.

      It favours Borrowers over Savers – Irresponsiblity over prudence.

      Remember that the First World War was only possible after the Creation of the Federal Reserve. France and England borrowed money inorder to fight the War which didn’t start until after the FED was created.

      • Conrad Jones (Cheam)
        Posted February 24, 2011 at 2:07 pm | Permalink

        From a Link: http://www.chrismartenson.com/forum/keynesian-vs-austrian-economics-made-simple-good-analogy/40845

        “Keynesian vs. Austrian economics made simple – Good analogy?”

        The basic anaology is of Forest Fires in the 1900s in America.

        Did they allow smaller fires to occur or suppress all fires?

        They initially attempted to suppress all fires which led to a build up of dead wood and overgrowth which eventually became a tinder box that created much bigger and more violent Fires causing more destruction.

        The Analogy is that the Keynesian School of Economics would suppress ALL fires, no matter how small leading to greater Fires which could not be controlled.

        The Austrian School would allow the smaller Fires thereby limiting the damage of greater fires in the Future.

        Perhaps we need two political parties:
        One called “Keynesian” and the other called “Austrian”.

        • Conrad Jones (Cheam)
          Posted February 24, 2011 at 2:28 pm | Permalink

          “Keynesian school – All recessions are bad and must be suppressed by government actions. This protects established businesses and jobs. The methods are elaborate and costly, but a benefit to the public overall.

          Austrian school – When markets stray too far from reality they must be purged by adversity. This clears unneeded or failing enterprises so capital is not allocated wastefully, and new businesses can emerge. Periodic small recessions are the price of a healthy economy.”

          I would presume that the “Failing Enterprises” also refers to Private (or Nationalised) banks.

          The Keynesian Theory is only meant to occur to “Jump Start” the economy. Unfortunately Labour spent heavily throughout the business cycle.

          Austrian economics is not just meant to apply to the Manufacturing sector, allowing Banks the Welfare safety net provided by Tax Payers.

    • lola
      Posted February 22, 2011 at 10:40 am | Permalink

      One of the main problems with a gold standard, as Keynes pointed out, is it only works well if by accident the rate of increase in the world supply of gold is the same as the rate of increase in the world economy. Nope. If the quantity of money stays still against an increase in the world (say) economy then there will be deflation, that is each money unit will buy more stuff as time goes by. This is exactly what capitalism does – more for less every day. And just what is wrong with that?

  11. Peter van Leeuwen
    Posted February 21, 2011 at 11:52 am | Permalink

    Total independence may not exist and may not be desirable either, but it still seems as though the former German central bank and now the ECB are able to act relatively more independent from politicians than the Bank of England.
    It enables them to prioritize long-term interests like price-stability, rather than interests of governments which are influenced by their need to be re-elected.

  12. Steve Cox
    Posted February 21, 2011 at 12:46 pm | Permalink

    All very true, John, especially the bit that says, “The elected politicians can always change its remit, its personnel…”. The problem I have is that our current Dear Chancellor is completely ignoring his power to stick a large boot into the Bank’s derrière to force them to meet their remit. Or to change the inept and incompetent members of the MPC. So really what is the point of pretending any sort of independence as long as politicians are in control? If Mr. Osborne came out of the closet and said that the Bank’s remit had been changed to one of maximising economic growth (by throwing free money at banks and corporations) then fine, we would all know where we stood and could make our choices accordingly. What galls me so is this apparent deceit of pretending that we are still firmly committed to a 2% CPI target when the truth is evidently otherwise. Lies, lies, and more lies. But I suppose that is what politics is all about. 🙁

  13. sm
    Posted February 21, 2011 at 1:09 pm | Permalink

    The problem is how do you prevent the executive/parliament/politicians/insiders/ rorting the system for their own designs.

    It could lead to stalemate, but that might not be bad.

    It would need to constitutionally protected and limited in its remit. eg It would need complete control of the money supply and private limited liability banks operating in the UK. It should be able to enforce net of tax revenue spending controls on government over its election cycle/ per their costed legally enforceable election mandates. It should ensure a capital spending projects reserve fund for use to smooth cycles in the economy. (The 15bn we pay to the EU comes to mind.)

