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September 7, 2011

A reminder in today’s Guardian that the Bank of England is unavoidably political despite being officially independent. Larry Elliot reviews Alastair Darling’s book thus:

 A year later, King used his Mansion House speech to call for the break-up of Britain’s banks into investment and retail arms, and for the job of policing the City to be handed to the Bank of England. Darling says that both were Conservative party policies, and that King’s earlier warning that the Brown government had not set out a credible plan for public borrowing could be similarly characterised. “Mervyn was careful to cover his pronouncements with caveats, which usually went unreported, but even so he was coming perilously close to crossing a line between legitimate comment and entering the political fray.”

I’ve long thought that making the Bank of England independent simply meant that it became less publicly accountable, whilst continuing to pursue what amounted to a political agenda. At the time, in 1997, Labour party enthusiasts were cowed by the technical argument that independent central banks are less likely to exaggerate the boom-bust cycle through politically-motivated interest-rate decisions. We now know that argument to be false.

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