After several decades in which the independence of central banks was seen as essential to economic stability, the notion is being questioned again. So are central banks free spirits? And do they truly need to be?
The Latin quote "quis custodiet ipsos custodes?" is worth revisiting in the interesting times in which we live. It roughly translates as "who will guard the guardians?” — a worthy avenue of inquiry when it comes to the increasingly thorny subject of central bank independence.
US President Donald Trump has repeatedly criticized the US Federal Reserve, with his latest comments suggesting that he believes the US central bank should "support" his economic policies.
Elsewhere, the Turkish financial system is going through the shredder at present, and several economists are blaming the mess on the authoritarian policies of President Recep Tayyip Erdogan, who has persistently meddled with the country's central bank by demanding lower interest rates.
Last week, German Chancellor Angela Merkel bemoaned the Turkish situation and directly referred to the aforementioned interference question, saying "everything must be done to ensure an independent central bank."
To many, the idea that a central bank must be independent of political interference will sound self-evident. Yet the 300-plus year history of central banking shows us that the concept has rarely enjoyed spells of unbroken consensus and that there is much fluctuation in thought on the subject.
On one level, it seems obvious that politicians seeking short-term electoral gain should not have too much access to the levers which control a country's longer-term monetary policy. Yet central bankers often make mistakes, and when they do, they can easily be painted as unelected technocrats with too much power, rather than expert custodians.
So does a central bank really have to be independent of politics to function properly? And if so, how can they be truly independent anyway?
Banking on it
First of all, what exactly is a central bank? Sometimes called a reserve bank, it is an authority that controls a country's currency, money supply and interest rates. It also often works as a regulator or overseer of the country's commercial banking sector.
As long as such authorities have been around, their power and independence from political decision-making has ebbed and flowed with the times. Their status has generally been pegged to the aftermath of economic crises; if they had power before one, they tend to lose it in the aftermath. If they were neutered before the doom, they are often empowered before the dawn.
From the regulation of a stable currency, to the control of inflation and interest rates, to the management of crises, the role of central banks has grown exponentially over the years. However, it took well over 200 years for them to achieve widespread credibility and even after that had happened by the start of the 20th century, they were regularly beset by the slings and arrows of turbulent economics.
In the 1930s, the US central bank, known as the Federal Reserve, was so fixated on controlling inflation that it had disastrous effects — almost half the country's banks went of business in the space of a few years.
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After World War II, various US presidents, from Harry Truman to Richard Nixon, persistently tried to interfere with the Fed's work. Truman was apparently so disgusted by Fed chief William McChesney Martin's refusal to keep interest rates low during his presidential term from 1945-53 that after it had ended, he passed Martin in the street and greeted him with one word: "Traitor."
When the Bretton Woods system of monetary management came to an end in 1971 and international currencies were floated, inflation soared alongside its most dreaded accomplice — high unemployment.
It was from that crisis that central banks derived much of the power and independence they hold today. When the EU's European Central Bank (ECB) was forged as an independent entity in 1990, it was following an established lead set in several countries in the previous years.
Tough like whipped cream
Since the global financial crisis of 2007-2008, which resulted in the Great Recession, the concept of central bank independence has come under renewed scrutiny.
A persistent criticism, with roots in the "Black Monday" crisis of 1987, is that in times of trouble, central banks such as the Fed and the ECB have taken their crisis management role to mean bailing out banks and financial sectors rather than ordinary workers and businesses in trouble.
Another criticism, hard to counter, is that for all their expertise which supposedly sets them apart from vote-hungry politicians, central bankers did not predict the crash, just like many previous crises they failed to foresee.
This has all helped to embolden politicians of several shades. From Erdogan's antics in Turkey to Donald Trump's persistent criticism of Fed decisions, it seems there are plenty of people who would happily clip the wings of central bankers.
"Now we have this new trend of criticizing the central banks and putting pressure on central banks," Carsten Brzeski, chief economist of ING Germany, told DW.
"In Europe I think we've had extremely good experiences in showing that central banks do not react to political pressure. Remember what former ECB President Wim Duisenberg once said, that central bankers are like whipped cream — 'the harder you beat them the tougher they get'."
Winds of change
Yet, aside from calls for power to be taken away from central banks, there are also plenty of question marks over just how independent central banks really are.
The heads of central banks are usually appointed by political processes — for example, the European Council picks the ECB head and the US president picks the Fed boss. Because of this, central banks are occasionally criticized for becoming politicized, such as when Transparency International criticized the ECB for veering into "political activity" during the eurozone crisis by being part of the so-called "Troika."
The famed banker of yore Nathan Rothschild reputedly subscribed to the maxim: "give me control of a nation's money and I care not who makes its laws." An insightful mantra or not, it's an illustration of the power potentially at the disposal of central banks or whoever ultimately makes the money decisions.
Since the financial crisis, some have argued for a more consensus-based approach to the kind of monetary decision-making associated with central banks, involving both politicians and other regulatory oversight bodies alongside established central banks.
Given the high stakes involved (see Turkey, for starters), and the long, winding history of central banks being both granted and relieved of mighty powers, it is an idea that may gain further traction in the coming years. The guardians may yet need guardians, after all.