    Its power would need to come from the people directly via direct democracy seperate from the current parliament. A banker to the politicians one with teeth that says no.

    Emergencies would need to be planned for but anything exceptional should trigger a general election or referendum to ratify or amend executive emergency action. eg Bailout clause and QE.

    Or maybe just have much more direct democracy?

  14. English Pensioner
    Posted February 21, 2011 at 1:20 pm | Permalink

    When I studied “O” level economics in the early fifties, I was told that in a capitalist free enterprise society, prices of everything were governed by supply and demand. Most things were rationed then, but I remember very clearly our (non-PC) teacher explaining the free market in terms of how the prices of rabbits, chickens and eggs varied on the black market due to the laying habits of the hens and the breeding habits of the rabbits. He also explained how rationing distorted the market, and I remember that this proved true when sweets were taken off the ration as, contrary to expert predictions, there was not a shortage after the first couple of weeks, but plenty for all and an increase in the types available.
    On the basis of what I was taught, I can’t understand why we don’t have a free market in money in this allegedly capitalist country. Why do we need the BoE setting interest rates; why isn’t it just left to the market? If people have plenty of money, interest rates to borrowers and lenders would fall; if people are hard up and need to borrow, there will be less money available and rates will rise. Rationing, in the form of setting an artificial interest rate simply distorts the market, and setting it so low that, after inflation, savers are getting negative interest, merely encourages them to spend now, and possibly, in the case of pensioners like myself, producing problems later when we run out of money and start making claims on the state.
    The BoE and treasury should let nature take its course, with the BoE being simply responsible for the physical currency, regulation and acting as the government’s banker.
    Or have economic fundamentals been changes since I was at school?

    Reply private sector rates are largely decided by the market and are currently different from public sector ones. The authorities do have to decide on their lender of last resort rate, and have influence over the government borrowing rate.

    • lola
      Posted February 21, 2011 at 2:39 pm | Permalink

      Reply “…and have influence over the government borrowing rate. Well, that’s the problem isn’t it? The borrower setting the rate it will borrow (our) money at? Mightn’t it give politicians pause to think if the rate at which they could borrow on our behalf was set by us?

      • Denis Cooper
        Posted February 21, 2011 at 3:48 pm | Permalink

        Lola, some of the money borrowed by the British government is “our” money, that is money belonging personally to British citizens, but most of that is mediated through institutional investors such as pension funds. The government only borrows “our” money directly if we put it into National Savings or if we go to the much greater trouble of buying some of a new issue of gilts (if that’s still possible). The rest of the money borrowed by the government comes from abroad, from various international private investors. The rates at which the government can borrow beyond the very short term are decided by the investors who collectively make up the gilts market, and their decisions can only be influenced the government and the Bank.

        • lola
          Posted February 22, 2011 at 10:43 am | Permalink

          “…but most of that is mediated through institutional investors such as pension funds.. more of ‘our’ money than? To repeat – “economies consist of people and things, governments and companies are just convenient admin fictions by which we try to better organise our lives”

  15. lola
    Posted February 21, 2011 at 1:26 pm | Permalink

    “There is no such thing as an independent Central Bank in a democracy. The elected polticians can always change its remit, its personnel, or even the currency it manages.” An excellent argument for shutting it down.

  16. Neil Craig
    Posted February 21, 2011 at 1:29 pm | Permalink

    You could if the currency were actually backed by something rather than being a government fiat currency. If we had a contractual right to cash it in for a set amount of gold or silver or possibly a set number of kwh of electricity or length of carbon tube, government would not be able to print on demand.

    It is another example of a free society needing constitutional/ legal rules “which altereth not” being different from a pure democracy or indeed “parliamentary sovereignty”

  17. grahams
    Posted February 21, 2011 at 2:26 pm | Permalink

    Your main point must be correct if the sovereignty of Parliament under a head of state means anything. It is also true of any national public body such as the Courts or the BBC. It is true of any state-regulated private business such as utilities, railways and airlines and any body depending for its finance on decisions of the Treasury, including Universities, local authorities and public charities, fake or not.
    Their degree of independence rests on government restraint and how strenuously they resist interference.

