We are told that central banks are neutral and above politics. The truth is, they're not. Central bank independence was created to remove responsibility from politicians and hand power to unelected bankers. This video explains why the idea is a con trick, how it undermines democracy, and why it's time to put money back under democratic control.
The audio version is here, because the player will not embed in this post.
This is the transcript:
We don't need central bank independence.
I've always thought that.
Nobody's ever going to persuade me otherwise, and I think I'm right.
The fact is that central bank independence is just a neoliberal con trick put forward by politicians who don't want to be held accountable for their actions, and that represents a failure of democracy on their part, and that's not good enough.
But let's talk about what central bank independence is meant to be about and why it fails.
Central bank independence is a con trick because what it says is that politicians can't be trusted with managing the economy, and therefore, we must put the task of managing interest rates within that economy out to independent third parties who can be presumed to bring cool, calm heads to the table when they're deciding what rates should be imposed upon us, and they will make the decisions that politicians are simply not up to making. That's what central bank independence is all about.
But the reality is that that idea is based upon an economic fiction which is deeply embedded within neoliberal thinking, but which is entirely false. And that is that there is a difference between fiscal economic policy and monetary economic policy. So let me go on to a little diversion for a moment and explain the difference between those two.
Fiscal policy is simply a term that is used to explain the difference between government spending and government taxation and other revenue, and the difference is called the deficit in a year and cumulatively, that difference is called the government's debt.
Let's be clear then. There's nothing desperately complicated about fiscal policy. It's just deciding by how much more the government wants to spend than it's going to get in income, and that's it.
Monetary policy, on the other hand, is all about supposedly trying to control inflation by setting interest rates that will keep that inflation rate down to 2%, which is a completely arbitrary target which has been set by the Bank of England, and it does so by trying to limit the impact of fiscal policy, because fiscal policy can, if spending is too much greater than taxation, boost the economy, and it can also cause recession if spending is too close to taxation revenue.
So monetary policy is, in fact, there to simply correct fiscal policy. And that's absurd. That's absolutely crazy, because the truth is that fiscal and monetary policy have to be coordinated together because they are essentially the flip side of each other.
The rate of inflation is the consequence of the way in which fiscal policy is set. It makes no sense at all to set interest rates to compensate for a decision the government has already made. So in that case, central bank independence literally makes no sense at all.
And the con trick is very real. We are told that these technocrats who run the Bank of England are neutral and objective and above politics, and that's their virtue. And that is why Gordon Brown, assisted by Ed Balls, who many people will still be familiar with because he's now a TV morning breakfast host, created this idea of central bank independence because they didn't trust themselves, or rather, they didn't think the media trusted them with managing the economy when Labour came into power in 1997.
But the truth is that central banks are deeply political. Almost all the people appointed to the central bank to decide on what interest rates we have are either long-term employees of the Bank of England, who have no real-world experience beyond it, which makes them decidedly narrow-minded, or they are economic professors who are almost invariably neoliberal to their core, or they are real-world bankers.
There's never been a trade unionist setting interest rates.
There's never been a pensioner on the board that sets interest rates.
There's never been a straightforward working person on there.
Instead, we just have people who think as the City of London does.
And the City of London is not neutral when it comes to politics.
And we know that these people also fail to understand money. Their thinking is that tax funds government spending. Their belief is, despite publications that the Bank of England has itself put out, is that banks take deposits from punters and then lend it out to borrowers, when we know that's entirely untrue. And they do not believe government has the power to create money, even though glaringly obviously, they were involved in managing the processes of quantitative easing in 2008 and 2020 and onwards, and yet they're in full denial of that.
Modern monetary theory actually explains how money works in the economy, but the Bank of England absolutely rejects the explanation of the reality that they operate, which MMT provides, preferring instead a work of fiction, and they manage the economy on that basis.
It's unsurprising that these supposedly neutral people have, as a result, made a complete and utter mess of almost everything they've done, and the UK economy is stagnating.
The consequence of that failure is clear. Any belief that the Bank of England is somehow our saviour has disappeared, because quite clearly, people no longer trust governments on the economy.
That loss of trust is threatening democracy.
That loss of trust is bringing in support for far-right extremists.
And voters are beginning to believe those far-right politicians that democracy is irresponsible by design because it has led to the outsourcing of responsibility to central bankers.
The fact is that if we are to have a democratic future, we cannot rely on unelected officials with their own political agendas that suit a tiny part of the population of the UK to run a significant part of our economic policy.
We trust democracy to decide on issues like war and peace, and health and education and rights and justice. Why then won't we trust democracy when it comes to controlling money?
Let's ask the fundamental question: Who benefits from independence now? Whatever the theory was, way back in 1997, when Ed Balls and Gordon Brown thought that this was a good idea, what is the reason for keeping independence? Who gains? In other words.
And the answers are obvious.
Financial markets gain.
Those who enjoy high interest rates, gain.
Inflation targeting often punishes workers, so big business gains.
And independence disciplines democracy in favour of elites by imposing austerity, and so the powerful in our economy gain from Bank of England independence.
