If central banks are to meet the macroeconomic necessities of their respective nations, they need to coordinate monetary policy with national economic objectives and with development plans. This article explains that the current architecture of the international financial system, and corresponding central bank independence, far from serving the interests of their respective national economies, the monetary policy of the central bank instead facilitates capital speculation detrimental to economic growth and social justice.
Argentine president Christina Fernandez de Kirchner fired Martin Redrado, then the president of the Argentine Central Bank (BCRA) on January 7, 2010. The grounds were “failure to comply with the duties of a public servant” and “poor conduct.” The now-former president of the BCRA had refused an order to facilitate the transfer of $6,569 million of the Argentine reserves to a “Bicentennial Fund” created by executive branch decree and destined to pay Argentine external debt obligations coming due in 2010 (some $13,000 million).
The replacement of the president of the BCRA has breathed new life into a discussion silenced in the past by those who consider the subject taboo. In the last three decades, we have become accustomed to hearing that central banks should be completely independent of executive powers, to guarantee the bank’s efficiency and the confidence of financial investors and the international community.
Argentina lived through the culmination of this policy in 2001. A avalanche of BCRA proposals were made, ranging from off-shoring the central bank to requiring that key personnel be designated by external institutions such as the International Monetary Fund (IMF), the Organization of American States (OAS), or the United Nations (UN). There was widespread fear that the economic and social collapse of Argentina might lead to national authorities proposing unfriendly market activities which could impinge on the positions of creditors and speculators, as indeed finally occurred—and it should be added—was an inevitability.
Countering this perspective, many heterodox economists, among them the new president of the Central Bank, Mercedes Marco de Pont, argue that monetary policy should be coordinated with political economics in general. That same public servant, then a legislator, presented a plan to reform the charter of the BCRA to encourage this, promoting the formation of a “coordinating council” aligning monetary policy with the executive branch. Are we looking at an oncoming disaster?
What is the Role of the Central Bank?
The principal role of central banks is the execution of monetary policy and the control of the banking system. With the spread of neoliberal economic policies, particularly since Paul Volcker, then head of the U.S. Federal Reserve, raised interest rates sabotaging the political economics of President Carter in 1979, it became practically unquestionable that central banks should be guided by a policy of price control and the provision of a stable economic base to attract investors. The argument went pretty much as follows: investors demand price stability, price levels in turn depend on the quantity of money in circulation. The public sector has a tendency to overspend, so the central bank needs to keep the keys to the printing presses, use as little ink as possible, and keep interest rates high to restrict the money supply. Therefore, central bank independence is essential to avoid the inflationary pressures, a result of the tendency of governments to issue too much money.
Every link in this logical chain is eminently arguable. For example, it is not at all true that the only thing that determines prices is the quantity of money. Very often we see that monopolies have effect on prices; also when there is idle productive capacity, raising the money supply stimulates demand augmenting both productivity and employment, but not prices. The structuralist school is the kind of developmentalist school of economics to which Marco de Pont, the UN South American Institute of Economics (CEPAL), and those who analyze economies in terms of dependency theory belong. These schools of thought have clearly shown that inflation in Latin America is not a problem caused by monetary policy.
On the one hand, tough monetary policy can attract or keep investment capital in the country, while on the other hand it is detrimental to those who invest in production due to the higher cost of credit. So what are really stimulated are financial investments of a speculative nature.
And who says the public spending is a bad thing? That it may often be put to bad use doesn’t imply that it is bad. Consider public investment in infrastructure, the promotion of employment in the productive sector, education, promoting science and technology, or providing care to marginal social sectors. It could be argued that such investments are necessary to consolidate an economic base for a solid economic system with solidarity.
The most radical example of an independent central bank is, without doubt, the European Central Bank (ECB) and it is quite true that it has managed to keep inflation in line over many years, confronting governments that have a tendency to squander. With the current collapse of the banking system, the adjustments in the labor market in the last decade and the consequent fall in salaries, more unemployment and cuts in social welfare, one might question the logic of such policies.
New and Old Models
Central banks became widespread in the second half of the 19th century as mixed (public/private) entities with a strong commercial orientation. However, after the Second World War, there was a drive to promote their nationalization and the regulation of economic policy, in an attempt to avoid the reappearance of another depression like the 1930s. The objective was not stability, but rather growth and employment. Because of this, bank authorities worked very closely with the executive branch of the government and aligned bank policies with more general economic policies. In that era there was not today’s cut-throat competition to attract capital, so flows of speculative capital were strongly regulated and curtailed.
The model of “independence” doesn’t just come from the monetarist school of Milton Friedman, it also the result of the collapse of the Bretton Woods monetary order, from the liberalization of the flow of capital and the collapse of the system of fixed rates of exchange. Since that time, independent central banks have become the standard of financial capital and the model of short-term fictitious financial gain which collapsed in that last three years. Might it be prudent to ask who benefited?
That is why the new discussion revolves around how one might recoup essential tools to re-launch pro-employment policies, for growth and to promote social justice. For such aims the tools of controlling the money supply, interest rates, fixing exchange rates, and restricting capital flows play a very important role.
An independent central bank is the playground of financial speculators. An alternative model for economic and social development requires a bank that responds to national needs and coordinates its policies for the general good. Under such conditions, technical adjustments can counter the tendencies of spendthrift governments.
The principle driver will be a national plan, encompassing the needs of the majority of the population, designed with their needs in mind, moving back to the long-term planning, aspects that are more crucial for a central bank than its so-called “independence.”
Andrés Musacchio is an economist at the IDEHESI- University of Buenos Aires, http://www.conicet.gov.ar.
Translated for the Americas Program by Tony Phillips.
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