Letter: Decisions that should not be entrusted to bankers

Sir: Your newspaper's programme for economic recovery contains as a prominent item the establishment of an independent central bank. I should like to say why I think this is not a good idea.

If politicians cannot be trusted with monetary policy, why should they be trusted with taxation, public spending, the public education system, the National Health Service? It would not be impossible to create colleges of experts to frame and oversee policies for each of these, and leave them to do so free of political control. Nobody would dream of doing such a thing, and why not? Because where public- sector activities impinge strongly and differentially on the welfare of citizens, the public rightly insists on having democratic control of all major acts of policy.

The idea exists that monetary policy is different because it is a simple technical operation, with a single, clear-cut objective (control of inflation) and with well understood and reliable techniques of operation. This is a delusion. Monetary policy (ie, nowadays, the setting of interest rates) is a process of great importance for the jobs and standards of living of millions of people. It does not affect only inflation, and it does not affect everyone equally. The nature and degree of its effects can by no means be free of doubt and argument. It is not a simple matter of giving effect to a clear resolve to get inflation down and freeing that resolve from the short-term interests and long-term irresponsibility of politicians.

High inflation in this country, when we have had it, has not been only or even mainly the result of monetary policy. Simply changing the system of control or the designated priorities of that policy would not make more than a marginal contribution to reducing inflation, if other policies were not designed with the same objective. Under our present arrangements, the control of inflation rests ultimately on maintaining unemployment at a high level. Conferring independence on the central bank would not remove this central dilemma of policy. It would only transfer from politicians to bankers a share in the vital decision about the level of unemployment the country should accept in order to keep inflation under control. This is not the sort of decision that ought to be entrusted to bankers.

If and when we as a people decide that we disappove of the way our political leaders have operated monetary policy, the remedy is not to take this power out of the hands of politicians but to insist that the policies, and if necessary the politicians, are changed. There is no short cut.

Finally, a word about Germany. Her case is regularly mobilised in support of the proposal for an independent central bank, with no proper allowance for her special characteristics. Low inflation in that country has not been only, or even mainly, the work of the Bundesbank. Everyone in Germany is aware of the dangers and costs of inflation. There is a strong and widespread hostility to even moderate inflation, which is not paralleled in the British population. The same attitudes which have made the Germans willing to hand over the responsibility for monetary policy to the Bundesbank would also have ensured relatively low inflation if their system had been similar to our own. There is no reason to believe that a system which is acceptable to the population of Germany would be equally acceptable, or work in the same way, for the very different population of Britain.

The proposal to set up an independent central bank is a gimmick and a distraction.

Yours sincerely,

BRYAN HOPKIN

Aberthin, South Glamorgan

4 December

The writer was the Head of the Government Economic Service and Chief Economic Adviser to the Treasury, 1974-77.