Outlook: Central banks: an endangered species?

MANY AND varied are the bull markets of the past 10 years, but one of the most memorable has been in independent central banks.

At the beginning of the decade, there were only three large countries - the US, Germany and Switzerland - that had genuinely independent central banks. Today they are too numerous to list, including our own Old Lady of Threadneedle Street. It has become a prerequisite for fully paid up membership of the global economy to have one, and the active pursuit through them of price stability has become one of the great economic mantras of the age.

But will it for ever be thus? This was the subject of a characteristically penetrating analysis yesterday by Mervyn King, deputy governor the Bank of England, to a symposium sponsored by the Federal Reserve Bank of Kansas City at Jackson Hole, Wyoming.

Central bankers find themselves in a position of power and authority unrivalled in their history, so much so that it seems more than possible the impending millennium will come to be seen as the high water mark of their influence. In future there may be less of them, and perhaps, Mr King tantalisingly suggests, they may face extinction altogether.

There are essentially three reasons for thinking this. The first concerns the possibility that central banks screw up - that through over- vigilant pursuit of price stability they plunge the world into recession or worse. In such circumstances, as Japan has already discovered to its cost, the central bank becomes impotent to act. Since nominal interest rates cannot fall below zero, monetary policy becomes powerless in the face of falling prices and the central banker loses his purpose.

It is this possibility, already a reality in Japan, that makes our own "symmetrical" inflation target, where it is as much a sin for the Bank to undershoot as to overshoot, such an important innovation.

Perhaps a more tangible threat to the central bank's growth stock status is exchange rate volatility. Liberalisation of capital flows and the often violent exchange rate fluctuations which has gone with it has made governments a lot less keen on national currencies than they were. More regional monetary unions seem certain, or failing this, the creation of currency boards or even complete currency substitution, as mooted by Argentina at the height of last year's currency turmoil. Either way, there is less of a need for national central banks.

But according to Mr King, the most potent threat comes from technology. This is where we begin to enter the world of science fiction, for although the Internet's impact on all aspects of the economy has already been profound, the real turbo charged effect is yet to come. One possibility is that the world will move towards a "pure exchange economy", in essence a world without money in the accepted sense. The primary purpose of a central bank is to act as a clearing house for transactions in the national, or in the case of Europe, regional currency. Plainly that purpose would be removed in the event of a moneyless economy.

In Mr King's vision of the future, individuals engaged in a transaction would settle by a transfer of wealth from one electronic account to another in real time, without any recourse to a central bank.

Financial assets and real goods and services would be priced in terms of a unit of account that would be calculated by reference to pre-agreed "algorithms". It is easy to see how globalisation and the growth of e- commerce makes this all too possible. Already the net allows for a degree of international price transparency that threatens to undermine the pricing mechanisms of many smaller national currencies.

That central banks are made an endangered species by these processes is perhaps the least worrying thing about them for national policy makers. For them, much more concerning is what technology might do to the tax system. Just as the net is no respecter of boundaries in terms of where goods, services and information are bought and sold, nor does it care a fig about where they are taxed.

The gaming industry's flight to offshore tax havens such as Gibraltar may be only a harbinger of things to come. It is only a matter of time before music, videos, software and perhaps a myriad of other services too come "tax free" through the net, downloaded from the British Virgin Islands or wherever the tax is least. The net might thus eventually allow ordinary people too to join the rich and the multinationals in escaping the tax system altogether, at least for a part of their income and spending.

In the meantime, Mr King doesn't perhaps need to worry too much about his long term employment. There would have to be regulatory organisations to monitor, arbitrate and licence these new "wealth banks" even in the moneyless, pure market economy he envisages. In the UK, banking supervision has already been stripped away from the Bank of England and placed with the Financial Services Authority but this won't stop the Bank trying to grab it back if there is nothing else to keep it gainfully employed. One way or another, there will always be a job for central bankers.

