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

660 Money, Bank Credit, and Economic Cycles“independent” as possible of the political decisions of themoment and that this independence should even be incorporatedinto legislation. 86 This constitutes a small step forwardin the reformation of the financial system. However, even ifrhetoric for the independence of central banks finds its wayinto legislation or the constitution itself, and even if it is effectivein practice (which is more than doubtful in most cases),many public-choice arguments regarding the behavior of central-bankofficials would remain unrefuted. Moreover, andmore importantly, the central bank would continue to generatemassive, systematic intertemporal maladjustments evenwhen appearing to pursue a more “stable” monetary policy. 87Oddly enough, the controversy over the independence ofcentral banks has provided the context for the discussion onwhich structure of incentives would best motivate central-bankofficials to develop the correct monetary policy. Thus, in connectionwith the “financial central-planning agency,” the steriledebate about incentives has revived, a debate which in the1960s and 1970s prompted theorists from the economies of theformer Eastern bloc to expend a veritable river of ink. In factthe proposal of making the salary of central-bank officials conditionalupon their performance with respect to set goals ofprice stability is strongly reminiscent of the incentive mechanismswhich were introduced in socialist countries in an unsuccessfulattempt to motivate the managers of state companies toact more “efficiently.” Such proposals for reforming the incentivesystem failed, just as the latest, similar, well-intentionedpropositions regarding the central bank are bound to fail. They86 A helpful overview of the different positions on this point and of themost recent related literature has been prepared by Antonio Erias Reyand José Manuel Sánchez Santos in “Independencia de los bancos centralesy política monetaria; una síntesis,” Hacienda Pública Española 132(1995): 63–79.87 On the positive effect which the independence of the central bank hason the financial system, see Geoffrey A. Wood et al., Central Bank Independence:What is it and What Will it Do for Us? (London: Institute for EconomicAffairs, 1993). See also Otmar Issing’s book, Central Bank Independenceand Monetary Stability (London: Institute of Economic Affairs, 1993).