So Long, Central Bank Independence...

Trump’s War with the Fed Shows Monetary Policy Was Always Political

One of the central myths of neoliberalism is that monetary policy is neutral, technical, and above politics. By making central banks ‘independent’ of government, policymakers could claim that decisions about interest rates were made by impartial experts, not politicians beholden to voters. That myth was crucial in the neoliberal counter-revolution of the late 20th century - and Trump’s war with the Federal Reserve is tearing it to shreds.

The Volcker Shock

When Paul Volcker, then chair of the Federal Reserve, pushed interest rates in the early 1980s, the effect was devastating. Millions of workers lost their jobs, unions were broken, and communities were hollowed out. These effects weren’t an unfortunate consequence of the policy – they were the intention. As I showed in Vulture Capitalism, the neoliberals never wanted to create a small or timid state – they wanted to create a state that served the needs of capital. And, in the 1980s, by far the greatest concern of bosses was the power of organised labour.

Paul Volcker with Ronald Reagan. Credit: https://www.wsj.com/articles/paul-volcker-was-inflations-worst-enemy-11575937617

The Fed – and the Bank of England under Thatcher – stepped in to crush workers by hiking interest rates and inducing a recession to discipline organised labour. They used neoliberal ideology to argue that the move wasn’t political – it was necessary to maintain the proper functioning of the free market. Inflation, argued neoliberal kingpin Milton Friedman, was “always and everywhere a monetary phenomenon”, so it must also have a monetary solution.