EDITOR'S LETTERMerryn Somerset Webb
The power of central banks
I’ve been re-reading one of the great books on Japan’s financial crisis, Princes of the Yen by Richard Werner (2003). We have often written about how independent central banks have a central flaw: their existence is undemocratic. Why? Because little matters more for an economy than how its money supply is controlled.
Central bankers know this, and control money supplies. Look to Japan in the 1990s. Despite an “obvious deflation problem” and a shortage of credit (despite low interest rates) that stopped most potential borrowers from doing so, the Bank of Japan (BoJ) refused to expand the money supply, says Werner.
Worse, at “crucial junctures” it even “actively reduced” the money in circulation. This cut domestic demand, deepened the recession, and strengthened the yen.
Why? Many believe the BoJ was just incompetent. Werner does not. For him, its refusal to help out Japan’s elected government was about its “desire to promote structural change”. Money creation would have given Japan a recovery – but not the kind the BoJ wanted.
You may think the BoJ is right on structural reform. But why should the power to insist on social and economic change rest with a central banker?
• Read the full editor’s letter here: The power of central banks