The illusion of neutrality is then just that; it's a facade.
So what's the alternative? The alternative is to end the pretence of independence; to make central banks explicitly accountable to elected government.
Now, I'm not saying that that means that we shouldn't have central bankers.
I'm not saying that means we shouldn't have a central bank itself.
I do think we need a Bank of England. That's glaringly obvious.
I'm not saying that this means that we shouldn't employ advisors.
But I'm saying that the decision on interest rates that are aligned with full employment, a balanced real economy, price stability, and climate transition must be taken by politicians.
Only they can be responsible for those decisions in the end. And only they can be accountable for them, not least because nobody in the Bank of England has ever been elected to undertake these tasks.
So we need a better way forward, and that means that central banking must be more transparent and more accountable.
Central banking must serve society and be seen to do so via the democratic system, and they must be seen to be a part of that democratic system by being fully accountable to government. Central bankers are important, but not so important that they are outside our control.
This is the duty that we have to reform the process.
Central bank independence is a myth. It hides money from democracy. If democracy means anything, it must include control over money, and that means we no longer need central bank independence if it ever served a purpose. We need ministerial accountability for what central banks do, and anything else will sell us short now.
So what do you think? Do you think the time has come to end central bank independence, or do you prefer the idea of having bankers in charge? Can you think of something else, or do you just want time to think about it?
There's a poll down below. Let us know what you think.
Poll
Do you think the Bank of England should remain independent?
- No – it must be democratically accountable (89%, 229 Votes)
- Keep some independence but under closer oversight (7%, 17 Votes)
- I’m not sure, I need more debate (3%, 9 Votes)
- Yes – bankers should run monetary policy (1%, 3 Votes)
Total Voters: 258
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This is another ‘ cannot be said enough’ post. To me, this was essentially the privatisation of central banking through the back door.
But I still cannot get over just how undemocratic it all is, when we got to vote for who was in charge of the money supply. It supports Thatcher’s myth that there is no such thing as government money – and that Brown et al essentially must have believed that too.
The Bundesbank (& it’s wholly controlled subsidiary: the EC B) is the lead example of a totally out of democractic control bank. Sadly, the German constitution enshires the banks independence. It was founded by a bunch of ex-nazis who called the shots well into the 1970s (i n the 1960s the bank engineered a mini-recession by reducing the money supply – leading to a government collapse – & later admitted to it. The ECB is as b ad, ditto the BoE. As previous blogs have noted, in the case of the BoE the independence is fictional.
The current crop of imbeciles running the UK won’t change anything – if UK serfs ever elect a half way sensible crop of politicos – there needs to be root and branch change @ both the finance ministry (Treasury? FFS UK grow up!!) and the BoE. Prob ably large scale sackings of upper “management” & a turf out of a all “generalists” (iunclduing the PPE imbeciles).
& for those wondering what a properly controlled central bank looks like & can do, I have one word: China.
Thank you and well said, Mike.
Just one thing to add: The Bundesbank’s chief economist Ottmar Issing was really in charge under presidents Wim Duisenberg and Jean-Claude Trichet. Issing joined Goldman Sachs from the ECB and often writes in the FT without declaring that he’s an adviser to the US giant and has some wealth tied to them. Issing’s successor Juergen Stark was no better.
Somewhat related but if be interested to learn more or see a video on the impact of interest rates. To me, a wage earner with a mortgage, interest rate rises simply mean I have less money in my pocket. I have to pay my mortgage. I have to pay for energy. Both recipients can do without my money as they are massively rich already. I cut my costs by not going to the gym. Not eating out. Cutting back on all non essentials. Generally these are smaller local businesses so they suffer as a result. Renters likely see an increase in their rent too, so they are affected the same as me. I cannot see how the super rich or those with homes but no mortgages are affected. It doesn’t. seem like a fair means to achieve. any sort of intended outcome as a. subset of the population.
I would like to know what the intention is if raising interest rates, if my assessment is fair, and what the alternative are.
Thanks as ever, your videos are eye opening.
I have added this to my list to make. I used to do tweets on this theme, but realise I have probably never made a specific video on the subject, so your request is pertinent and it will happen, but, I cannot be sure when because there are quite a lot of ideas floating around at present, and current events also change the scheduling.
This is complicated. Let’s start by agreeing on one thing – the BoE has been consistently poor and the aim is to get a better system of policy making…. preferably one that is achievable (politically speaking).
But what is that set up?
Placing it under political control doesn’t solve anything – politicians already control it! It’s only operationally independent and politicians set the goals and appoint the people. They just fail to use the levers they already have.
So, for me, no need for a big fight to change the law….. just sack the incumbents and install a more balanced committee to execute policy more actively decided by politicians.
Of course, the problem is that under this type set up a Trump like character might do immense damage…. but I guess that true across the policy board – why should money be excepted.
Clive – the regular voice of reason – Parry nails it. The BoE is only operationally independent with goals and people set by our representatives. Agree with him, there is no need to change the law, but better people and better models/macro foundations would be a very welcome change.