    Your may be technically correct that the switch to CPI was a loosening but inflation since 2005, which reflects interest rate policy from 2003, has generally been above the CPI target. Under the RPIX regime it was generally below target. I think that this probably stems back to the rate cuts in early 2003 which, ironically, responded to internationally low share prices at a time when the UK economy was already recovering.

  18. Ralph Musgrave
    Posted February 21, 2011 at 2:36 pm | Permalink

    No such thing as a central bank in a democracy? Central banks in dictatorships are even LESS independent. Ergo, on the face of it, there is no such thing as an independent central bank.

    Obviously there is no such thing as an independent central bank in the sense that government controls the armed services, which in the last resort can smash down the central bank’s doors and take control. However a set of rules can be established drawing the line between a central bank’s responsibilities and government’s. Once those rules are established and widely accepted, the central bank DOES have a degree of independence.

    For example a British Chancellor who tried to overrule a Bank of England decision on an interest rate change and for no good reason would be an object of ridicule.

    Reply: Any Chancellor overruling an interest rate decision would have good reason – as Chancellor Darling did.

  19. H
    Posted February 21, 2011 at 2:43 pm | Permalink

    Ultimately, any powerful state can command any institution to do just about anything, regardless of whether it is a democracy or not. One could pose a similar question about the independence of the judiciary or civil service, for instance. The point is that, for longish periods of time, many states have found it both possible and useful to give central banks high degrees of independence. In the British context, one could point to the Bank of England for the almost 300 years up to nationalisation in the 1940s.

    • Denis Cooper
      Posted February 21, 2011 at 3:01 pm | Permalink

      Apparently Keynes didn’t think that formal nationalisation of the Bank of England, the legal change whereby it became publicly owned as it still is now, was crucially important.

      http://www.staff.city.ac.uk/andy.denis/research/keynes.htm

      “A salient example cited by Keynes in this context, and – significantly – prior to its nationalisation, is that of the Bank of England: ‘there is no class of persons in the kingdom of whom the Governor of the Bank of England thinks less when he decides on his policy than of his shareholders. Their rights, in excess of their conventional dividend have already sunk to the neighbourhood of zero’”

      • Conrad Jones (Cheam)
        Posted February 22, 2011 at 11:09 am | Permalink

        “‘If [income deflation] occurs, our present regime of capitalistic individualism will assuredly be replaced by a far-reaching socialism’ (Keynes, 1971: 346).”

        Income Deflation (in real terms) is happening now.

        “The battle of Socialism against unlimited private profit is being won in detail hour by hour’ (Keynes, 1972a: 290). A salient example cited by Keynes in this context, and – significantly – prior to its nationalisation, is that of the Bank of England: ‘there is no class of persons in the kingdom of whom the Governor of the Bank of England thinks. less when he decides on his policy than of his shareholders. Their rights, in excess of their conventional dividend have already sunk to the neighbourhood of zero’ (Keynes, 1972a: 290).”

        Does the Bank of England still have shareholders despite being Nationalised?

        It’s not transparent enough to establish this type information as it is illegal to ask about it in the House of Commons.

        • Denis Cooper
          Posted February 23, 2011 at 6:42 pm | Permalink

          All the shares are held by The Treasury Solicitor on behalf of the Treasury.

          I have that in writing in a letter from his office in response to my FOI request.

          How can it possibly be illegal to ask about it in Parliament?

        • Conrad Jones (Cheam)
          Posted February 24, 2011 at 1:30 am | Permalink

          I’m not an expert on this but…

          Isn’t Keynesian Theory based on full on Government Intervention centred around a wealth transfer from Savers to Borrowers?

          Charles Bean has confirmed this on National Television. Although he disguised this by saying that Savers (and presumably – Pensioners) should spend their Capital into the econmoy before the low interest rates and Quantitative Easing reduces their purchasing power to near zero.

