Speaker’s lecture – you cannot have an independent Central Bank in a democracy

 

The UK has had kept returning to the idea that there is some independent professional way of managing the economy free of political dispute or Parliamentary disagreement. Like moths to a flame, this has usually proved destructive to the jobs, incomes and businesses of our country.

During my lecture on Monday I will return to this theme. The UK was mesmerised after 1964 with the idea of German economic performance. Many decided that one of the central differences which delivered this better result was an “independent central bank”. The UK first tried to copy this by linking our currency to the German one. This policy led to a spectacular failure on the markets and a nasty recession.

More recently it led to the UK adopting the underlying idea, and seeking to have its own independent Central Bank. This same Bank presided over a huge build up in credit and risky bank balance sheets. It followed this up by starving the markets and banks of money, leading to the largest banking collapses for over a century.

The truth is you cannot have an independent Central Bank in a democracy. Someone has to appoint the Governor and the Board of the Bank. Someone has to establish the powers of the Bank, and someone has to set the Bank its tasks and targets. All that rightly remains the work of Parliament. So Parliament remains sovereign in these matters. You can have Parliament dismissing the Bank officials or changing the Bank’s powers if it ceases to please. You cannot have the Central Bank dismissing the elected government or changing the  government’s powers if they no longer like the government. That remains the electorate’s job.

The German model was  no more independent than the UK Bank has proved. The German Bank gave good advice on the hasty and badly drawn up Ostmark DM merger and was overruled. Even more amazing, the so called Central Bank whose main task was to defend the German currency was then overruled with the abolition of the currency itself! Some independence then!

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45 Comments

  1. Mark B
    Posted March 16, 2014 at 6:33 am | Permalink

    And what of the European Central Bank ? Is this any better, or worse ?

    Germans trust the Bundesbank far, far more than they trust the Bundestag. Germans, more than any nation on earth, know the values of ‘good money’. It was a lesson that was taught to me in the 80’s and one of the reason why we still hang on to Sterling.

    Being able to control ones currency is the ultimate symbol, next to independent military might, a nation has of its Sovereignty. Because of that, any nation that surrenders such, is no nation at all and, any Parliament that surrenders such, is no Parliament at all. You effectively become vassals, as we are seeing on the continent. The same therefore can be said of Parliament with regard to a Central Bank, or indeed any bank that can print money. Parliament has to maintain overall control, otherwise it is not Sovereign. Therefore, Central Banks cannot be independent. They may be independent of thought, but cannot be independent of action, there has to be some overall authority and democratic control / mandate.

    The BoE should be independent of Government and in particular, both the Chancellor and the First Lord of the Treasury. But it should be subservient to the will and scrutiny of Parliament. It should be Parliament that the BoE should answer to, and no one else. It should be Parliament that the BoE gets it mandate. The BoE should both be seen and made, to act in the interests of both Parliament and the people and not of the Government. It should be Parliament that should give it its mandate and do all the hiring and firing.

    Free from the Executive and able to work in the interests of the Nation and its people, it would be much stronger and more trustworthy. It would also be more democratically accountable and would be subject to more scrutiny.

    Reply The German Bank was so independent that against its advice the government abolished the currency it was meant to defend!

    • Mark B
      Posted March 16, 2014 at 2:36 pm | Permalink

      Reply to reply

      I do not disagree. But you said, Government. I said Parliament – legislature, not the executive. Different thing, as I am sure you will agree.

      • Mark B
        Posted March 16, 2014 at 2:41 pm | Permalink

        Actually, you did say Parliament – apologies.

        But currently it is the executive that influences decisions, is it not ? That needs to change.

    • Mockbeggar
      Posted March 17, 2014 at 11:27 am | Permalink

      Yes, who does control the ECB? That’s an interesting question.

      • Mark B
        Posted March 19, 2014 at 7:20 am | Permalink

        The UK has shares in it I believe ? And as such, we are liable for the debts it incurs.

