The Bank of England Should Not Be Independent
Central Bank independence is sometimes cited as an achievement of the New Labour government. In fact, removing this powerful economic institution from the sphere of political oversight was fundamental to neoliberalism’s war on democracy itself.
A central bank is the primary institution with which states manage the creation of money. The central bank introduces liquidity into markets by making loans to commercial banks and setting interests rates either higher or lower, in order smooth over economic fluctuations by promoting either the lending or saving of money. In times of dire emergency, such as during the 2008 financial crisis, the central bank can also use money creation as a form of state intervention. This took the form of direct bank bailouts and through quantitative easing, where the Bank of England “printed” new money in order to purchase the bad debt toxifying the balance sheets of private banks.
Since the 1980s, the theory of “monetarism” has dictated that manipulations of the money supply by the central bank should be its sole mandate, replacing all other forms of economic management. The function of the central bank is to use its (politically derived) ability to set the base interest rate as a way of controlling inflation.
Inflation is triggered when the amount of money in circulation begins to outstrip the amount of goods being produced. Too much money chasing too few goods drives up the price of those goods. This is a primary argument for policies which promote wage restraint for the working class. Workers will naturally respond to rising prices with demands for higher wages, creating a spiral of inflation that can only be tamed by increasing production and limiting wage growth.
Taming the Beast
It is true that inflation can have politically destructive consequences. An uncontrolled spiral of inflation — known as hyperinflation — can render money worthless and destroy popular trust in the institutions of state. The most (in)famous incidence of hyperinflation was during the interwar German Weimar Republic, which many historians directly link to the subsequent rise of Nazism. Support for the Nazis was particularly virulent among the middle classes, who had seen their savings all but wiped out by hyperinflation.
Hyperinflation aside, the basic economic argument against inflation is that unstable prices dissuade investment activity by firms, ultimately reducing economic growth. The period of high inflation which struck Britain in the 1970s, in which steady wage increases negotiated by trade unions met a crisis of industrial productivity caused by a dramatic hike in the price of crude oil, was used by monetarists like Margret Thatcher as an argument for her all-out attack on trade union bargaining power and the working class in general.
Instead of employing Keynesian tools of economic management — state control of higher economic functions, high levels of taxation on accumulated wealth, and rigid control of cross border investment flows — Thatcher employed a form of shock therapy. Using the central bank to massively hike the base interest rate, Thatcher’s government dramatically reduced the amount of money in circulation, taming inflation and making millions unemployed in the process.
The Monetarist Con Trick
Although “the beast of inflation” has now been tamed for several decades, the predicted return to rapid growth has not occurred. Despite the establishment of a stable environment for investment, economic growth has never returned to the levels achieved in the 1945–1973 Keynesian era. The real reason for such militant control over inflation is not, in fact, to promote economic growth, but to protect creditors from debtors, capitalists from workers. Because inflation reduces the relative value of fixed lump sums, it reduces the overall value of debt in relation to wages. Inflation partially acts as a quiet “back door” form of downwards redistribution. This is useful for states in several ways, as it provides them with a redistributive mechanism which avoids the political dangers of direct taxation and quietly “inflates away” public debt. This was the mechanism which allowed the British state to quickly reduce its enormous war debts while simultaneously making massive investments in physical reconstruction. Thatcher’s monetarist policies reversed this economic direction. The upwards redistribution of wealth and increasing power of money lending institutions is therefore fundamentally linked to the increasing crisis levels of public debt. Further, as a result of quantitive easing, some inflation is more acceptable than others. The asset price inflation which directly benefits the owners of property (for example in ever increasing house prices) is allowed to continue while wage inflation is kept to a bare minimum. Inflation is a class issue.
Although the Bank of England had been a tool of inflation busting since the early 1980s, New Labour’s promise to institutionalise central bank independence was, in effect, a promise to the financial markets. The days of using the central bank for hands-on economic management were over, and New Labour would respect Thatcherite monetarism. The promise to firmly place the central bank outside of the sphere of democratic oversight (“political interference”) was how Labour demonstrated its willingness to follow the neoliberal policy path to the letter.