          Therefore, by quoting Keynesian Economics you are effectively saying that your views are no different from Socialism.

          Please tell me that you disagree with Keynesian Theory. Please tell me that you are not going to support a policy which punishes Savers and Pensioners by taking their purchasing power and places it directly into the hands of the Speculators and Borrowers thereby increasing debt and instability.

          Keynesian expansion of the money supply is the very reason that made it possible for the bad debt to topple the economy into the state it is in now, combined with enormous Government spending and overseas “Aid” to foreign countries.

          Isn’t Keynesian Theory about the destruction of Capital, and therefore Capitalism, placing all capital with the Government? Or is it only meant to be used for brief periods only?

          I cannot believe that a Right of centre Conservative MP would even quote Keynesian Economics.

          “Government spending or government expenditure consists of government purchases, which can be financed by seigniorage, taxes, or government borrowing. It is considered to be one of the major components of gross domestic product.

          John Maynard Keynes was one of the first economists to advocate government deficit spending as part of a fiscal policy to cure an economic contraction. In Keynesian economics, increased government spending is thought to raise aggregate demand and increase consumption.”

          With the Country in so much debt, do you honestly believe that the Country should carry on spending and increasing that debt?

          As Keynes says, as Government Spending goes up – so does GDP. So we are led to believe that when GDP goes up – the Productive output of the Country must be improving, when in fact it’s just Government Spending (spending Savers money through inflation) and therefore National Debt getting larger.

          Please tell me that I have got this all wrong and that Keynes was a Right Wing Monaterist in Sheeps clothing.

          Reply: I can quote one of Keynes views with which I agree without implying I agree with all that he wrote, or all that his followers think that he wrote. Keynes himself did not recommend more deficit spending in a situation like our current one, though his followers since seem to think he would also support more public spending and borrowing.

  20. Denis Cooper
    Posted February 21, 2011 at 2:50 pm | Permalink

    I have to admit that I find this article intensely depressing.

    Not because it says anything much which is obviously wrong, but because most of what it says was obviously right over thirteen years ago, and it should have been said then, and it should have long ago entered and become embedded in the consciousness of the general public.

    I know some of the excuses which may be offered: that after Labour’s landslide in the 1997 general election the Tory party was in shock and not thinking straight, and that in any case nobody would listen to what they said, and that the mass media were massively prejudiced in favour of the new government, etc etc etc.

    I still find it intensely depressing that as a nation we continue to conduct our public affairs in this half-baked and incompetent fashion.

    Reply: We did say just that 13 years ago. Peter Lilly and I opposed the Brown reforms of the Bank and forecast the new arrangements would not work

    • APL
      Posted February 21, 2011 at 5:12 pm | Permalink

      Denis Cooper: “and that the mass media were massively prejudiced in favour of the new government, etc etc etc.”

      Now they have the chance to do something about the ‘mass media’ the biggest of them all, the BBC and its subsidy junkie the Guardian, the Tories refuse to do so.

    • Conrad Jones (Cheam)
      Posted February 21, 2011 at 6:18 pm | Permalink

      Mr Redwood,

      So does that mean that you will reverse the powers that Labour gave to the Bank of England?

      I would support anything that reverses what Gordon Brown did.

  21. John Ward
    Posted February 21, 2011 at 7:40 pm | Permalink

    Agree with every word, but tell me:

    1. Why then are unelected media owners and wealthy Party patrons allowed to influence General Election results?
    2. Why then are unelected non-central bankers allowed the final say on emptying the Treasury and paying themselves bonuses with Tax Revenue monies?

    Shurely shome double standards here.

  22. Mr J Leslie Smith
    Posted February 21, 2011 at 9:07 pm | Permalink

    How can a Central Bank ever be independent in a so called “Democracy” as Politicans as you rightly point out, can always overide the bank or change the Personnel. It also can never be considered independent, by the Public at large as today we simply do not trust either Politicans in charge, nor Senior Civil Servants. We only watch your actions today, not what you might say as a Government. You personally, are only listened to and respected, as we have watched not only what you say over years, but how you have voted in the House. Sadly, the John Redwoods are few and far between, in the present House of Commons.

