Central Banks and Self-Governance: The Argument from Delegation

In my last article, I argued that our current monetary institutions are not compatible with self-governance. However, there is one more possibility we need to consider: that current monetary institutions can be justified as a delegation of authority rather than seen as an unjustified usurpation of authority. Would a self-governing society ever choose to delegate the broad monetary, financial, and regulatory powers now enjoyed by central banks?

The argument in favor of delegation seems straightforward. Macroeconomics, monetary economics, and financial economics are extremely complex and difficult fields. Staffing and running critical macroeconomic institutions is unquestionably a specialized task. It is simply infeasible for average citizens to possess the information necessary to participate meaningfully in conversations about the economic well-being of the nation. Thus the people, acting through legitimate institutions of government consistent with a self-governing society, may rationally choose to delegate monetary policy to experts. The arrangement may appear at odds with self-governance, but since it results from citizens’ rational appraisal of the difficulties associated with macroeconomic stewardship, it is best viewed as a prudential appointment of specialists.

There are several problems with this. First, the vast majority of central banks throughout history, such as the Bank of England, have their roots in political elites’ desire to secure favorable financing terms so they could more easily fight wars. Central banks were instruments of the fiscal-military state, not agents of public macroeconomic stewardship. (Indeed, the latter role would only be embraced centuries later.)

Even in the American context, delegation of the kind required for central banks to be consistent with self-governance never occurred. The debates over the creation of the Federal Reserve showed that even its defenders did not (at least publicly) advocate creating a central bank. The Fed was originally supposed to be a formalization of the interbank clearing system to facilitate the transfer of emergency liquidity between banks in times of turbulence. The Fed’s performance of central banking functions was out of the question. Central banks were a reactionary, Europeancreation that had no place in a New World democratic republic. So the argument went. When the First World War rolled around, suddenly traditional central banking functions, such as supporting the market for government debt, became not only acceptable, but necessary.

So any argument from delegation cannot rely on actual delegation. The delegation must be hypothetical. Notice how this argument is identical to many social-contract arguments for the state more generally: Of course nobody actually agreed to the state itself. (No, not even in the American founding.) But if it can be shown that the state performs a useful social function (e.g., the provision of basic law and order), then it can be hypothetically justified. Likewise, if it can be shown that central banks perform a useful social function, they can be hypothetically justified.

I will address the argument for hypothetical justification in my next article.