“But the truth is that central banks are deeply political…….. Their thinking is that tax funds government spending. Their belief is, despite publications that the Bank of England has itself put out, is that banks take deposits from punters and then lend it out to borrowers….”
I am not convinced the BoE does believe that. What they believe, and what they are prepared to do, however are two different things. That is the human condition. I suspect rather, the BoE follows established British cultural tradition (whatever the economic theory, which – we all know – describes a form of intellectual blancmange). The established British cultural tradition, which is sacrosanct; is that an industry regulator (and the BoE is the monetary regulator), is captured by the industry it regulates. That is the real politics of Britain. It always has been. As for the economists; they are either in academia, with big egos to care for, and have no responsibility; or those in industry, who plodded through the maths without thinking about the problem of application or relevance, and find a job exactly where they shouldn’t be. They are life’s natural gophers (they never ask the awkward question); but they end up with some responsibility (because the industry they end up in think economics is real science), but without the required talent for the task ahead; and they quickly conform to the culture, and do what is expected of them by their patrons.
The academic paper to quote:
Berkeley, A., Ryan-Collins, J., Tye, R., Voldsgaard, A., & Wilson, N. (2025). The Self-Financing State: An Institutional Analysis of Government Expenditure, Revenue Collection and Debt Issuance Operations in the United Kingdom. Journal of Economic Issues, 59(3), 852–880. https://doi.org/10.1080/00213624.2025.2533726
When we analyse some of the poor decisions our government makes, I think input from BoE can help but under close supervision.
It is interesting to see how the BoE shareholders were compensated after nationalisation in 1946 and these repayments were finally completed in 2015.
https://www.google.com/search?q=How+were+the+shareholders+of+BoE+compensated+after+it+was+nationalised+in+1946%3F&authuser=0&aep=21&udm=50&utm_source=google&utm_campaign=aim_aware&utm_content=oo-seaport-10215&mstk=AUtExfBz8tbEdbx2tKWpsvlCEfJZg79nDBF19tcH9OVRiftdzLTkj3EY8d0iWTdEm8hb7nbuyHplMATn28x6LzyBWfMFnJ5ANp48QSFes217bwo-nZsBw0e1BSdwypxGlNBuX9oITarCryf9oikQd3udu64nj1pjgIwTuyXorHRPRjqTJAtSwFx6xAUQOZnSQP7rXg2PhbXCMyqE6yO4O-3-Wdwnw9Lk_YodAENhANumHDp8mc_kZOVqeiFI6nszqaacWo0M-cIJswCjHO-9xEXD82j9ztBCh6IBSrQrjRNzFuKTNLoyqZ4OXTzmIxfXLrFDJ4ZxuGPEBG0tHoJyPgxqfq4PE_5GQyuqyQ&csuir=1&mtid=7RTAaNvsMJ26hbIPjYe2uQ0
For those interested, there is also a list of the original shareholders in 1694 (with appropriately poor quality print!)
https://www.bankofengland.co.uk/-/media/boe/files/archive/original-bank-subscribers/1694.pdf
Thanks
This form of compensation on nationalisation was commonly used at that time, and was exceptionally good value for money. The reality was that inflation wiped out most of the compensation cost, meaning that many of the assets nationalised in 1946/47/48 were bought for next to nothing, although that could not have been known at the time.
I have the video link via Steve Keen, if anyone wants to watch it. It has over 2,000 views already
https://www.youtube.com/watch?v=hRQrY9GnYyc
I suspect the 1997 Brown & Balls decision to grant “independence” to the BoE was largely as a means of deflecting the heat from themselves in the Treasury when economic difficulties/crises arose. I find it hard to believe they were ignorant of the fact that the BoE is essentially wholly-owned by the UK Gov’t (but recognise that it’s not beyond possibility).
The question is: did they fully understand the risks of ceding control of the Bank Rate? Was it not obvious to them that, by shifting that responsibility onto the shoulders of BoE staff and appointees, that decisions of the BoE committee were likely to act against the interests of the less well-off: potential premature raising of the Bank Rate in times of economic fluctuation and, (as we’ve been witnessing for some time recently), a reluctance to lower the rate when economic storms abate. The BoE has a target inflation level of 2%, but by keeping the rate high when trends indicate inflation is declining, it has effectively contributed to inflation which has played into the hands of the banks, landlords and the ultra-rich.
Meanwhile the hapless UK Gov’t hides behind the “BoE Independence fallacy”, just as it does with its own Fiscal Rules. My vote is make the BoE democratically accountable.
Thanks Ken.
I hope you are better now.
Blame game deflection is now clearly apparent as the reason for the introduction of a faux independence. A stock-in-trade of the worldwide political class. Let’s appear to give the powers to private technocrats who are linked to the private banks and finance.
On a consolidated accounting basis just fold the BoE into the Exchequer, where it appropriately belongs, as its decisions are plainly political and should be subject to full public scrutiny and justification by government.
By all means, separate it into sub-departments of the Exchequer for bureaucratic management of day to day non-government banking operations and the interest rate settings plus macroprudential regulation of banking.