A Social Democratic Central Bank
The Bank of England was nationalised in 1946 by the Labour government of Clement Attlee and, despite its new found operational independence, still remains publicly owned today. The policy was masterminded by the socialist economist and Chancellor of the Exchequer Hugh Dalton with the help of a secret group of Labour supporting bankers who called themselves “the XYZ club”. During the early 1930s, in the wake of the Great Depression, market led economic growth seemed to have disappeared from the advanced capitalist world for good. Dalton, alongside other moderate Labour figures like Herbert Morrison, began considering a transition to a full planned economy on the Soviet model. The Labour left (led by Stafford Cripps) had long advocated planned economics and had pushed forcefully for full nationalisation of the entire private banking sector, whose investment decisions would be deferred to a system of planning boards.
However, following the successful example of the New Deal in the United States and the implementation of comprehensive state intervention in the British economy during the Second World War, a more moderate policy was settled upon by the Labour Party. Supported by the theories of John Maynard Keynes and supplied with important economic information by the XYZ bankers, a new system of economic management was sketched out. The publicly owned central bank would form part of a larger infrastructure which would manage the “commanding heights” of the economy in accordance with an explicit set of social goals, most significantly the maintenance of full employment. During the 1940s, the conventional political logic was that it was not so much inflation, as mass unemployment which had triggered Europe’s insane march to war. The conditions of social unrest brought about by mass deprivation had to be avoided at all costs.
Alongside manipulation of the basic interest rate, other economic tools were created. High levels of top rate taxation brought inequality to a historic low and allowed the state to promote economic growth and rising living standards through redistribution, rising consumption, and direct investment via Herbert Morrison’s “Public Corporations” — the nationalised industries. Capital controls allowed the government to carefully regulate what investments British firms made abroad, or foreign firms made in Britain. The state limited investment options as a way of encouraging British capital to serve the national interest and protect the British worker (and capitalist) from the predatory activity of foreign capital.
The Mask Slips
British democracy has always been more honoured in the breach than in the observance. Although we nominally express our democratic will at the polls every few years, the real experience of democracy is felt in a thriving civil society, whereby an empowered citizenry are able to exercise power over their lives not just politically, but socially and economically. The robust institutions of economic and social planning erected after the Second World War, of which the Bank of England was a central component, allowed workers via both the ballot box and through trade union leverage, to press demands for higher living standards and greater opportunities for their children.
The steady disassembly of this economic infrastructure is what has led to a “hollowing out” of democracy. We are still entitled to vote, but every year the economic spheres that our vote can usefully control are reduced, as ever larger sections of the state are transferred into private hands. For the ideologues of the political right this presents no problem, democracy can be measured in terms of “one dollar one vote”. Although New Labour’s alienation of the Bank of England from direct public control was only partial — the state can and does override this independence in times of emergency — the symbolism was incredibly potent. No longer will governments of the left try to pretend they know better than the infallible forces of the market, and the most powerful tools of the state will be placed firmly in the service of those markets and the class of plutocrats which controls them. Where the Bank of England once served the working class with its mandate to control unemployment, a direct bait and switch has been achieved. It now serves the ruling class with a sole mandate to control inflation.
In 2018 former New Labour Chancellor Alistair Darling sat in front of the assembled ranks of the Labour supporting bankers in the heart of the City of London (“Labour in the City” no longer goes by the cryptic “XYZ” pseudonym). Although he was ostensibly booked to discuss the impact of the financial crash ten years on, he devoted most of his time to discussing how the financial aristocrats of the New Labour era could intervene to crush the dramatic shift to the left occurring under the leadership of Jeremy Corbyn.
Many in the audience were not quite so devoted to the cause of internecine conflict and attempted to question Darling about whether, in the light of the failed recovery and years of austerity, the left might have a point on some issues. For a brief moment the mask well and truly slipped. Darling sharply reminded his audience:
“You have no idea how close we came to having to exercise direct state control of the banks in 2008.”
In their own words, New Labour’s greatest achievement in 2008 was not saving the country from the banking collapse, but saving the banks from the people. A central bank under full democratic control could be mandated beyond even full employment. It could usefully orient the economy in the direction of rising wages, greater equality, and improved environmental sustainability. The independence of the Bank of England is, and always has been, a fundamental pillar of neoliberalism’s assault on our democracy, and Labour must commit to end it.