The Central Bank Is a Standing Vote of No Confidence in Our Representatives

Every modern democracy has taken one of the most consequential economic powers a state holds, the control of its money, and placed it deliberately out of reach of the people it elects. The central bank is independent. Its governors are appointed, not elected, on long terms, and the arrangement is defended by economists of every school as a precondition for a functioning economy.

I want to take that arrangement seriously as a statement about our system of government, because that is what it is.

What the Arrangement Says

The justification for central bank independence is not subtle, and economists state it openly. Left in charge of monetary policy, elected representatives will expand the money supply whenever it is convenient, which is always shortly before an election. They will buy growth today with inflation tomorrow, and the tomorrow will belong to somebody else. The incentives of a person facing re-election are simply incompatible with the job.

Notice what this concedes. It is not a claim that monetary policy is technical and requires specialists; plenty of technical policy is set by ministries answerable to parliaments. It is a claim about motive: that the people we elect cannot be trusted to act in the public interest when their own interest points the other way.

Every democracy on earth has formally agreed with that claim, written it into law, and built an institution around it. That is a vote of no confidence in representative government, passed unanimously, and it has been in force for decades.

The Question That Follows

If representatives cannot be trusted with the money supply, why are they trusted with the budget?

Fiscal policy has exactly the same incentive structure. Spending is popular and taxing is not; the benefits of a spending programme arrive before the election and its costs after. A representative who runs a deficit to win is doing the same thing as one who prints money to win, through a slightly slower channel. Buchanan's whole case against representative democracy, which I have written about before, is that it is fiscally irresponsible by construction.

So we have diagnosed a disease, treated one of its two symptoms, and declared the patient healthy. The monetary half was insulated because the damage there was fast and visible, hyperinflation being the kind of thing that ends governments. The fiscal half was left alone because its damage accumulates slowly enough that nobody in office has to answer for it. That is not a principled distinction. It is a description of which failure was embarrassing enough to fix.

The Second Problem, Which Is Worse

Grant that the central bank should be independent. Look at what it actually decides.

Economists who think the bank has a role at all say its job is to keep inflation from running away. Doing so has a cost: tighter money means slower growth and higher unemployment, at least for a while. So every decision the bank takes is a point on a trade-off between people losing purchasing power and people losing their jobs.

That is not a technical question. It is a value judgement. How much unemployment is worth how much price stability is exactly the kind of question a society is supposed to settle politically, because there is no fact of the matter about the right answer, only a distribution of who bears the pain.

And we have handed it to an unelected committee, on the explicit grounds that it is not political. The most consequential distributive decision in the economy is made by people no citizen can vote for, remove, or, in most countries, meaningfully question. When it goes badly, the response is not an election but a speech.

Is This a Democracy?

I am not arguing for putting the printing press back in the hands of parliament. The economists are right about what parliament would do with it.

I am pointing out that the argument proves more than its proponents want. If the representatives cannot be trusted with monetary policy because their incentives are wrong, then their incentives are wrong, full stop, and the fix we chose was to remove one decision from them rather than to fix the incentives. We then discovered that the removed decision was a value judgement, and quietly reclassified it as engineering so that nobody would ask who gets to make it.

The honest conclusions are two. First, the case for central bank independence is a case against representative government, made by economists who did not notice they were making it. Second, a decision that is admitted to be a value judgement and is kept from every citizen is a democratic deficit, not a technical necessity, and a system that decided issues directly would at least have to confront it as one.

We already agreed our representatives cannot be trusted with the money. The interesting question is why we stopped there.