Central banks have been around a long time. The Bank of England celebrated its tercentenary in 1994. The even older Swedish Riksbank marks its 350th anniversary this year. But the modern independent central bank is a relatively new development that started for the most part in the 1990s. The European Central Bank, the most autonomous of all, was born at the start of June 1998, exactly 20 years ago. Now there is disquiet among central bankers that their golden age of monetary independence may prove to be as transient as previous eras such as the late 19th century gold standard.
These concerns were aired in a conference held on 25thMay in Stockholm to mark the Swedish central bank’s 350-year history. Jerome Powell, since February the Chairman of America’s Federal Reserve (a stripling by comparison, barely more than a century old), said that this was “a challenging moment for central banking.” Noting that trust in government and public institutions was at historic lows, he added that “central banks cannot take our measure of independence for granted.”
If a backlash is coming against central banks, the surprise is that it has taken so long. For in truth the golden age of monetary independence ended a decade ago, with a bang. The charge against central bankers is straightforward. The worst financial crisis since the early 1930s occurred on their watch, after they had been handed the keys to managing the economy.
Whatever their success in achieving price stability, which was probably overstated given underlying secular disinflationary forces from technology and globalisation, central banks spectacularly failed to achieve financial stability. Yet that was traditionally just as crucial a mission. As early as the 1870s, Walter Bagehot had formulated in Lombard Street the Bank of England’s indispensable role as lender of last resort in order to thwart bank runs. The Fed for its part was created in 1913 after a succession of banking panics in America in order to prevent further financial instability.
Extraordinarily, central banks paid no price for their collective failure. Far from it: they emerged from the financial crisis even more powerful than before. The Bank of England regained the banking supervisory role that it had lost in 1997 when the newly elected Labour government made it independent in monetary policy.…