  2. arschloch
    Posted March 16, 2014 at 6:34 am | Permalink

    John you have missed out the main argument for an independent CB in that the UK economy has been harmed in the past by politically motivated and economically unjustifiable interest rate cuts. Can you imagine such a dangerous tool in the hands of little George Osborne? He is your “grand election strategist” who could not even deliver a majority against the most corrupt and inept political party of modern times. You might want to remind him that most people consider having a big house or a flash motor as being status symbols, not how much money HMRC is taking off them.

    Reply Mr Brown simply changed the inflation target when he wanted to influence these things – the government will always be in charge

    • margaret brandreth-j
      Posted March 16, 2014 at 11:41 am | Permalink

      On the advice of Mervyn King.

      • Denis Cooper
        Posted March 17, 2014 at 3:43 pm | Permalink

        Why do you say that? I’ve never seen any suggestion that King wanted that change or advised Brown to make it, and when King made a speech about it six months later he seemed to have some misgivings:

        http://www.bankofengland.co.uk/archive/Documents/historicpubs/speeches/2004/speech211.pdf

        “Unfortunately, there is an additional complication. Unlike the translation between Fahrenheit and Centigrade, the difference between RPIX and CPI inflation does vary with the economic temperature … “

    • Posted March 16, 2014 at 1:03 pm | Permalink

      According to Simon Wren-Lewis (Oxford economics prof.) if you look at the detailed figures, it can well be argued that Osborne actually is organising a pre-election boom. See:

      http://mainlymacro.blogspot.co.uk/2013/12/osbornes-plan-b.html

      But it looks like Labour are too dumb to have noticed.

      • Lifelogic
        Posted March 16, 2014 at 9:44 pm | Permalink

        Of course Osborne is trying to get a pre-election boom feel good factor. That is all he can now do, having failed to cut tax borrow and waste, failed to provide cheap non religious energy and having ratted on IHT four years ago when he had the chance.

        It surely will not work. Not even against the dreadful Miliband.

  3. alan jutson
    Posted March 16, 2014 at 7:26 am | Permalink

    What has the economic performance got to do with a central/independent bank.?

    This shows group thinking as has been outlined in yesterdays post.

    Economic performance surely has more to do with the way businesses are structured in the first place, how they are regulated with regards to employment laws, taxation,health and safety etc, and other costs such as land, buildings, raw materials, power and wages, but above all the way they are managed.

    Yes of course money has to be available which often comes from a Bank, but then most normal functioning banks will lend if the risk is sensible as it increases their profits too.
    Do not forget another option is shareholder investment (rights issues etc) and private venture capital.

    Certainly Governments can make a difference with regard to a certain number of the above points.
    Employment Regulation, taxation, health and safety, taxation of all kinds, and the excessive cost of power, but in general their best bet is to simply keep out of the way, as most politicians make poor businessmen, and make businessmen poor.

    Reply Business performance is strongly affected by changes in overall money supply and demand, as the recession of 2007-9 showed. This was an avoidable error of Central and commercial banking, led b y the errors of the Bank of England under the general direction of the Labour government.

    • Colin
      Posted March 16, 2014 at 9:52 am | Permalink

      Indeed, what we really need is the adoption of real money and the abolition of the central bank altogether. The central bank/fiat money model has failed. We need sound money and free banking.

    • alan jutson
      Posted March 16, 2014 at 12:25 pm | Permalink

      Reply -Reply

      You have answered the very point I made.

      Politicians got involved and made the wrong decisions.

      Pray tell me what did Gordon Brown run on any commercial basis before he was made Chancellor.
      Does he have any sort of accountancy, or investment/financial/taxation qualifications.

      Same could be said of Osbourne.

      Selling Gold off at its lowest price in decades was another great investment idea of Mr Bowns.
      Committed the Classic failure of telling everyone in advance of his intentions.

      Also presided over the Biggest Bank merger failure in History such was his commercial sense.

