Money, Bank Credit, and Economic Cycles - The Ludwig von Mises ...

Central and Free Banking Theory 659Indeed central-bank officials are human and are affected bythe same incentives and restrictions as all other public officials.Therefore they may be somewhat swayed in their decision-makingby groups with a vested interest in influencingthe central bank’s monetary policy. These include politicianseager to secure votes, private banks themselves, stock-marketinvestors and numerous other special interest groups.Goodhart concludes:There is a temptation to err on the side of financial laxity.Raising interest rates is (politically) unpopular, and loweringthem is popular. Even without political subservience,there will usually be a case for deferring interest rateincreases until more information on current developmentsbecomes available. Politicians do not generally see themselvesas springing surprise inflation on the electorate.Instead, they suggest that an electorally inconvenientinterest rate increase should be deferred, or a cut ‘safely’accelerated. But it amounts to the same thing in the end.This political manipulation of interest rates, and hence ofthe monetary aggregates, leads to a loss of credibility andcynicism about whether the politicians’ contra-inflationrhetoric should be believed. 85Acknowledgment of the harmful behavior (analyzed bythe Public Choice School) of central-bank officials and of the“perverse” influence politicians and interest groups exert onthem has led to the consensus that central banks should be as85 Charles A.E. Goodhart has written an accurate summary of the insurmountabletheoretical and practical difficulties the central bank encountersin implementing its monetary policy. See his article, “What ShouldCentral Banks Do? What Should be their Macroeconomic Objectives andOperations?” published in Economic Journal 104 (November 1994):1424–36. The above excerpt appears on pp. 1426–27. Other interestingworks by Goodhart include: The Business of Banking 1891–1914 (London:Weidenfeld and Nicholson, 1972), and The Evolution of Central Banks.Thomas Mayer also referred to the inevitable political influences exertedon the decisions of central banks, even those banks most independent ofthe executive branch from a legal standpoint. See Mayer’s book, Monetarismand Macroeconomic Policy (Aldershot, U.K.: Edward Elgar, 1990),pp. 108–09.