Start your day with The Independent, sign up for daily news emails
News
Kim Wilde began gardening in the 1990s when she moved to the countryside
peopleThe singer is leading an appeal for the charity Thrive, which uses the therapy of horticulture
Sport
Alexis Sanchez celebrates scoring a second for Arsenal against Reading
football
Life and Style
health
Voices
An easy-peel potato; Dave Hax has come up with an ingenious method in food preparation
voicesDave Hax's domestic tips are reminiscent of George Orwell's tea routine. The world might need revolution, but we like to sweat the small stuff, says DJ Taylor
News
i100
News
Japan's population is projected to fall dramatically in the next 50 years (Wikimedia)
news
ebooks
ebooksA special investigation by Andy McSmith
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE £45,000: SThree: SThree Group have been well e...

Ashdown Group: IT Manager / Development Manager - NW London - £58k + 15% bonus

£50000 - £667000 per annum + excellent benefits : Ashdown Group: IT Manager / ...

Recruitment Genius: Sales Consultant / Telemarketer - OTE £20,000

£13000 - £20000 per annum: Recruitment Genius: Scotland's leading life insuran...

Ashdown Group: Training Programme Manager - City, London

£40000 - £45000 per annum + benefits : Ashdown Group: Training Programme Manag...

Day In a Page

NHS struggling to monitor the safety and efficacy of its services outsourced to private providers

Who's monitoring the outsourced NHS services?

A report finds that private firms are not being properly assessed for their quality of care
Zac Goldsmith: 'I'll trigger a by-election over Heathrow'

Zac Goldsmith: 'I'll trigger a by-election over Heathrow'

The Tory MP said he did not want to stand again unless his party's manifesto ruled out a third runway. But he's doing so. Watch this space
How do Greek voters feel about Syriza's backtracking on its anti-austerity pledge?

How do Greeks feel about Syriza?

Five voters from different backgrounds tell us what they expect from Syriza's charismatic leader Alexis Tsipras
From Iraq to Libya and Syria: The wars that come back to haunt us

The wars that come back to haunt us

David Cameron should not escape blame for his role in conflicts that are still raging, argues Patrick Cockburn
Sam Baker and Lauren Laverne: Too busy to surf? Head to The Pool

Too busy to surf? Head to The Pool

A new website is trying to declutter the internet to help busy women. Holly Williams meets the founders
Heston Blumenthal to cook up a spice odyssey for British astronaut manning the International Space Station

UK's Major Tum to blast off on a spice odyssey

Nothing but the best for British astronaut as chef Heston Blumenthal cooks up his rations
John Harrison's 'longitude' clock sets new record - 300 years on

‘Longitude’ clock sets new record - 300 years on

Greenwich horologists celebrate as it keeps to within a second of real time over a 100-day test
Fears in the US of being outgunned in the vital propaganda wars by Russia, China - and even Isis - have prompted a rethink on overseas broadcasters

Let the propaganda wars begin - again

'Accurate, objective, comprehensive': that was Voice of America's creed, but now its masters want it to promote US policy, reports Rupert Cornwell
Why Japan's incredible long-distance runners will never win the London Marathon

Japan's incredible long-distance runners

Every year, Japanese long-distance runners post some of the world's fastest times – yet, come next weekend, not a single elite competitor from the country will be at the London Marathon
Why does Tom Drury remain the greatest writer you've never heard of?

Tom Drury: The quiet American

His debut was considered one of the finest novels of the past 50 years, and he is every bit the equal of his contemporaries, Jonathan Franzen, Dave Eggers and David Foster Wallace
You should judge a person by how they peel a potato

You should judge a person by how they peel a potato

Dave Hax's domestic tips are reminiscent of George Orwell's tea routine. The world might need revolution, but we like to sweat the small stuff, says DJ Taylor
Beige is back: The drab car colours of the 1970s are proving popular again

Beige to the future

Flares and flounce are back on catwalks but a revival in ’70s car paintjobs was a stack-heeled step too far – until now
Bill Granger recipes: Our chef's dishes highlight the delicate essence of fresh cheeses

Bill Granger cooks with fresh cheeses

More delicate on the palate, milder, fresh cheeses can also be kinder to the waistline
Aston Villa vs Liverpool: 'This FA Cup run has been wonderful,' says veteran Shay Given

Shay Given: 'This FA Cup run has been wonderful'

The Villa keeper has been overlooked for a long time and has unhappy memories of the national stadium – but he is savouring his chance to play at Wembley
Timeless drama of Championship race in league of its own - Michael Calvin

Michael Calvin's Last Word

Timeless drama of Championship race in league of its own