    • Posted March 16, 2014 at 1:27 pm | Permalink

      Mr Redwood,

      I would agree that any Central Bank cannot be considered independent of government. I would say this was true regardless of the level of democracy.

      From your reply to AJ , if I understand you correctly, you say it must be recognised thus, otherwise the Labour Government can’t be held responsible for the 2008 GFC?

      It’s fair enough to criticise the Government of the time for not foreseeing the crash. But all Parliamentarians had a responsibility too. The Conservative Party naturally are using the 2008 GFC to their advantage, but I don’t remember any warnings from them until it was far too late. It could have been foreseen at least a couple of years earlier. Did I miss those warnings? If so, what were they?

      Reply The Conservative opposition did warn of too large a debt build up, and I warned throughout the second half of 2007 and into 2008 that the Bank was squeezing too tightly. See back numbers of this blog.

      • Posted March 16, 2014 at 10:30 pm | Permalink

        Mr Redwood,

        I’ll have to have a look. This is what I wrote on 12.05.2007 from Australia!

        Let me stick my neck out and say that we are on the brink of deep recession or even a depression. The first thing that you’ll notice is that there will be a much increased concern about the housing market. Prices will start to level out. Many properties in Australia are vacant and have been purchased by speculators for investment only. Incidentally, I should say that the coming crash won’t happen just in Australia. It will probably start off in the USA and spread from there. As it becomes clear to the speculators that there is no more profit to be made they will start to offload them on to the market. Prices will start to fall , slowly at first, then later panic will set in and the market will crash. You’ll hear the term “negative equity” quite a lot as homeowners find that they owe more on their property than it is worth. Some will just walk away and hand in their keys to the bank. Prices will crash even more as forced home sales become commonplace.
        The share market will probably do OK for a time as some of the speculators money is diverted away from property into shares. However, much of the recent boom has been fuelled by perceptions of increased wealth , leading to increased personal debt. That will all change, as people look to reducing their debt and spending will slow down. Profits will fall, and in turn share prices will fall. Lower share prices will lead to lower investment and in turn higher unemployment.

        Pretty good eh? I should say that my more Conservative minded friends thought I was crazy. It wasn’t what they were reading at the time.

    • acorn
      Posted March 16, 2014 at 5:34 pm | Permalink

      Strangely JR, the US FDIC is not suing the Labour Government. Financial fraud in general and accounting control fraud specifically, is not a crime in the UK. And, certainly unthinkable for the “elite / political” class headed by Eton old boys in the City of London; Westminster and Whitehall.

      NEP’s Bill Black is reporting. “The FDIC has sued 16 of the largest banks in the world plus the British Bankers Association (BBA) alleging that they engaged in fraud and collusion to manipulate the London Inter-bank Offered Rate (LIBOR). BBA called LIBOR “The most important number in the world.”

      LIBOR is actually many numbers that depend on the currency and term (maturity) of the loan. The collusion involved manipulating most of these rates. A vast number of loans and derivatives are priced off of these “numbers.” Estimates of the notional dollar amount of deals affected by the collusion range from $300-550 trillion in deals manipulated at any given time. The LIBOR frauds began no later than 2005 and continued through 2011.”

      I wonder what the FDIC will settle for. Probably best if fencing City Spivs get lawyered up pending the Sheriff arriving, quoting the US/UK Extradition Treaty, preferably before their Wall Street masters shaft them.

      • Denis Cooper
        Posted March 17, 2014 at 7:23 am | Permalink

        There is the common law offence of “conspiracy to defraud”, and charges (may be ed) laid against a number of people:

        It remains to be seen whether any of the prosecutions succeed.

