BBLs Control the World
Central bankers are the masters now. Presidents and prime ministers may play at war and peace. They can prance abroad and posture at home. But money is different. Leave the politicians in charge of our money and they will debauch it. They freely admit as much. We are to put our trust instead in greyer men in darker suits.
These guardians of price stability have been tip-toeing from the shadows for some time. We know that the masterly economic management of Alan Greenspan, chairman of the US Federal Reserve, assured Bill Clinton of a second term in the White House. And the German people will surrender the D-Mark to Europe’s single currency only after Hans Tietmeyer, the Bundesbank president, gives grudging assent. But, by and large, central banking remains a society as secretive as it is powerful, a profession that has always prized discretion over its public profile. The relentless accretion of power has gone largely unnoticed in the wider world.
The euro will change everything. We have heard a thousand times that economic and monetary union is a political project, a venture to bind Europe to a peaceful future. The economics was an afterthought. That’s true. Yet Emu is also the final victory of the central bankers. In 11 of the European Union’s 15 nations, the unique power to create money and to set the rate at which it is borrowed and lent will henceforth lie with a new central bank.
The ECB, as it is known, will have awesome authority. It will ultimately determine the living standards of 300m people in a currency zone that produces 20 per cent of the world’s output of goods and services. Its president will be the most powerful man in Europe. Two men (when will there be more women central bankers?), Wim Duisenberg and Jean-Claude Trichet, are bidding for the post. One is Dutch, the other French. Both are steeped in the orthodoxy of their institutions. Both are barely known beyond them. I cannot recall a moment in history when so much power was so eagerly relinquished.
Some will say this is nothing but catching up with realities. The turning point came nearly 30 years ago when Paul Volcker, Mr Greenspan’s predecessor and as famous a central banker as there has ever been, returned early to Washington from a meeting of the International Monetary Fund in Belgrade.* The Fed thereafter got a grip on the inflation that had raged for most of the 1970s. The goal of full employment gave way to the quest for stability. After a decade of economic chaos, politicians were no longer to be trusted. Monarchs had clipped the coinage. Their successors simply printed money. It was time for the central banks to take charge.
The Bundesbank, of course, had always held a special place in the affections of the Federal Republic. It was the beneficiary of the dark memories of the collapse of the Weimar Republic. It derives its authority not so much from a constitutional guarantee of freedom from political interference but from a contract with the German people to preserve the value of the D-Mark.
France was won over to the new faith only after the failure of François Mitterrand’s Socialist experiment in 1983. But it has practised since with all the zeal of the convert. Mr Trichet, who is fond of commissioning opinion polls on the subject, will tell you that the nation’s politicians are not even in the same game as the Banque de France when it comes to public esteem.
The religion has spread like wildfire. In the new democracies of central and eastern Europe, an independent central bank has become the sine qua non of eventual admission to the rich man’s club to the west. Nations as far-flung as New Zealand exult in their search for the holy grail of price stability. Even Britain, a self-appointed absentee from the vanguard of Emu and a notorious delinquent in matters of money, has given the Bank of England operational independence.
Yet Europe’s new central bank represents a quantum leap. The Fed is independent within the US system of government. Even the Bundesbank can sometimes be overruled by the politicians, as it was over German unification. The ECB is being built behind impregnable walls.
The sacred text of the Maastricht treaty rules out the slightest interference by national governments. It will set its own targets for money and inflation. Its secret deliberations will be subject only to the most cursory scrutiny by the European Parliament. Even the economic and finance committee, which is to serve as the secretariat for the euro zone’s finance ministers, will have a majority of central bankers. The victory is absolute.
We are told to be content with this brave new world of technocrat as autocrat. It is the way of the future. Global markets are unforgiving. Feckless politicians cannot be left to take on the bond traders. Like the citizens of Plato’s Republic, we will rejoice in the rule of the philosopher kings. I doubt it.
I have nothing against central bankers. Those of my acquaintance are as engaging as they are serious. They laugh occasionally. Some will even admit they are sometimes wrong. That is not the point. Modern democracy demands that its citizens find someone to kick in times of adversity. The ability periodically to turn out the scoundrels is the essential safety valve in our societies.
The central bankers are immune to such remedies. We are told they are above politics and answerable only to the economic othodoxy of the times. Yet a group so powerful cannot indefinitely stand aloof from political discourse. They will make mistakes, sometimes grievous ones. We might recall that the Fed shouldered much of the blame for America’s great depression 60 years ago. And these modern masters of the universe will never abolish the economic cycle.
If the price of sound money comes to be seen, rightly or wrongly, as permanently high unemployment, we can be sure the politicians will not take the blame. The banks have power without accountability. Citizens will demand redress. The men in dark suits will occasionally appear before this or that assembly to explain themselves. But democracy demands the people have the right to fire and hire.
Mr Volcker has remarked that central bankers can act as “a leavening influence” in the political process. He has also said that without accountability they will lose their capacity to serve a democratic society. He is right on both counts. They should enjoy their moment in the sun. Nothing is forever.
*The Central Banks, by Marjorie Deane and Robert Pringle (Hamish Hamilton), is an excellent account of the rise and rise of the central banks.
Financial Times, March 27, 1998