To accompany Paul Tucker’s mini-course at the Stigler Center this week, we offer here an extract of the former Bank of England Deputy Governor’s ambitious new tome Unelected Power: The Question for Legitimacy in Central Banking and the Regulatory State.



All we can do is ask simple questions and listen to your very erudite explanations. . . . What good is that sort of accountability to elected politicians?

—George Mudie, MP, to Mervyn King, House of Commons Treasury Committee hearing, June 28, 2011


London, UK - A sign for Threadneedle Street, the location of the UK's Central Bank, the Bank of England, in London's traditional financial centre, the City of London.

Giving the first Andrew Crockett Memorial Lecture in June 2013, Raghuram Rajan, the then recently appointed governor of the Reserve Bank of India, concluded by suggesting that central banks had “offered [themselves] as the only game in town.” The assembled company of central bankers was not comfortable. [Bank of England governor] Mervyn King got close to their feelings when he responded, “If central bankers are the only game in town, I’m getting out of town!” (which he literally was, retiring a few weeks later).((Rajan, “Step in the Dark,” p. 12. Andrew Crockett was head of the Bank for International Settlements from 1994 to 2003. Among many other contributions to economic policy, he called in the early 2000s for a macroprudential approach to banking-system regulation.))


That same weekend in Basel, the Bank for International Settlements’ annual report set out at length why and how the true heavy lifting of sustainable economic recovery was, in fact, unavoidably in the hands of the governments, banks, households and firms whose balance sheets needed strengthening. Above all, supply side reform was needed to improve long-term growth prospects, increasing the spending power that easy monetary policy was bringing forward. By supporting near-term demand for goods and services, the central banks could create time for those fundamental adjustments and reforms to be effected, but could not do more. The BIS fretted that things would be even worse if that time was not grasped by governments and others because, perversely, central banking interventions seemed to suffice to get through immediate problems.


Even in countries with solid public finances and even when standard monetary policy reached the effective lower bound for short-term nominal interest rates, politicians declined to provide sustained discretionary short-term fiscal stimulus in the years after the worst of the Great Financial Crisis. So, as the BIS feared, the central banks were left as the only game in town. Coming on top of their sometimes controversial liquidity support operations during the first phase of the crisis, their macroeconomic interventions raised questions about independence.


For some, it reinforced preexisting doubts about whether CBI [central bank independence] could ever be legitimate. For others, it ignited concerns that they had got too close to finance ministries, compromising invaluable independence.


Central banks can buy time but cannot enhance long-run prosperity. They can help the economy recover from disastrous recessions but cannot improve underlying growth dynamics. They can help bring spending forward but cannot create more long-term wealth.

In fact, the world was bumping into a costly strategic tension between central banks and elected policy makers. The former have legal mandates that impose constraints but also create obligations, whereas the latter are subject to few constraints but carry equally few legal obligations. In consequence, when short-term politics raises problems (what political scientists call political transaction costs) for elected governments and legislators acting to contain a crisis or bring about economic recovery, they can sit on their hands safe in the knowledge that their central bank will be obliged by its mandate to try (within the legal limits of its powers). Rajan had the right verb but the wrong mode. Central banks did not volunteer to be the only game in town, they were volunteered by governments (transitive, not intransitive, volunteering). The upshot can be a flawed mix of monetary, fiscal, and structural policies, creating avoidable risks in the world economy and financial system.


Central Banks Could Not Set Aside Their Legal Mandate


Notwithstanding those likely truths, however, it is a mistake to stipulate or imply that central banks should sit on their hands in order to induce governments to act. To do so would be to set aside their legal mandates from elected assemblies, flouting our democratic values and the rule of law. It is one thing for central banks to be the only game in town, but quite another for them to abrogate the sovereign power, taking it to themselves.


Constrained as they were, therefore, to do as much as they could within their powers, they ended up looking like something they are not: the macroeconomic policy makers. And they were left exposed to being held responsible for something they simply cannot deliver: prosperity.


That this has not caused a bigger political outcry among the people would be remarkable were it not for the precrisis orthodoxy that monetary policy could get us through any cyclical downturn and the practical success in escaping another Great Depression. In the short term, the only answer is for the community of central bankers to get back to a previous generation’s mantra, repeated over and over again: Central banks can buy time but cannot enhance long-run prosperity. They can help the economy recover from disastrous recessions but cannot improve underlying growth dynamics. They can help bring spending forward but cannot create more long-term wealth. To channel the late Eddie George, stability is what central bankers exist to deliver, and stability is a necessary condition for the good things in life, but it is not remotely sufficient.((That is the theme of El-Erian, Only Game in Town.))


Clarifying the Role of the Fiscal Authority in the Fiscal State


In the longer run, however, a deeper challenge has to be met.