  4. formula57
    Posted March 16, 2014 at 8:44 am | Permalink

    As is well known, Germany’s Bundesbank was made subservient only to the courts, hence its ability to disregard Adenauer’s repeated demands for stimulus for example. Perhaps it was as a means of ridding themselves of independence to that extent that the politicians saw virtue in abolishing the Deutschemark. So there could be virtue in allowing those nominally in charge of everything to be in charge of the central bank also, but it has been refreshing to be spared actions aimed at pleasing the crowd, like for example interest rate cuts announced by a Chancellor in the party conference season.

  5. Leslie Singleton
    Posted March 16, 2014 at 9:24 am | Permalink

    For “Independent Central Bank” substitute “Sound Value of Money” and you won’t go far wrong. The fact that any independence is not absolute of 100% is neither here nor there–you can only do what you can do.

    • Leslie Singleton
      Posted March 16, 2014 at 9:27 am | Permalink

      Postscript–Besides, I thought what the Bank was given was only what was called “operational” independence

  6. Lindsay McDougall
    Posted March 16, 2014 at 9:48 am | Permalink

    The German Bundesbank built its reputation on ensuring that Germany always had a hard currency and low inflation. It would be nice if the Bank of England copied that.

    America has an independent Federal Bank. So presumably America is not a democracy.

    Reply The German central Bank was overridden (disastrously) on the Ost mark merger and on the abolition of the DM showing that the so called independent Bank was not independent. The Fed has to co-operate with the Administration under their constitution, and the Head of the Fed is chosen by the President.

  7. Gary
    Posted March 16, 2014 at 10:27 am | Permalink

    when you lower the price of money by increasing its supply, you change the investment signals to entrepreneurs, capital is misallocated, structural inefficiencies arise, eg. low productivity, inefficiencies are papered over, savings are stolen, gambling is encouraged as money is diverted to interest rate speculation. The low rates become a trap from which there is no easy escape.

    You get a short term, feel good, boost, but over time the economy is wrecked.

    The money supply should never be the economic driver, the money supply should be as a response to economic demand. The money supply must arise out of market demand, and no govt or bank committee must be involved. If you believe that the market is the most efficient allocator of resources, then you must also believe that the market will be the most efficient allocator of money. After all, the millions of market players know better than a committee how much they each can and want to spend.If not, just revive the Politburo and be done with it.

  8. Denis Cooper
    Posted March 16, 2014 at 10:44 am | Permalink

    “The truth is you cannot have an independent Central Bank in a democracy.”

    We haven’t really tested the truth of that proposition here in the UK, because the system we have is a democracy more in name than in reality; it is dominated by the oligarchs who control the main parties, who pre-select their official candidates for parliamentary elections and then bully and bribe those who have been elected to follow whatever party line they may choose at the time.

    One result is that the oligarch who has been appointed as the Chancellor decides what inflation target shall be set for the Bank of England; as often pointed out in comments on this blog this is a deliberate policy of devaluing our money year after year, but the MPs who voted through Section 12 of the Bank of England Act 1998 did not insist that the House of Commons must decide the planned rate of that devaluation and instead were content for the House to be provided with a copy of each of the Chancellor’s notices after he had decided.

    So in June 2003 when Brown decided that to fit in with the EU he would change the inflation target from one expressed in terms of RPI-X to one expressed in terms of the EU’s HICP, there was no Commons debate and vote to approve that change; no MP could afterwards tell his constituents “I voted against this proposed change to the inflation target because I believe that it will probably exacerbate already excessive house price inflation”; it was left to the Governor, Mervyn King, to quietly voice his misgivings in a little-publicised speech in January 2004.

    And then of course there have been no Commons votes to approve the creation of successive tranches of new money by the Bank of England and its use to buy up gilts previously issued by the Treasury in order to facilitate the sale of new gilts to fund the government’s budget deficit; letters are exchanged between the Governor and the Chancellor and made public to give the impression that this is always done at the instigation of the Governor solely for the purpose of meeting the inflation target and the Chancellor merely approves what he suggests, but outside observers suspect that there is informal communication before the formal letters are exchanged and that in reality it is the Chancellor who is taking the initiative and in effect giving directions to the Bank on monetary policy, contrary to the normal practice laid down by law, Section 10 of the 1998 Act, and he is inducing the Bank to put economic growth before the control of inflation, contrary to Section 11 of the Act; but MPs stand back and do not demand to know why the Chancellor has never asked them to approve the activation of reserve powers under Section 19 of the Act if he wishes to depart from the established normal practice and resume control of monetary policy, and nor do they question the wisdom and purpose of his policy or object to the excess inflation that it generates.

