Ricardo expressed benefits of CBI in 1824

Yeah. David Ricardo had expressed the need to have Central Bank Independence in a note in 1824. I came across this 1994 speech by then  RBA Governor, B.W.Fraser.

He points:

The issue is as old as central banking itself, having been debated on and off over the past couple of hundred years. The hallmarks of independence – namely, autonomy from the government and non-financing of budgets – were identified clearly by David Ricardo in a paper on the establishment of a national bank in 1824:

‘It is said that Government could not be safely entrusted with the power of issuing paper money; that it would most certainly abuse it … There would, I confess, be great danger of this if Government – that is to say, the Ministers – were themselves to be entrusted with the power of issuing paper the hands of Commissioners, not removable from their official situation but by a vote of one or both Houses of Parliament. I propose also to prevent all intercourse between these Commissioners and Ministers, by forbidding any species of money transactions between them.

The Commissioners should never, on any pretense, lend money to Government, nor in the slightest degree be under its control or influence … If Government wanted money, it should be obliged to raise it in the legitimate way; by taxing the people; by the issue and sale of exchequer bills; by funded loans; or by borrowing from any of the numerous banks which might exist in the country; but in no case should it be allowed to borrow from those who have the power of creating money.’

Amazing stuff. What seemed like a major contribution of modern monetary economics is as old as 1800s. It is pretty much basic economics. Only economists keep recycling the old ideas and pose them as new. Again, knowing history is so so important.

He then also points to Keynes and his mention of setting RBI as an independent central bank:

Earlier this century, Keynes expressed his thoughts on central bank independence
while testifying before the 1913 Royal Commission into an Indian central bank.
The ideal central bank, he said, ‘would combine ultimate government responsibility with a high degree of dayto- day independence for the authorities of the bank’. He added that it would be desirable ‘to preserve unimpaired authority in the executive officers of the bank, whose duty it would be to take a broad and not always commercial view of policy’. 

 I had read about the Keynes and RBI connection but this is interesting as well. It is a pretty good speech which covers basics of CBI and what it means.

 ‘Independence’ in this context means the freedom of central banks to pursue monetary policies which are not dictated by political considerations. It does not preclude Ministers from commenting on monetary policies, and it does not preclude central banks from consulting with the government on monetary and other policies. In practice, varying degrees of independence have been exercised
through a variety of approaches.

Increased central bank independence does not necessarily lead to lower inflation. This is because monetary policies, on their own, cannot guarantee to deliver lower inflation without unacceptable costs in terms of lost output and jobs. Fiscal and wages policies have an important bearing on inflation outcomes, and these need to be compatible with an anti-inflation monetary policy.

Credibility’ is helpful to central banks in implementing monetary policy and a pre-condition for this is that the central bank be perceived to be independent and free from political interference. Beyond that, however, credibility has to be earned, essentially through the consistent demonstration over a long period of the bank’s determination to achieve its goals.

And finally something on cricket and CBI:

The competence of central banks and the personalities of their Governors, and of Treasurers and other Ministers, are obviously important, whatever the precise legislative framework. In this regard, central bank independence can be likened to a game of cricket. The legal framework that central banks operate in is important, as the rules of the game are important in cricket. What matters most to the outcome of the game, however, is the performance of the players on the field. 

Get on with the game mate 🙂

One Response to “Ricardo expressed benefits of CBI in 1824”

  1. Evolution of central bak governance around the world « Mostly Economics Says:

    […] it was not just Bagehot but Ricardo who understood the importance of central bank independence as early as 1824. I will not be surprised to read some other economist in even earlier times saying […]

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