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.

News
peopleTop Gear presenter and all-round controversialist is at it again
Sport
Aaron Ramsey celebrates after opening the scoring in Arsenal's win over Hull `
sport
News
peopleActress speaks out against historic sexual assault claims, saying things have 'gone quite far now'

Arts & Entertainment
A stranger calls: Martin Freeman in ‘Fargo’
tvReview: New 10-part series brims with characters and stories

VIDEO
Life & Style
Guests enjoy food and cocktail parings by Chefs Jimmy Bannos, Jimmy Bannos Jr, Daniel Rose and Mindy Segal with mixologists Josh King and Alex Gara at Bounty & Barrel: A Jack Daniel's Single Barrel Dinner Series at Heaven on Seven on April 9, 2014 in Chicago, Illinois.
food + drinkSprinkle Palcohol 'on almost any dish' for 'an extra kick' firm says...
Arts & Entertainment
Shaun Evans as Endeavour interviews a prisoner as he tries to get to the bottom of a police cover up
tvReview: Second series comes to close with startling tale of police corruption and child abuse
Arts & Entertainment
Schwarzenegger winning Mr. Universe 1969
arts + entsCan you guess the celebrity from these British Pathe News clips?
News
politicsLabour launches the 'completely hollow' Easter Clegg
Sport
Luis Suarez celebrates after scoring in Liverpool's 3-2 win over Norwich
sport Another hurdle is out of the way for Brendan Rodgers' side
News
Portrait of Queen Elizabeth-II by David Bailey which has been released to mark her 88th birthday
peoplePortrait released to mark monarch's 88th birthday
Arts & Entertainment
The star of the sitcom ‘Miranda’ is hugely popular with mainstream audiences
TVMiranda Hart lined up for ‘Generation Game’ revival
Life & Style
The writer, Gerda Saunders, with her mother, who also suffered with dementia before her death
healthGerda Saunders on the most formidable effect of her dementia
Arts & Entertainment
Last, but by no means least, is Tommy Cooper and the fez. This style of hat became a permanent trademark of his act.
comedyNot Like That, Like This centres on alleged domestic abuse
Arts & Entertainment
Oxegen in Ireland has been axed as promoters decide it is 'no longer viable'
arts + ents Promoters have axed the event as it is 'no longer viable in current form'
News
The troubled star is set to give fans the biggest insight into her life away from the headlines
people Star made the announcement during the final episode of the programme, entitled Lindsay
Have you tried new the Independent Digital Edition iPad app?
Independent Dating
and  

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

iJobs Job Widget
iJobs Money & Business

Database Team Lead ( Leadership, Sybase, Computer Science)

Negotiable: Harrington Starr: Database Team Lead ( Leadership, Sybase, Compute...

C#.NET Delphi SQL Developer (C#,DELPHI,SQL)

£40000 - £50000 per annum + Bonus+Benefits+Package: Harrington Starr: C#.NET D...

VB.NET SQL Junior-Mid Level Developer (VB.NET,SQL,Excellent com

£25000 - £35000 per annum + Bonus+Benefits+Package: Harrington Starr: VB.NET S...

Trade Support, Application Support, Operations Analyst, CRM MS

£45000 - £55000 per annum + Bonus and Benefits: Harrington Starr: Trade Suppor...

Day In a Page

Rubin ‘Hurricane’ Carter: The man who could have been champion of the world - and the Bob Dylan song that immortalised him

The man who could have been champion of the world

Rubin ‘Hurricane’ Carter and the Bob Dylan song that immortalised him
Didn’t she do well?

Didn’t she do well?

Miranda Hart lined up for ‘Generation Game’ revival
The Middle East we must confront in the future will be a Mafiastan ruled by money

The Middle East we must confront in the future will be a Mafiastan ruled by money

In Iraq, mafiosi already run almost the entire oil output of the south of the country
Before they were famous

Before they were famous

Can you guess the celebrity from these British Pathe News clips?
Martin Freeman’s casting in Fargo is genius

Martin Freeman’s casting in Fargo is a stroke of genius

Series is brimming with characters and stories all its own
How I brokered a peace deal with Robert Mugabe: Roy Agyemang reveals the delicate diplomacy needed to get Zimbabwe’s President to sit down with the BBC

How I brokered a peace deal with Robert Mugabe

Roy Agyemang reveals the delicate diplomacy needed to get Zimbabwe’s President to sit down with the BBC
Video of British Muslims dancing to Pharrell Williams's hit Happy attacked as 'sinful'

British Muslims's Happy video attacked as 'sinful'

The four-minute clip by Honesty Policy has had more than 300,000 hits on YouTube
Church of England-raised Michael Williams describes the unexpected joys in learning about his family's Jewish faith

Michael Williams: Do as I do, not as I pray

Church of England-raised Williams describes the unexpected joys in learning about his family's Jewish faith
A History of the First World War in 100 moments: A visit to the Front Line by the Prime Minister's wife

A History of the First World War in 100 moments

A visit to the Front Line by the Prime Minister's wife
Comedian Jenny Collier: 'Sexism I experienced on stand-up circuit should be extinct'

Jenny Collier: 'Sexism on stand-up circuit should be extinct'

The comedian's appearance at a show on the eve of International Women's Day was cancelled because they had "too many women" on the bill
Cannes Film Festival: Ken Loach and Mike Leigh to fight it out for the Palme d'Or

Cannes Film Festival

Ken Loach and Mike Leigh to fight it out for the Palme d'Or
The concept album makes surprise top ten return with neolithic opus from Jethro Tull's Ian Anderson

The concept album makes surprise top ten return

Neolithic opus from Jethro Tull's Ian Anderson is unexpected success
Lichen is the surprise new ingredient on fine-dining menus, thanks to our love of Scandinavian and Indian cuisines

Lichen is surprise new ingredient on fine-dining menus

Emily Jupp discovers how it can give a unique, smoky flavour to our cooking
10 best baking books

10 best baking books

Planning a spot of baking this bank holiday weekend? From old favourites to new releases, here’s ten cookbooks for you
Jury still out on Manchester City boss Manuel Pellegrini

Jury still out on Pellegrini

Draw with Sunderland raises questions over Manchester City manager's ability to motivate and unify his players