    We have found that Parliament can pass a law laying down that the Bank of England shall operate monetary policy independently of the Chancellor but that does not ensure that in practice the Bank of England will always operate monetary policy independently of the Chancellor, and we have found that those we have elected to Parliament are prepared to turn a blind eye to infringements of that law; do we pin the blame for this on the very concept of an independent central bank, supposedly a flawed concept which is incompatible with democracy, or do we instead point the finger at those who we elect to Parliament under what is clearly a flawed system of democracy?

    • Posted March 17, 2014 at 12:46 am | Permalink

      Denis Cooper,

      “this is a deliberate policy of devaluing our money year after year”

      This is true. If money doesn’t depreciate then there’s no incentive to do anything with it – except purchase just the bare essentials. Part of me doesn’t like the idea of rampant consumerism but that’s 21st century capitalism at work. The system works best when people spend their money as it is received. If they don’t, cash piles accumulate, the spending power in the marketplace isn’t enough to buy everything that is for sale in the marketplace and unemployment and recession results.

      If wages, generally, are reduced the available spending power becomes even less so that can’t be considered a solution. If prices are reduced the profit margin disappears so there is no incentive for any business person to take any sort of risk. They may as well keep gold bars in a safe.

      If there is an alternative to our present system that has been shown to work anywhere, ever, I’d be interested to know what it is. It may be imperfect but what’s the alternative other than to try to improve it? To try to make it work for the benefit of all rather than just the few?

      • Denis Cooper
        Posted March 17, 2014 at 10:17 am | Permalink

        I have suggested improvements, but they depend upon us electing MPs who wish to exercise proper democratic control rather than agreeing to leave important decisions to the Chancellor.

      • APL
        Posted March 17, 2014 at 11:35 am | Permalink

        petermartin2001: If money doesn’t depreciate then there’s no incentive to do anything with it”

        You underestimate the 1. entrepreneurial nature of the population, 2. the avaricious nature of the population.

      • Gary
        Posted March 17, 2014 at 4:10 pm | Permalink

        When all govt does is to facilitate consumption for consumers, no matter what, then we have become spiritually bankrupt, and later will become economically bankrupt.

        If the govt debases our economic touchstone, the rate of interest, by rigging the price of money outside of the market, just so that we spend money we don’t have on stuff we don’t need, then we all become spiritually poor.

        That which separates civilized man from hunter gatherer, is the ability to plan and store so that we can forgo immediate unneeded consumption to plan for a future where where may have more efficient consumption. In order to do that we need to invest savings into capital and build, the non-rigged interest rate guides us into the areas that are economical to invest and build and correspondingly also guides us into when and how much to save.

        Debasing the value of money by oversupplying it and thus rigging the price of money lower than the market would otherwise set it, severs this link between forgone immediate consumption, savings, investment and more efficient future consumption.

        Debasing the money to increase immediate unneeded consumption is a way for the party doing the rigging to steal money. It is a pig-headed, short term, criminal enterprise, that should be cut short and prosecuted wherever it is found, for the sake of our future.

      • waramess
        Posted March 21, 2014 at 5:37 pm | Permalink

        I really struggle to believe that there are still people like you “out there”

        If markets are left to their own devices and money were to increase against stuff then merchants might find that their sales are for an amount of sterling smaller than that which they paid for there stock in the first place but that the sterling they receive would be for a greater value.

        In other words the currency they receive for their sales would cover their initial costs and profit even though it might be for a nominally smaller amount.

