July 20, 2021
Stefan Eich is Assistant Professor of Government at Georgetown University. He is the author of The Currency of Politics: The Political Theory of Money from Aristotle to Keynes, which will appear with Princeton University Press in early 2022
The idea of central bank independence is today in crisis. The reason is not—as its own logic would have it—that prying politicians have managed to impose their wills after all. Instead, and more paradoxically, independent central banks have become victims of their own success. This moment of introspection is also an opportunity to reconceive the notion of independence by placing monetary policy on a more democratic footing while acknowledging the peculiar difficulties of governing contemporary money under global financial capitalism.
Our goal, I want to suggest, should be to move beyond stale debates about the pros and cons of central bank independence as currently conceived in order to discuss more fundamental constitutional questions of how we can make central banks more democratic internally and at once more independent, by redefining independence as not against democracy but rather against the executive and financial markets.
A Constitutional Question
Between the Financial Crisis of 2008 and last year’s COVID measures, our economic news cycle has been dominated by central banks repeatedly stepping into the breach through emergency measures, while otherwise inhabiting the void left behind by more than a decade of lackluster fiscal policy and public investment. This renewed ubiquity of central banking brought with it a level of intense political scrutiny that central bankers have haphazardly sought to deflect through a mantra of transparency. But with their powers revealed for all to see, the distributive effects of monetary policy and broader questions of democratic governance have moved into the limelight.
Much of the nascent political theory literature on the democratic status of independent central banks—not least Paul Tucker’s influential Unelected Power—bases legitimate delegation on a set of principles or conditions. Delegation requires from this perspective the legislative specification of concrete goals and tools. But this presumes a world in which monetary policy is largely confined to narrow objectives and specific instruments. As Adam Tooze has set out in the context of the ECB, that is quite simply no longer the world we live in. Far from merely ensuring a narrow mandate of price stability, contemporary central banks have become dealers of last resort and indeed often market makers of first resort. They rely on an extremely wide range of complex tools that involve a broad and fluid mission of managing the liquidity of the financial system.
This now also involves—especially over the past year—actively managing the liquidity of markets in government debt as the ultimate safe asset on which financial markets depend. Despite protestations to the contrary, central banks have through their own actions by now implicitly acknowledged that the line between the delegated realm of monetary policy and the democratic realm of fiscal policy is blurry at best. The principle of independent central banking risks, in this context, being reduced to a transparently hypocritical attempt to insist on a line of demarcation as a default while happily skipping across it when convenient.
A new generation of historians of money and central banking have meanwhile rewritten the history of independence by situating it in concrete political struggles over the democratic status of money since the 1970s, as well as broader debates during the interwar years about the uneasy role of central banks as previously quasi-private institutions that had inadvertently become public levers of the war economy. The call for “independence” as it emerged in the wake of World War I and World War II was in this context never merely an attempt to check an overweening executive, but was as much directed against worries that the powers of the war machine could pave the way to greater democratic meddling in monetary matters.
This longer and altogether more political history serves as an important reminder that the status of central banks is not primarily a technical or even an economic question, but one that touches on fundamental questions of constitutional rule, as well as our conception of democracy and our theory of the modern state as both an agent and a site of contemporary capitalism. All these strands converge, I want to suggest, in the question: independence from what?
Let me flag what appear to me to be two crucial dimensions for how to approach that question as well as one—more subversive—provocation about how to reconceive “independence” today.
Delegating Money Power
The first dimension of future debate concerns whether delegation is really the best theoretical framing for assessing the constitutional status of central banks and the legitimacy of central bank independence. I already mentioned the way in which the constantly evolving self-understanding of contemporary central banks seems hard to reconcile with a fixed set of delegated objectives and tools. That might, of course, simply mean that central banks have stepped beyond their delegated authority. But there is another, even more troubling worry.
Two central requirements for legitimate delegation are (1) that delegation reflects an underlying agreement about shared goals and (2) that the delegation would aid in achieving these goals. But it is far from clear that this is what actually happens. Democracies often delegate not to achieve outcomes that are widely seen as superior, but precisely because there is too much political disagreement, including concerning what would even count as a superior outcome. Delegated independence would then arise not as an ingenious solution to problems of time inconsistency or falsely-aligned incentives but instead as a tool of partisan depoliticization. Far from reflecting a free lunch that reflects an underlying societal agreement, this would mean that delegation is used primarily to escape the burdens of democratic responsibility.
More theoretically: is the power of central banks even adequately captured as just another area of delegation akin to those of other kinds of administrative agencies? Or are there aspects of money and monetary policy which pose distinct challenges that are fundamentally different from other areas of administration? I am asking this partially because I wonder whether debates over the institutional design of central banks hinge more than we commonly think on prior debates about the nature of money and what we might call “money power”, as well as the specific role of private banks in money creation.
