Donald Trump intends to challenge the independence of the Federal Reserve, the venerable US central bank created in 1913. He believes that, since he was elected President of the United States, he alone has the legitimate right to steer the country and its economy—and that the Fed must obey him.
The 51 per cent fallacy
This conception of democracy lies at the heart of contemporary populist illiberalism: whoever secures 51 per cent of the vote possesses all rights. Such leaders feel entitled to imprison their enemies, silence critics, rewrite the rules of the game as they see fit, pardon friends caught with their hands in the till or, worse still, those who stormed the nation’s parliament.
For many months, Trump has showered Jerome Powell, chairman of the Fed, with sarcasm in an effort to force him to cut interest rates further. Powell is a Republican whom Trump himself nominated to lead the institution in 2017. When Powell did not comply quickly enough with his demands, the president asked the US attorney general to launch a probe concerning testimony Powell gave about the cost of renovating the Federal Reserve building. Powell responded with an unprecedented video statement on 12 January, unequivocally denouncing the pressure exerted by the administration.
On the left, however, many have long shared Trump’s hostility to the very principle of central bank independence.
The case for independence became widely accepted after the 1970s, when recurring inflationary spirals afflicted all developed economies. Autonomy appeared essential to preserve the critical public good that is fiat currency—money that exists only as paper banknotes or lines of code in computers. Its value now rests solely on public confidence, no longer on a stockpile of gold, since President Richard Nixon ended the dollar’s convertibility into gold in 1971.
If, as Trump and a significant portion of the left would prefer, monetary policy in the United States or Europe depended entirely on the whims or short-term needs of the executive in power, there would be legitimate grounds to fear that the currency would rapidly lose its value and that the public would increasingly distrust it.
Such an executive would invariably favour a lax monetary policy that helps win the next election by temporarily and artificially boosting activity. This is precisely what Trump desires today, hoping to avert the disaster that probably awaits him in the midterm elections, if they proceed normally next autumn. Yet such a policy would inevitably stoke inflation by excessively expanding the money supply, with the ultimate risk of uncontrolled inflationary spirals—the kind that have destabilised countries such as Iran in recent months. And such spirals always hurt the poor and vulnerable more than the rich and powerful.
This obviously does not mean that an independent central bank should be free to act without accountability.
First and foremost, central banks are always composed of individuals chosen by political authorities and confirmed by parliament. As noted, Jerome Powell, a Republican, was nominated by Trump before having his four-year term renewed by Joe Biden. The members of the European Central Bank’s Executive Board are selected by the eurozone member states.
Clear mandates and democratic oversight
An independent central bank must operate under a clear mandate bestowed by the sovereign people. That mandate must not—and cannot—focus solely on combating inflation. It must also encompass other dimensions essential to societal balance, such as maintaining social cohesion by limiting unemployment and preserving the environment by enabling the investments necessary to achieve climate goals.
In the United States, the Fed is charged with “conducting the national monetary policy in order to support the objectives of full employment and price stability”. The mandate of the European Central Bank is more narrowly focused on inflation, although it too permits broader interpretation. According to Article 127 of the Treaty on the Functioning of the European Union: “The primary objective of the European System of Central Banks, hereinafter referred to as the ‘ESCB’, shall be to maintain price stability. Without prejudice to the objective of price stability, the ESCB shall support the general economic policies in the Union with a view to contributing to the achievement of the Union’s objectives.”
An independent central bank must then be subject to stringent transparency requirements and regular democratic scrutiny by parliament, obliging it to justify the relevance of each decision in relation to its mandate. In particular, vigilance is required to ensure that its policy serves the interests of society as a whole—not only, or primarily, those of the financial sector, to which it is by definition close since it also bears responsibility for supervision. In this area, much progress remains to be made in Europe to strengthen the European Parliament’s oversight of the ECB.
We can, and must, debate the procedures for appointing the members of an independent central bank, the mandate entrusted to it, and the obligations of transparency and accountability imposed upon it. But the central bank must not be subject to the orders of the executive of the day. Were that to happen, as Trump desires, the value of currency as an essential public good would swiftly be called into question. Americans risk learning this the hard way in the coming years if the president gets his way.
Let us hope that Trump’s reckless conduct will finally have enabled the entire European left to understand why central bank independence is a democratic necessity. And beyond the specific case of central banks, why a strict separation of powers and independent regulatory authorities are vital in any democracy. The person who won 51 per cent of the vote does not—and should not—have all the rights.
