China’s Predatory Lending
February 12, 2025
The United States is economically the most powerful nation in the world today. This is what makes the study of central banking in the United States all the more interesting. Almost all other countries in the world adopted central banking without any major hassles. However, in the United States, a lot of conundrum took place […]
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Last month Donald Trump fueled a debate when he called the Fed “crazy.” Political accusations started flying all across the media. However, it raised a very important point.
The world realized that Donald Trump is not in control of the Federal Reserve which is the central bank of the United States. To the financially savvy, this was no revelation at all. However, a majority of the people believe that central banks are in complete control of their government.
However, this is not the reality, at least, not in recent times. For instance, the Bank of England had been controlled by the government to a large extent until the year 1997. After 300 hundred years of its existence, the Bank of England was finally able to become an independent body in 1997. It was the not the only central bank to do so.
Ever since the 1970’s, central banks all over the world had been lobbying for financial independence. The OPEC shocks of the 1960’s and 1970’s had exposed the weakness of the central banks. All throughout, the 1960’s and 1970’s, inflation was running at double digits in Europe.
Central banks needed greater autonomy to fix this problem. They were given this autonomy. As a result, almost all the central banks in the world are free from political influence. This policy has its pros and cons. In this article, we have described the advantages and disadvantages of having an independent central bank.
Having an apolitical central bank obviously has many advantages. Some of them have been listed below.
The business, on the other hand, operates based on business cycles. It is not necessary that periods of boom and bust will coincide with the political cycles. Also, if they do, politicians may have a conflict of interest.
For instance, if there is too much inflation during an election year, politicians might simply skip the necessary but unpopular decision of implementing rate hikes.
Hence, it is likely that the politicians will end up jeopardizing the entire economy for selfish gains. This is the reason why central banks need to be independent. They can take tough decisions regardless of the election cycle. The economy and elections are not naturally correlated. Hence, it is imperative that the decisions regarding the economy be taken independently.
For instance, governments may decide to provide free health care and retirement benefits even though they don’t have the financial wherewithal to implement such decisions.
The bottom line is that if the government is given control of the economy, they might resort to indiscriminate money printing which will ultimately lead to economic collapse. This is what has happened in many ancient civilizations including Rome. Hence, to prevent this, central banks have been made independent of government authority.
Consider the case of sports stadiums built for the Olympics in Greece and for FIFA World Cup in Brazil. In both cases, the government should not have indulged in deficit spending, but it did. These instances would become more common if the government had full control of the monetary policy.
Hence, it is important to keep the monetary policy separate from the government in order to maintain the financial health of the state.
Separating the central bank from the state has many advantages that have been listed above. However, there are some disadvantages as well.
To prevent this from happening again, central banks need to ensure smooth transitions. Their policies should not be secretive and should not shock the economy.
However, after the 2008 crash, they followed a policy of quantitative easing to save the big banks. This has ended up creating more inflation than any government policy ever has.
In summary, one can say that there are pros as well as cons to having independent central banks. However, the pros seem to be outnumbering the cons as of now. This is the reason why central banks across the world have witnessed increased autonomy.
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