While I have argued that it is possible to fix the democratic legitimacy of multiple-mission central banks, nothing I have offered cures the problematic strategic interaction between fiscal and monetary policy makers described above.


That is because I have focused on principles and democratic processes for drawing the boundary between unelected technocratic power and elected representative power. But in terms of effectiveness (welfare), it is hard to decide where the boundary should be by looking inside only one of the zones (that of the technocrats). It matters what is in the other zone and what incentives its occupants have to act. This is the grand dilemma of central banking.


In short, a Fiscal Constitution is needed, not just [the] Money-Credit Constitution [proposed in chapter 20 of this book]. It needs, among other things, to cover the role of the fiscal authority in macroeconomic stabilization when monetary policy is close to the effective lower bound and the economy faces deep recession; how the distributional effects of central banks’ actions will be tracked; and, in the financial services sphere, whether a capital-of-last-resort policy will be in place for when all else has failed or whether a policy of “no bailouts” will be credibly absolute.((For example, DeLong and Summers, “Fiscal Policy in a Depressed Economy.” On COLR, Tucker, “Repertoire,” and Geithner, “Are We Safer?”))


These questions are not small. For example, if the automatic stabilizers of the tax and welfare system were to be reset so as to kick in more strongly in really bad economic circumstances, it might be necessary for governments to operate with lower stocks of outstanding debt during normal times. Issues of this kind have tended to get much less attention than debates about optimal monetary policy.


What Central Bankers Can and Can’t Do to Solve Their Own and Society’s Problem


In other words, it is possible that a cost (negative externality) of central bank independence has been underinvestment in fiscal institutions (both research and practice).


We need society to reject the notion that central banks are the Only Game in Town, not because they failed but because it is not sustainable and violates our values. Even where central bankers themselves see this, as some surely do, they cannot do more than talk about it. They cannot play at being Plato’s guardians. But, to reintroduce a point already made at a less strategic level, there is no reason on earth why they should not speak about the downsides to their policies and about their limited role in healing the economy.


This requires central bankers to pull off a tough act of communication, explaining what they cannot deliver rather than what others should do. The public should trust them for what they can do but not rely on them for what they cannot do. It means looking burdened by the current expectations they labor under. (As one wit put it, if they are the only game in town, God help us if they ever look as though they might be enjoying it.) And it means admitting ignorance of the deep forces that might be reshaping real- economy prospects.


If [central bankers] are the only game in town, God help us if they ever look as though they might be enjoying it.

Overmighty Citizens: Central Banks in a Democratic Society


All that is made harder by the remarkable expansion in central banks’ powers and responsibilities in the regulatory state. If central banks are not omniscient, why give them even more powers? We have spent this book articulating and, in part IV, applying principles to address this, the greatest tractable challenge to CBI.


Our solution revolves around well-defined regimes, with powers that are tied as narrowly as possible to the goal of monetary-system stability. That is needed to incentivize central bankers to seek esteem and prestige through results (chapter 5). Were they also to carry various of the responsibilities we ruled out in chapter 21 (e.g., competition policy, consumer protection), they would be so very powerful that simply holding office would instantly bestow on them whatever standing or fame they valued.


We should acknowledge, however, that risks remain even with central bankers that have tightly drawn responsibilities: today’s top monetary officials can be world famous irrespective of their achievements. That reinforces the importance of effective political accountability (chapters 6, 9, 11, and 15).


Political Accountability


But lacking powers over central bank budgets, are legislators effectively impotent once they have set the rules of the game? This is not an idle question, as illustrated by the quotation at the chapter head from a Westminster committee hearing.


In June 2011, George Mudie, MP, then the senior Labour party member of the UK House of Commons Treasury Committee, pressed Mervyn King (and, briefly, me) on what, if anything, happened as a result of such hearings; could they really influence monetary policy? Our response was that so long as Parliament maintained the Bank’s operational independence, month-by-month monetary policy decisions were for the Bank, but that parliamentarians had the power to change or abolish the regime. This is no less true of the Fed and most other national monetary authorities.


Here we see something important. It is not just that “independence” is still being negotiated, in a long process of becoming embedded into our societies. It means that it is a good thing that independence is debated, tossed around, criticized, applauded, tolerated, because those very debates are integral to the democratic legitimacy of IA [independent agency] regimes (chapter 11). That is the necessary ingredient for the people’s representatives choosing to maintain independent central banks because they wish, on balance, to keep society strapped to the mast of a continuing commitment to monetary stability. Thus, far from retreating to safe spaces (chapter 1), monetary authorities need to expose their very existence to challenge.


It is a good thing that [central bank] independence is debated, tossed around, criticized, applauded, tolerated, because those very debates are integral to the democratic legitimacy of IA regimes. That is the necessary ingredient for the people’s representatives choosing to maintain independent central banks because they wish, on balance, to keep society strapped to the mast of a continuing commitment to monetary stability.

