The US Fed and the Bank of England: Ownership, structure and ‘independence’

Abstract

This essay looks at the foundation and development of the US Federal Reserve (Fed) and the Bank of England (BI), through the perspective of the recent debate over central bank independence in the design of optimal monetary policy. It shows that the creators of the Fed were acutely aware that they were establishing a central bank (based to some degree on the BI as it had then evolved). Thus they were troubled by the potential power that such an institution might wield and so the question of control and influence was paramount. Interestingly, the founding fathers eventually opted for independence from the money interests of Wall Street rather than independence of the state. The Fed’s reputation for policy competence and independence owes much more to the role of strong Chairmen in recent years than to any statutory design.

By contrast, the BI was founded as a private bank. Concerns about independence played no part in its early history and only came to the fore after it had acquired, step by step, the responsibilities of a central bank.   The first serious concerns about independence were voiced in the inter-war period when it was thought that the Bank was too keen to support London’s role as the centre of international finance, against the interests of the domestic economy. Partly for this reason it was nationalised in 1946. When it was granted operational independence in 1997 it was stripped of two of its oldest responsibilities in order to avoid conflicts of interest.

What the history of the two banks shows is firstly, that it is not independence of government that is essential for optimal policy, but a freedom to pursue one, single priority and secondly, that the effectiveness with which this is carried out has little or nothing to do with laws, charters and statutes.