  23. zorro
    Posted February 21, 2011 at 9:43 pm | Permalink

    The meddling with the banking system and the ‘tripartite’ arrangement in the late 90s says more about, and is compatible with Gordon Brown and his Midas touch in reverse deft handling of the economy.

    Memory tell me that the reason for the ‘independent central bank’ and the ‘strengthening of the regulatory apparatus’ was an innate fear by normal people of what a Labour government could do to a country. Mr Blair at least was aware of that very reasonable fear.

    In short, the idea of an ‘independent central bank’ is a conceit. It worked well in Germany whilst times were good and the political imperative was to control inflation at all costs (Weimar 1920s) and politicians wanted the conceit to be seen to be effective letting the expert technocrats run the economy.

    I did not find your exposition of the keynesian argument on problems with the gold standard particularly convincing. I had this picture of miners in my mind digging for gold with one eye on GDP figures and the other on the stock exchange to work out how quickly they should be digging…..it rather defeats the point of having a gold standard.

    In any case, the economy could still be run well without going back to the gold standard, but the power of the institutional banks must be broken. For democratic accountability, the state should be able to issue its own money without having to go to banking institutions to create money charging interest. I’m sure that the Rothschilds would take it in good grace…. :-)……but Mr Mandelson and Mr Osborne might not get so many invites. By the way, if anyone proposes to do this in the future, might I suggest that you wear your invisible bullet proof vest.

    zorro

  24. Conrad Jones (Cheam)
    Posted February 22, 2011 at 10:56 am | Permalink

    “However, he subsequently altered the aims of the Bank when he switched the requirement from keeping the RPI to 2.5% a year increases, to asking for
    2% increases in the CPI.” – The CPI-Lie.

    Absolutely agree. The CPI was yet another Labour Newspeak method of misleading the public about inflation. Reassuring them to leave their savings in the Banks.

    http://www.statistics.gov.uk/downloads/theme_economy/cpi-rpi-information-note.pdf

    Note: RPI includes Housing costs and used car prices.

    “The RPI covers a range of costs excluded from the CPI, including:

    Mortgage interest payments (MIPs)
    Council tax
    House depreciation
    Buildings insurance
    House purchase costs, e.g.estate agent fees
    TV licence
    Road fund licence
    Trades union subscriptions

    The RPI includes a price index for
    cars which is based entirely on used
    car prices.”

    CPI does NOT include Housing Costs

    “The CPI covers certain charges
    The index for the purchase of new cars in the CPI is quality adjusted and based on actual published prices for new cars.”

    Note: ” The index for the purchase of new cars in the CPI is QUALITY ADJUSTED ”

    That means that if new cars are rising by 10% a year, the CPI can rack this down if the New car has a better radio or better brakes than previous years.
    Marketing dictates that salesmen need to be able to say that this years model is better than last years model even if the upgrade is totally unnecessary for any practical purpose.

    How this “Quality Adjusted” index is calculated is anybodies guess. Do they go to each manufacturer and ask them how much extra each feature or improvement costs in real terms – adjusted to inflation – but wait – inflation is what they are trying to calculate.

  25. Neil Craig
    Posted February 22, 2011 at 12:57 pm | Permalink

    In Africa we are seeing mobile phone credit being traded (mobile phone communication being a major reason for Africa’s growth & deals being sealed on air). This is effectively a new currency & not subject to the depredarions of Africa’s governments, elected and otherwise. It may be a wave of the future as such communications become more common everywhere.

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

  • John’s Books

  • Email Alerts

    You can sign up to receive John's blog posts by e-mail by entering your e-mail address in the box below.

    Enter your email address:

    Delivered by FeedBurner

    The e-mail service is powered by Google's FeedBurner service. Your information is not shared.

  • Map of Visitors

    Locations of visitors to this page