Tower of Babel on Mt. Olympus
For almost a half century we were assured that parliament, governments, and of course the public should keep their noses out of the higher mysteries of monetary policy. These were best left to central banks, no matter what their charters might say. Declared independent, they seemingly get their wisdom from heaven Ė not directly, but via the Bank for International Settlements (BIS) That is a non-elected institution that has had more to do with the distribution of national incomes than elected parliaments.
The amazing story is to be found in Meltdown, Money, Debt, and the Wealth of Nations, COMER Publications, 1999, p. 15. "[Canadian] Prime Minister Kim Campbell has declined to explain just what she meant when she promised to make the Bank of Canada more independent" (The Globe and Mail, 8/4/93). Let us fill in that information gap. For the purpose, we will turn to a scholarly work that not surprisingly has been allowed to gather dust on library shelves: Henry H. Schloss, The Bank for International Settlements (New York University, 1970).
"BIS was set up in 1930 to manage the transfer of Germanyís reparation payments to the victors of the First World War. BIS shareholders were to consist entirely of central banks, but because the US Federal Reserve was unwilling to participate, a syndicate of American commercial banks (J.P. Morgan & Company, the First National Bank of New York, and the First National Bank of Chicago) took up the US subscription.
"The shareholders of BIS are central banks rather than governments as are the members the International Monetary Fund and the World Bank founded at Bretton Woods towards the end of WWII.
"A further sign of BISís dislike of anything smacking of democracy: voting rights are permanently reserved to the original members in the proportions to the shares originally subscribed by them, though they may subsequently have sold their shares. [Its shares can be bought on the Parisian stock exchange!]
"Quoting directly from Schloss: ĎTo safeguard the "independence" of BIS, a director of BIS shall not be an official of a government or a member of a legislative body, unless he is governor of the central bank. It is this provision that gives BIS its characteristic as a central bankersí organization. It has jealously guarded itself against the intrusion of government officials.í
"One of the major stigmas attached to the reputation of the Bank in the 1940s was a widespread feeling that it had been pro-German during the interwar period and collaborated in appeasing Germany in the 1930s and during the war. In fact, the charge of collaboration with the Axis was an important reason why the BIS was not transformed into the preeminent international monetary institution in the early postwar period and a new International Monetary Fund was created instead.
"These charges of collaboration by the Bank have been investigated in considerable detail by the author [Schloss]. The Bank may have been guilty of appeasement in the late 1930s. But the charges of pro-German conduct during the war are essentially unfounded." [More recently the question has been raised about BISís role in handling gold extracted from the teeth of concentration camp victims during the war.]
At the Bretton Woods Conference Resolution Five was passed recommending the liquidation of the Bank at the earliest possible moment. But by 1951 the dissolution of BIS was a dead issue.
The Comeback Coup of the Banks
By then the commercial banks were well advanced towards recapturing the positions surrendered during the Depression. "In May 1951 President Truman assented to a negotiated settlement between the Treasury and the central bank agreeing to slightly higher rates of interest and granting minor flexibility to the Fed. Within two years, however, Fed officials claimed a more sweeping interpretation of the Treasury-Fed agreement. It was, they attested, a declaration of full independence for the central bank. By that point, the liberal Democrats were gone from the White House." Central banks on the comeback trail had need for an international bunker. BIS filled the bill.
It was at secret BIS sessions that much of the future of the world has been plotted. That appears from the annual report of the BIS General Manager Alexandre Lamfalussy of May 23, 1991.
"It has been argued that a quality bias in price level calculations implies that inflation in the range of 1-2% may be considered price stability for all practical purposes. Nonetheless, the move from an environment of low or moderate inflation to one of no inflation implies an important psychological shift. It has proved very difficult in recent decades to do better than achieve merely low inflation and to move to actual price stability, even in those countries with the best price performance. [This can only be seen as a reprimand to even super-achieving central bank heads such as John Crow in Canada who was brought in after an IMF career of bullying indebted Latin American governments. He ran up a good part of Canadaís debt with interest rates four percentage points higher than of the US in his effort to obtain "zero inflation." In the article Our Sunken Continents on page 4 of this ER issue you will learn that this elusive 1-2% of stubborn "inflation" that not even John Crow could eradicate was in fact not inflation but a reflection of the growing need of public infrastructures in a modern urbanized, high-tech economy.]
"From all this it must be clear why central banks Ė even if they enjoy full independence from government Ė find it difficult to pursue the objective of absolute price stability. An obvious condition is a sufficient degree of social consensus, since in a world in which unavoidable price increases need to be offset by price decline, the consequence will be felt very different by different social groups."
Such then is the background needed to appreciate the sensational nature of a Dow Jones Newswire carried in The Globe and Mail (01/06, "Central Bankers, BIS at odds over degree of deflation risk" by Brian Blackstone and Antonio Ligie): "Central bankers from Europe played down the risks of deflation, even as the so-called central bank for central banks yesterday highlighted itís a growing risk.
"In an annual report that was sometimes quite blunt, the Bank for International Settlements backed US acceptance of a weaker dollar to stimulate the economy, arguing in essence that whatís best for the US economy is best for the global economy thatís facing deflationary risks.
"But an issue that received so much attention from the BIS, [deflation] got scant mention from central bankers gathered here for the annual meeting of the BIS.
"ĎDeflation isnít the main topic because there isnít any,í European Central Bank (ECB) President Wim Duisenberg said yesterday. Bank of France Governor Jean-Claude Trichet also underlined in his statements that deflation wasnít an issue in Europe.
"Central bankers do have a point. For now, Japan is the only major economy facing outright deflation. The US and euro zone have inflation rates above zero, conceded BIS general manager Malcolm Knight.
"But the US Federal Reserve Board has already signalled it considers a rapid fall in inflation a risk. And with annual inflation at one percent in June, Germany isnít far from price stability or an eventual fall in prices.
"History may explain the ECBís greater reluctance to identify deflation as a greater threat than the Fedís, BIS economic adviser William White said. He noted that the US economyís defining point in history was the deflationary great Depression. In contrast, Europeís defining moment was hyperinflation after the First World War."
It remains to ask why the Fed disregarded that "defining point" in the 1980s when chairman Paul Volcker, drove the Fed rate into mid-double digit levels Ė pushing commercial credit into the twenty-percent region, and in doing so almost wrecked the world economy.
"Defining points" (a new weasel expression) are no substitute for an economic theory that would tip us off on what was up and what was down, and what exists and what is fiction. What is lacking once more is the morality of a serious science. For that would begin by recognizing rather than covering up failures That would help prevent the same faulty policies being repeated on a mounting scale because they seem to serve the interests of those in power. That has been the sorry record of the last three or four decades.
ó from Economic Reform, August 2003