Central bank independence and the 1951 Accord
January 20, 2012
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Gavyn Davies have an interesting post in the FT.com today about “How the Fed defeated president Truman to win independence”. I have been reading several articles recently about the Accord, and I agree fully with Davies that the Fed – Treasury Accord is important in understanding the rationale behind central bank independence today.
However, reading here about the key actors in the drama, especially Governor Eccles, who fought the main battle before being sidelined by Truman, it becomes clear that their view of CB independence was more relative to the needs of the day. During the depression both Eccles and his famous assistant Lauchlin Currie were rather skeptical to central bank policies as a way out of the crisis, and they both favored strong fiscal stimulus. I therefore note in a blogpost to the article that
… when inflation became an issue after the war, they both felt the need for a more flexible interest rate policy, which required a break with the Treasury’s low rate policy. Thus the need for central bank independence.
Governor Eccles has been accused of turning with the winds, whereas I would rather see him (and the rest of the Chicago school for that manner, including Henry Simons and Jacob Viner) as being pragmatic economists who understood that the central bank’s policy tools and governance structure are relative to the situation at hand. Therefore, central bank independence and inflation fighting cannot be seen as a holy grail to be defended at all cost and all times.
What is needed now, as in the 30s, is forceful monetary stimulus, both through fiscal and monetary means. The ECB has been doing this reluctantly, partly with reference to this misconceived notion of independence. And the fiscal stimulus seems even further away, due to an even stronger intellectual straightjacket of “balanced budgets”. In due course there will hopefully be some reconciliation between the ideology and what is constructive polices to resolve the crisis.