The power to make money, and the power to decide who gets to make money, is one of the most awesome powers of the modern world. A central bank tasked with managing the amount of credit in a system in which most credit is, in fact, created by private banks faces a peculiar set of constraints that make it uniquely vulnerable to elaborate forms of more or less overt blackmailing. This poses challenges that are distinct from other administrative powers, and the resulting questions concerning the banking system as a provider of credit seem to point us instead toward the political theory of, what Chiara Cordelli has recently called, the privatized state.
Constitutions and Democracy
The second dimension of future debate concerns the proper constitutional role of central banks and the way in which we theorize the very nature of constitutions and their relationship to democracy. Much intellectual excitement has in recent years rightly come from Christine Desan’s constitutional approach to the study of money, which has powerfully highlighted the ways in which money is a legal project (and this website is itself a wonderful reflection of its productive potential). It is interesting in this light that champions of central bank independence—from the interwar years to the present—have long presented their case precisely on the basis of a plea for the constitutionalization of monetary policy, often by invoking a division of powers. It is worth asking what implicit models of constitutionalization have historically been deployed in these arguments and what alternatives are available today. How can we ensure that a constitutional approach is not limited to the principle of the division of powers or, even worse, reduced to a mere anti-majoritarian reflex? How can constitutionalism be employed to achieve more democratic objectives?
This seems to matter all the more if we accept that even the very distinction of what counts as monetary policy and what as fiscal policy is in the end not a technical distinction but a political and indeed a constitutional one. In the implicit narrative that structures Tucker’s account, for example, one of the crucial steps in the emergence of modern constitutional rule was to require for representative assemblies to approve taxation, which in turn implied a clear distinction between fiscal powers and monetary policy. But is this familiar constitutional tale the most plausible way to account for the emergence of representative government and democratic control over public finance? Reflections on central banking have much to gain here from the history of political thought and its engagement with the complex relationship of constitutions to democracy.
Far from inevitably pointing toward central bank independence based on delegation, the constitutional analysis could equally well point to novel institutional setups. If our primary concern is the excessive executive use of the printing press, why not root monetary policy more tightly in elected assemblies, as happened with fiscal powers? Even if one of our concerns is the division of powers, why does this point toward delegation? Why not set up a distinct elected body instead to direct monetary affairs? If our concern is with better decisions and more just distributive outcomes, why not organize central banks more democratically internally by, for example, ensuring that various segments of society—not least labor alongside capital—are equally represented?
Most fundamentally, this would imply embracing the possibility that central banks can become laboratories of what Hélène Landemore describes as experiments in “open democracy.” Instead of either defending existing forms of central bank independence or dispensing with it altogether by yoking central banks to political systems that have themselves serious democratic deficits (a likely recipe for disaster), we can place central banks on a more democratic footings that would operate independently from the rest of the existing political system. This holds open the promise that central banking can be at once more democratic and yet independent.
Independence from Finance
Let me conclude by pushing this point even further, and suggest a more radical possibility. Almost the entire literature on central bank independence, defenders and critics alike, converges in a shared understanding of “independence” as autonomy from immediate democratic politics. But is it possible to reconceptualize independence itself? Instead of assuming that the primary source of interference against which central banks have to be insulated consists in elected officials or the public at large, there are a number of obvious forces that are just as possibly distortive and corruptive, if not more so.
In other words, instead of remaining captive to the existing discourse of independence is there a way to harness it in the service of rendering central banks more democratically accountable precisely by seeking to make them more independent from, say, financial markets? This would imply creatively rethinking the constitutional politics of money in an age in which the most damaging pressures do not arise from democratic politics but from the unceasing and erratic demands of financial market actors, within and without the state.
This point extends from the domestic realm to the global monetary system. After all, some of the most overt dependencies in the realm central banking come from various forces within a hierarchical global monetary system in which most states—especially emerging markets—are substantially affected by the actions of banks and central banks far beyond their control, not least the Federal Reserve. What work, if any, can the concept of central bank independence do in the global context of financial capitalism? Is it possible to make central banks more responsive to domestic democratic politics without compounding the international dimension of the problem?
True central bank independence would then mean abandoning the obsessive anxieties of democratic interference and instead broadening our concerns to include the constant pressures that financial markets and other central banks currently exercise on monetary policy. More paradoxically, true central bank independence in a global context might mean both more democratic checks against non-political dependencies, as well as greater efforts at international cooperation in the hope of constructing a more egalitarian global monetary system that addresses hierarchical dependencies.
 Despite a number of important differences, Jens van ’t Klooster similarly structures his ethical account of central bank independence through an inquiry into what would make delegation legitimate.
Return to Central Bank Independence roundtable prompt.