I would like to reflect on independent central banks as institutions, and how their authority is grounded and is challenged.
On 3rd September 1780 (246 years ago yesterday) a 23 year old aide to George Washington wrote that: “the Bank of England unites public authority and faith with private credit and hence we see what a vast fabric of paper credit is raised on a visionary basis.” That 23 year old was Alexander Hamilton.
The meaning of central bank independence is not just a technical point about monetary policy or financial stability, or just a point about the design of public institutions. It is about the relationship between societies and the institutions they create to serve them. This brings to mind Douglass North's definition of institutions as the rules of the game in a society or, more formally, the humanly devised constraints that shape human interaction.
Institutions are not just organisations. They are durable arrangements through which societies solve collective problems. To do this, they must embody understandings about how authority should be exercised, how conflicts should be managed, and how common interests should be protected.
Independent central banks are among the most distinctive institutions modern societies have created. They exercise important powers. Their decisions influence borrowing costs, saving decisions, employment prospects, investment plans and the broad stability of the financial system. Their powers, and how they are used, are always the subject of debate, and that's fair enough given the importance.