        Probably a good idea for you to brush up on the role of savings also.

  9. Neil Craig
    Posted March 16, 2014 at 11:10 am | Permalink

    It depends very much on what you define as the needs of a democracy. Are there constitutional limits to what government can do (a liberal democracy) or is it possible for a democratic majority to pass any law (an absolute democracy). In the latter you can get 50% + 1 voting that they all get more money and indeed we often do. However you could have a constitution under which the central bank had a duty to keep inflation to a set amount and the politicians were, short of a change in the constitution, forbidden to interfere (which is what Gordon Brown promised, falsely).

    I’m one of those who regard liberal freedom as the principle and democracy, usually, as a way of getting it.

  10. brian
    Posted March 16, 2014 at 11:11 am | Permalink

    I find it difficult to blame the Bank of England for Labour’s mess. The infamous tripartite arrangement was completely flawed.

    Reply Of course – and I have always said so.

  11. yulwaymartyn
    Posted March 16, 2014 at 11:22 am | Permalink

    The truth is you cannot have a democracy and an independent central bank.

    True to form we don’t have either.

  12. Tad Davison
    Posted March 16, 2014 at 12:19 pm | Permalink

    I agree.

    ‘So Parliament remains sovereign in these matters.’ – yup! Ours! Duly elected by the British people.

    ‘You can have Parliament dismissing the Bank officials or changing the Bank’s powers if it ceases to please. You cannot have the Central Bank dismissing the elected government or changing the government’s powers if they no longer like the government. ‘

    My antithesis towards the US system with what is essentially a privately-owned Federal Reserve, is well known on these pages. The meddling hands of the big corporations in the political direction of America and hence its leadership, has been documented by far better and more knowledgeable scholars than little old me, but we in the UK dare not go down the same road, because democracy soon flies out of the window to be replaced with something very sinister indeed.

    I like to try to see a situation from every angle, so I attended an Islamic convention yesterday in Nottingham where a friend was giving a lecture. It gave me the chance to talk to those of the Islamic faith, and to garner their views on global issues. (Generalised criticism of Islamic government removed ed) Elected representatives that are in the pockets of others, has to be a bad thing. They must be free to hold the execute to account, and that includes control over our own central bank. etc #
    Tad Davison

    Cambridge

  13. miami.mode
    Posted March 16, 2014 at 12:38 pm | Permalink

    Thoroughly agree with you that an elected government, and Chancellor in particular, must have full control and thus responsibility for the economy.

  14. Posted March 16, 2014 at 12:52 pm | Permalink

    JR says “You cannot have the Central Bank dismissing the elected government or changing the government’s powers if they no longer like the government.”

    Whoever said the central bank SHOULD HAVE powers to dismiss government?

    The important point here is that decisions on stimulus can be kept entirely separate from strictly political decisions (e.g. what proportion of GDP is allocated to the public sector). The way to do that is explained in the submission made to the Vickers Commission by Positive Money, Prof. Richard Werner and others. See:

    http://www.positivemoney.org.uk/wp-content/uploads/2010/11/NEF-Southampton-Positive-Money-ICB-Submission.pdf

    Indeed that separation is already in effect to a large extent, in that the BoE MPC decides on interest rates, and another independent committee, the OBR, has a significant say on fiscal stimulus. All that Positive Money & Co advocate is taking the existing system to its logical conclusion, that is having just ONE COMMITTEE deciding on the size of stimulus, while politicians decide how to spend that stimulus.

    Incidentally, Positive Money & Co disapprove of interest rate adjustments (quite rightly) and advocate that the economy be regulated by adjusting the money supply. But that’s a technical detail. The important point is that decisions on stimulus can be kept separate from political decisions.

