Rollins College

The independence of central banks

It’s been a long time since a political-economic article has grabbed my attention like The Economist’s “The independence of central banks is under threat from politics.” The article opens with “This is bad news for the world,” and I would have to agree. We are in a good place when it comes to inflation for quite some time now, but if the politicians and populists keep pushing their agenda without economic consequences in mind, we might have another economic crisis coming our way.

The independence of central banks is in serious danger. Politicians are breaking the current unwritten rules about the autonomy of the central banks and deciding who is going to be running them. We can see multiple examples of this, not just in United States, but in the rest of the world. President Donald Trump has considered firing the chairman of the Federal Reserve, saying that he will nominate Stephen Moore and Herman Cain, whom The Economist lists as unqualified cronies. In the United Kingdom, Brexiters are undermining the competence and motives of the Bank of England, while, further east, Turkish President Recep Tayyip Erdogan is in constant conflict with the nation’s central bank.

Additionally, there are many important job openings in the European Central Bank that are just waiting to become victims of an international econo-political game. The danger that comes with political influence in these banks is that they have a tendency to manipulate the interest rates when elections come along just to satisfy uninformed voters. We don’t have to go that far into history to see how this situation generally plays out. In the 1970s it was common for the politicians to manipulate the interest rates during elections to gain popularity without thinking what consequences this could bring. This led to a giant spike in the inflation rates which is also pointed out on this graph that shows the inflation rates in the United States since the beginning of the 20th century. This is the only time we see such a huge spike in inflation that was not related to a recession or other big global events such like the World Wars. It is only in the 1980s that the autonomy is given back to the banks that we see a big drop in inflation.

Inflation comes with great cost. Since money starts to lose value, so do the investments. Also, inflation usually leads to lenders raising interest rates and people with fixed incomes and no bargaining power will experience hard drops in their buying power. It is also hard for businesses to make future plans when the value of the dollar is uncertain. All of these consequences of increasing inflation rates can have substantial influence on economic stability.

There is one more problem here that is not as obvious as the data shows, but that might paint a much more serious picture of the state of the democracy in the United States and other global democratic systems. Behind most of the current political push towards the central banks are populists fueled by the belief of the common people that big government and bureaucratic institutions are failing them. This is a classic populist move, as they oversimplify a problem and offer a solution that probably is not going to work, but the masses that are tired of the current status are willing to agree to anything that might mean change. We see evidence of this in Katherine J. Cramer’s “The Politics of Resentment” and in  Arlie Russell Hochschild’s work, “Strangers In Their Own Land.” Most of the working class in rural America is tired of and angry with the government and how things have affected them socially, politically, and economically over the last few decades. They believe the government is taking their hard earned money and giving it out to everyone else. This makes it incredibly easy for a populist like Donald Trump to accumulate large amount of votes and, later, power. And as Robert A. Dahl points out in his work “On Democracy,” it is incredibly hard to keep the individuals that gain this kind of power from taking advantage of it and not turn totalitarian.

In the end, we have to face the fact that our economic stability is in great danger and we have to find a way to not repeat the same mistakes from the last century. We have to keep the central banks independent and far away from the influence of the new populist ways. But this is a daunting task that can only be done one way: we have to understand what is causing the mass dissatisfaction in the blue collar community and act on it.

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