Domestic Accountability and the Transnational Elite


Such debates and, where sustained, consensus go some way to address the concern that central banking has drifted into being, or always was, a vehicle serving the interests of a globalized metropolitan elite: policy by and for “Davos Man.”


The sober version of that issue is that domestic democratic responsibility and accountability might in practice be closed off by the modalities of international policy making on the monetary system, symbolized by closed-door meetings at the central bankers’ Basel Tower headquarters. That is exaggerated, however. The machinery for and acceptance of international policy cooperation exists only because domestic lawmakers permit and accept it. And, in the regulatory sphere, all stability policy is articulated in domestic laws, rules, and guidance, subject to local checks and balances.


Nevertheless, in the course of this book (chapters 12 and 15) we have advocated greater and more frequent transparency on the emerging ideas and plans of the international bodies and committees through which central banks cooperate. Among other things, they should actively seek out opportunities to testify domestically (and, in the EU, regionally) on international regulatory issues; call out politicians when they pretend not to know that domestic policy making draws or even relies on international cooperation; and make clear that the core standard for stability policy is set or blessed at the political level.


If only more could be done to ensure domestic awareness of international cooperation, more could also be done to insulate central bankers from the risk of capture by their private sector counterparts in the global financial elite. As well as staying away from cosmopolitan business gatherings that are not open to scrutiny, this might involve reinforcing the soft norms of their service. . . .


Who Are the Central Bankers?


Come what may, as central bankers exercise their great powers there will be continuing debate about who they are: not just about the chairs but, if the committee systems work as they should, also about their board colleagues who share the weighty responsibilities. That is to the good; a necessary condition for enduring legitimacy. Central banks may not (and should not) stand as high in the constitutional order as the judiciary (chapter 12), but the powers bestowed upon them are profound.


So, who are the central bankers? It is best expressed by who they are not.


Our central bankers are not a priesthood. Often deployed in critiques of central banking mystique or in genuflection to the incantations they still occasionally wheel out to keep markets on an even keel, the metaphor’s resonance lies in its appeal to higher authority. As Hobbes observed, late-medieval priests and bishops saw themselves as beyond the control of political authority, owing their duty only to God (or the Pope). As latter-day priests, central bankers would owe a duty only to Stability; and, as carriers of that Truth, they would “detect . . . right in themselves.”((Holmes, Passions and Constraint, p. 90, which offers a striking interpretation of Hobbes’s discussion of this issue.)) If stability is a precondition for a democratic state, then wouldn’t their higher duty be to do whatever they could to preserve stability and, so, the state itself? Our response to that is no. Mario Draghi’s burden, as I perceive it, was that he is not serving a fully fledged democratic state, endowed with the powers to save itself without his organization’s levitational aid to the monetary system.


Nor are the central bankers philosopher kings, maestros, or celebrities. That is in contrast, perhaps, to the Edwardian world of Montagu Norman. As painfully illustrated by the later Greenspan years, charisma and mystique do not suffice in the modern world.


Nor, more modestly, is the chair of a central bank board its country’s chief economist, as I recall a governor of the Bank of England being described on television by a powerful and influential politician.((I understand that in Israel the central bank governor is formally chief economist to the government.)) Rather, they head an independent agency operating with powers delegated by the legislature on the initiative or with the agreement of the executive government. They and their vote-carrying colleagues are not elected: they must work within clear democratic constraints and oversight.




DeLong, J. Bradford, and Lawrence H. Summers. “Fiscal Policy in a Depressed Economy.” Brookings Papers on Economic Activity (2012): 233–97.


El-Erian, Mohamed A. The Only Game in Town: Central Banks, Instability, and Avoiding the Next Collapse. New York: Penguin Random House, 2016.


Geithner, Timothy F. Stress Test: Reflections on Financial Crises. New York: Broadway Books, 2015.


Holmes, Stephen. Passions and Constraint: On the Theory of Liberal Democracy. Chicago: University of Chicago Press, 1995.


Rajan, Raghuram. “A Step in the Dark: Unconventional Monetary Policy after the Crisis.” First Andrew Crockett Memorial Lecture at the Bank for International Settlements, June 23, 2013.


Tucker, Paul. “The Repertoire of Official Sector Interventions in the Financial System: Last Resort Lending, Market-Making, and Capital.” Speech given at Bank of Japan Conference, May 27–28, 2009. Bank of England.


[Excerpted from UNELECTED POWER: The Quest for Legitimacy in Central Banking and the Regulatory State by Paul Tucker Copyright© 2018 by Paul M. W. Tucker. Reprinted by permission of Princeton University Press.]



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