  15. Livelogic
    Posted March 16, 2014 at 1:29 pm | Permalink

    Indeed JR you are completely right. But surely this should be blinding obvious to all but the totally daft. Why do we have so many daft and dishonourable people in politics & government, trying to buy votes, pushing propaganda and distort the economy for short term electoral gains. While destroying businesses and jobs in the process.

    It should be under political control but how can we stop the politicians from trying to create short term electoral booms or just leaving as big a mess and as much debt as possible for the next lot – in the Gordon Brown/labour Style?

  16. Antisthenes
    Posted March 16, 2014 at 2:15 pm | Permalink

    Central banks do have roles to play but setting interest rates and money supply are not two of them that is not the roles that parliament should have either. If you truly believe in a democracy what is more democratic than free markets where multitudes of people vote with their money in a type of rolling referendums. No markets are where these things should be decided like so many other things that politicians and bureaucrats believe they should have so much say over.

    • Posted March 16, 2014 at 7:52 pm | Permalink

      They had something much nearer a free market in the 1800s than nowadays, yet they had the same boom-bust problem. So free markets are not a panacea.

      • APL
        Posted March 17, 2014 at 10:56 pm | Permalink

        Ralph Musgrave: “yet they had the same boom-bust problem.”

        Yes, and guess what hasn’t changed, human nature.

        The point of a free market is that it *is* subject to ‘boom and bust’ because of the nature of the market participants. But the bust is a feature not a bug, a bust purges the misalocation of resources that took place in the boom.

        The problem for us now, we had a Chancellor who claimed to have abolished ‘boom and bust’ partly because of his economic ignorance, but also because of his idealogical mindset. Because he tried to stave off the bust, when it actually happened it was worse than it would otherwise have been.

        Same pattern has been repeated right through the US, UK, EU, China.

  17. acorn
    Posted March 16, 2014 at 4:01 pm | Permalink

    In the interest of educating the debate / lecture, can I refer you to a neo-lib explanation of Central Banking by Prof Larry White. If Larry was available, he would be the Eurosceptics (Redwood division) laissez faire, neo-liberal standard bearer; delivering Hayek’s message; casting out the Kenesian apparatchiks in the Treasury and Bank of England.

    The four videos are less than 15 minutes, if you start with “Should we end the FED” take note of the comment about Scotland operating without a Central Bank, he fails to mention that it has to have the BoE’s permission (and some collateral), to issue Stirling notes, otherwise it would be a counterfeiter.

    As I am currently a follower of MMT, I would say that some of the Prof’s causalities are arse backwards; and, have been proven to be so beyond reasonable doubt since the 2008 crash.
    http://www.learnliberty.org/speakers/lawrence-white/ . This will be music to neo-liberal ears. If it makes it past moderation that is ;-) .

  18. waramess
    Posted March 16, 2014 at 4:40 pm | Permalink

    The scarcity of money makes it more valuable against the goods for which it is a medium. That is as money becomes more valuable goods appear to become cheaper which is an issue that monetarists fear because they believe it will lead to manufacturers and others ceasing their activities and causing a slump in employment.

    As we see in this modern world a fall in prices does not lead to a slump in business activity, and sometimes quite the opposite.

    The Weimar Republic printed money in response to what they believed was a market shortage and look what they achieved: hyperinflation.

    Whether Central Banks should be or should not be independent of government is hardly the issue; more to the point is, why do we need a Central bank at all?

    Are they smarter at establishing interest rates than borrowers and lenders who submit to the rules of supply and demand? After all they are causing interest rates to rise and fall depending on the state of the economy.

    Are they cleverer at establishing what quantity of money the market requires than the natural process of money becoming more or less valuable depending on demand?

    Should they be there to protect the value of the currency against foreign currencies?

    Take a step back and look at the untold misery and the unintended consequences of such meddling by Central Banks both both independent and dependent of government dictat.

    Some are born to meddle and others persuaded to do so by the witchcraft of moneterism but whatever the reason, they are meddling in matters far better sorted out by the markets without political interfearance.

