Central banking needs to be improved, not re-written.

https://www.economist.com/news/briefing/21721354-contemporary-criticisms-central-banks-echo-debates-times-past-history-central

This is a fascinating article about the history of central banking, and the growth of their power over time.

You may not be able to access it behind the paywall, but it essentially chronicles how the power of central banks has risen and fallen based on the politics of the time, but risen over the long term (skip ahead of these dot points if you have read the article):

• The first central banks were established to directly support government. The Bank of England for example, established in 1694, offered assurance to creditors that the government wouldn't default on its debts, thereby making it easier and cheaper for government to borrow.
• Given the authority and credibility of a government-banked central bank with tax-raising ability versus a private bank, central banks were also able to start issuing paper money as a more convenient medium of exchange than gold or silver. This drove economic activity and also provided governments with additional revenue (called seigniorage - the difference between the cost of creating new currency, and its value).
• Alexander Hamilton believed a central bank could control the money supply and end the hyperinflation plaguing the US after independence. But many resented the power of such an institution, so they never seemed to exist in the US before the 20th century for long before being dismantled.
• In the 19th century, central banks were also given authority to manage financial crises. When a bank run ensued and everyone was rushing to not be the last to get their money, the central bank quelled the panic by guaranteeing to provide solvent banks with the liquidity they needed (thereby taking away the reason for the panic). In Britain, this role as 'lender of last resort' was established after the panic of 1825 - a development not without its critics.
• Central banks often fixed their currencies against the value of gold (the Gold Standard), regardless of the often devastating effects this had on internal inflation and unemployment. It also favoured creditors and employers over debtors and workers by preventing any long term inflation and often requiring painful internal wage deflation and unemployment.
• But the difficulty of maintaining such a system in wartime, and the role it played in driving the world into the Great Depression in the 1930s caused a rethink of their duties (for the better, I would say). They abandoned the Gold Standard (the very thing that ironically made it impossible for them to undertake their above crisis-management role) and focused on internal stability.
• Politicians continued to pressure central banks to enact policy that was politically convenient rather than economically necessary. This included US Presidents Truman, Johnson and Nixon bullying the Fed into keeping interest rates low during the Korean and Vietnam Wars (despite the inflationary consequences) so the government could continue to borrow. Finance departments, rather than central banks, often maintained the power over interest rates.
• The inflationary bubbles of the 1960s and 70s drove central banks to focus more on controlling inflation, abandoning the Bretton Woods system for the same reason as the Gold Standard - it hindered the achievement of internal stability in favour of external stability.
• By the late 1980s, central banks seemed to have tamed the inflation beast. This encouraged more central banks to be given greater power and independence to control inflation, starting with the Reserve Bank of New Zealand's independence in 1989, and the European Central Bank in the 1990s.
• The asset bubbles of the early 2000s and indeed the GFC have reinforced the need for central banks to focus not just on inflation, but also asset markets. Many now have enhanced powers to oversee and regulate the financial sector to this very end.
• Now, central banks are arguably the most powerful entities in the world. They largely have independence from government to achieve their mandate - generally low and stable inflation, a stable currency and full employment. And they can do this not just by manipulating short term interest rates and overseeing and regulating the behaviour of the financial sector but, as we've seen over the last decade, amassing tremendous balance sheets of assets to prop up not just the financial sector, but the broader economy in the face of impotent government fiscal policy.
• And it is these unconventional actions that are driving recent discussions that central banks may have overstepped their mandate, that they focus more on bailing out Wall Street and government than Main Street, and that they risk triggering hyperinflation again. Moreover, despite all their power, they were still unable to predict and prevent the GFC or the European debt crisis. Therefore, maybe their power should be reigned in.

Like I said, fascinating. But also worrying.

I think central banks have the formula broadly correct now. They have the ability to effectively ensure financial stability and economic strength (sometimes seen as contradictory goals when stock/property markets are booming but the real economy/inflation is sluggish, like before the GFC in the US, and recently in Australia).

And if an unforeseen crisis occurs (which it inevitably will - central banks can't foresee everything always), central banks have the tools to manage it (though proper recovery also requires government fiscal support).

Of course there are areas for improvement. Better understanding the exact nature of asset price booms and their 'wealth effects' on the real economy is one area. Better international coordination of central bank crisis responses is another. But these improvements will affect the timing and magnitude of central bank responses - they shouldn't completely re-write the responses themselves.

I don't want to see central banks abandon inflation-targeting, macro-prudential regulation and oversight, and appropriate liquidity/lender of last resort responses during crises. These policy responses were needed during the Great Depression, they worked 80 years later during the GFC, and unless something drastic changes the very structure of the economy, they should be effective in the next crisis.

My biggest fear is that governments will reign in central bank power and they won't be fast enough to deal with the next crisis. Or worse, governments will completely change central bank mandates by, for example, re-establishing a Gold Standard and forcing the central bank to focus primarily on the exchange rate, thereby paving the way for massive fluctuations in inflation and unemployment.

This must not happen. Especially if imposed by populist politicians with an inadequate grasp of economics.