Apr 21·edited Apr 21Liked by Brian Romanchuk

The conclusion of my 'Why the Bank of England Act 1998 has no effect (on government spending)' section in a talk I gave yesterday was that this is fundamentally a constitutional question. Can an unelected set of Bank officials really say no to Parliamentary approval of supply?

The UK legislation states that the monetary policy objectives are 'price stability' and 'support the economy policy of the government'. The Treasury then gets to define, by order, what those two terms mean and change them at any time.

So if MMTers were in charge we'd just define price stability as £100 of central bank money for delivery in a year's time costs £100 today.

Job done.

It's all smoke and mirrors. I doubt anybody at the sharp end in finance believes the 'independence' concept, if they ever did.

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Apr 21Liked by Brian Romanchuk

My casual observations regarding central banks (both their legal status and their behaviours) leads me to conclude that they aren't "independent" in any ordinary sense of the word -- that seems to me to be more of a slogan than any actual existing thing; sort of like "free trade."

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There are a number of non-mutually exclusive ways one could pose the question of "central bank independence." Here, you pose it as, "Independence to do *what*?", and answer it as, "At the very least, set the policy rate." We should note that in time of national crisis, even that level of independence goes away. Even if Fed chair Marriner Eccles had not been politically aligned with Franklin D. Roosevelt at the start of World War II, he would not have remained in charge very long if he had contravened how the President and Treasury Secretary Morgenthau wanted the financing of the war effort to proceed.

It's also useful to pose this as, "Independence *from whom*?" In the U.S., the mainstream consensus answer to this is, "From the White House and the Treasury Department -- and that's a good thing." However, in a 1917 book, "The Myth of Independence: How Congress Governs the Federal Reserve," Sarah Binder and Mark Spindel argue that the Federal Reserve is not independent *from Congress*. They quote former Wisconsin senator William Proxmire as describing the Fed as a creature of Congress -- language that MMTers like Stephanie Kelton also use. The Fed chair has to testify twice a year before each house of Congress -- a level of scrutiny which no other head of a powerful agency must face. Granted, a lot of this Congressional oversight is grandstanding, but it nonetheless reflects the fact that the U.S. Constitution does assign oversight of money to Congress, not to the executive branch. Binder and Spindel argue that in good times Congress is content to let the Fed do its thing. But in crises the Fed is hauled before Congress, used as a whipping boy -- and then given extra authority to deal with the crisis!

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"The diffusion of central bank independence around the globe was another battle horse of economic experts in the 1920s. In a historical moment in which the general public was demanding a greater voice in economic decisions and the British Labour Party advocated for the nationalization of the Bank of England, the in-house economist of the British Treasury, Ralph Hawtrey, vehemently defended the vital necessity for central banks to be free from “criticism and pressure,” noting that only in this way could they follow the precept “Never explain; never regret; never apologise” (Hawtrey 1925a, 243). Keynes agreed heartily. He wrote: “My own view is in complete accord with that of Mr. Hawtrey, that this activity is one which should be pursued by a semi- autonomous body not subject to political interference in its daily work” (“Discussion by Prof. J. M. Keynes from the Chair,” in Hawtrey 1925a, 244). The common ambition was impeccable: the economic sphere had to be shielded from political liability." https://medium.com/@monetarypolicyinstitute/the-political-rationale-to-engineering-a-recession-monetary-austerity-and-class-wars-5d0564a3bea6

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