    • Posted March 16, 2014 at 11:01 pm | Permalink

      “The Weimar Republic printed money” Yes that’s true.

      Just on a point of information, all modern money, with the possible exception of loose change, is either printed or created by keystroke in a government , or bank, computer. That includes the $, the £, the €. There just isn’t any other sort in use any more.

      If governments overdo it they’ll end up, like the Weimar republic, with high inflation. If they underdo it they end up with recession and very unemployment like in the Eurozone. The trick is to get it right. The USA has got it reasonably right, whereas the UK hasn’t quite done that but isn’t in as bad a situation as the Eurozone.

    • Posted March 17, 2014 at 9:58 pm | Permalink

      “why do we need a Central bank at all? Are they smarter at establishing interest rates than borrowers and lenders who submit to the rules of supply and demand?”

      To answer this question you need to ask yourself where money comes from. It’s not created by God! There’s no gold and silver involved any more. The body that issues money, which is effectively nothing more than a number of government IOUs, has to be under the control of government and the name “central bank” is as good as any for that body. In the UK its the BoE in the USA, its the Federal Reserve.

      Having said that, the Treasury has in the past issued money. They still issue Treasury bonds which are another form of government IOU. That could be considered money too – but that’s another argument!

      Interest rates aren’t determined by the process of supply and demand. If they were they’d always be just like they are now. That is close to 0%.

      When the time comes to raise them the BoE will independently. if we believe what we are told, intervene in the market to set rates at a higher level.

      • waramess
        Posted March 21, 2014 at 5:21 pm | Permalink

        You are completely mistaken.

        The government issues bits of coloured paper that for the time being are used as money because a semblance of confidence remains.

        Note well that it is no longer viewed as a good store of wealth as shown by the low savings rate.

        Money is simply a medium of exchange and does not require a bunch of halfwitted economists to meddle in the process.

  19. David Hope
    Posted March 16, 2014 at 6:32 pm | Permalink

    I agree that an independent central bank is no better than one under government control, policy is less accountable and we have found monetary policy to be just as loose if not more so.

    Personally I don’t think we should even have a central bank. But if we must it should be limited by a hard inelastic currency.

    I don’t believe we are all better off for having a way for governments to raise revenue without tax. Nor for having lots of manipulated fiat currencies that require anyone important or exporting to have to take out all sorts of hedges on rates and currency. Without central banking I suspect we’d have a much more balanced economy without heavy Cantillon effects causing winners and losers via the dissipation of inflation.

  20. Denis Cooper
    Posted March 17, 2014 at 10:49 am | Permalink

    Off-topic, JR, the Tory party has missed a trick with its feeble response to Miliband’s proposal for a different “referendum lock” law. It seems not have been understood by Tory leaders how easily their party could be put in an impossible position if/when a Labour government held an EU referendum where by his law the status quo would be excluded as an option, and especially of course if the choice being offered to voters was either a) join the euro or b) leave the EU. Just suggesting that he wouldn’t ever hold any EU referendum and saying that the only certain way to get an EU referendum is to elect a Tory government misses the point that an overwhelming majority of the electorate would never want to have that kind of choice forced upon them and many would have rallied to the side of the Tory party if Cameron had forcefully condemned Miliband’s proposal rather than treating it as inconsequential. Of course he would have to explain why his own plan to offer a forced choice was different, but no doubt the wordsmiths at Tory HQ could have come up with some formulation, as they usually do. I believe that this is one occasion when Lord Ashcroft has given bad advice, playing it up would have been much better than playing it down.

  • About John Redwood

    John Redwood has been the Member of Parliament for Wokingham since 1987. First attending Kent College, Canterbury, he graduated from Magdalen College, and has a DPhil from All Souls, Oxford. A businessman by background, he has been a director of NM Rothschild merchant bank and chairman of a quoted industrial PLC.
    Published and promoted by Thomas Puddy for John Redwood, both of 30 Rose Street Wokingham RG40 1XU
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