The priesthood of central bankers.

• Author: Whalen, Christopher

Neil Irwin, The Alchemists: Three Central Bankers and a World on Fire (New York: Penguin, 2013), 400 pp., $29.95.

Worshipping and lionizing central bankers is an increasingly popular activity. This veneration holds appeal not only for investors but also for politicians and the media. Indeed, a strong codependence exists between politicians and central bankers. Without the political class, a central banker like Ben Bernanke is just a college professor. At the same time, politicians often find central bankers to be useful foils for political rhetoric around election time.

Although the growing power of central bankers since the 1970s is largely a political phenomenon, it has been scantly discussed in political discourse. Outside the grim ghettos of financial media, the issue of central-bank accountability is not a hot topic. The global bureaucracy of central bankers operates across national boundaries, exercising huge authority over both fiscal and monetary policy while avoiding explicit political responsibility. The Fed is all-powerful, for example, yet largely unaccountable.

In his classic 1995 book Confidence Game, Steven Solomon described how economic change in the 1980s and 1990s created a political vacuum in terms of policy mechanisms to address global currency and capital flows--and how that void was effectively filled by central bankers. Global capital mobility caused governments' sovereign control over national savings and national monetary policy to slip away--or, more specifically, to be pooled. According to Solomon, George Shultz characterizes the new era as one in which

the "court of the allocation of world savings" every day judges the economic policies of governments, rewarding those it favored with investment and strong currencies and punishing others by withholding capital and weak currencies.... Capital was free to pursue its innate profit-expansive logic regardless of geographic boundary or political consequences. In his new book The Alchemists: Three Central Bankers and a World on Fire, Neil Irwin picks up the policy and personal narrative of this global central-bank priesthood. Like other journalists turned authors such as Solomon, William Greider and Martin Mayer, Irwin brings to the task his personal experience with the people at central banks. Irwin, who has covered the Fed and economic issues for the Washington Post for over a decade, is now a Post columnist and the economics editor of Wonkblog.

Irwin explains the evolution of the global fraternity of central bankers through the actions and deliberations of three key figures: Ben Bernanke, chairman of the U.S. Federal Reserve; Jean-Claude Trichet, president of the European Central Bank (ECB) from 2003 to 2011; and Mervyn King, governor of the Bank of England and chairman of its Monetary Policy Committee. He starts right off with a blunt assessment of the role of the central banker in Western democracies:

Central bankers uphold one end of a grand bargain that has evolved over the past 350 years. Democracies grant these secretive technocrats control over their nations' economies; in exchange, they ask only for a stable currency and sustained prosperity (something that is easier said than achieved). Central bankers determine whether people can get jobs, whether their savings are secure, and, ultimately, whether their nation prospers or fails. Regrettably, this is an accurate assessment of the political situation with respect to central bankers generally and the U.S. Federal Reserve System in particular. They have been given a very wide economic portfolio. But it wasn't always thus. A little history provides a context for Irwin's tale. In the 1970s and 1980s, the chief concern of central bankers and their political patrons was inflation, an economic concept well understood by Americans. Experience with soaring living costs, scarcity of jobs and price controls going back to World War I meant Americans generally supported efforts by the government to curb inflation, even if jobs were also a big concern. Even in colonial times, inflation and bad money had chastened the common man against paper currency issued by unscrupulous bankers. This was one reason why the United States did not have a central bank for eighty years prior to World War I. This sentiment was well articulated by President Andrew Jackson when he killed, through his veto, the reauthorization of the Second Bank of the United States:

Every monopoly and all exclusive privileges are granted at the expense of the public, which ought to receive a fair equivalent. The many millions which this act proposes to bestow on the stockholders of the existing bank must come directly or indirectly out of the earnings of the American people. It is due to them, therefore, if their Government sell monopolies and exclusive privileges, that they should at least exact for them as much as they are worth in open market. The value of the monopoly in this case may be correctly ascertained. The twenty-eight millions of stock would probably be at an advance of 50 per cent, and command in market at least $42,000,000, subject to the payment of the present bonus. The present value of the monopoly, therefore, is $17,000,000, and this the act proposes to sell for three millions, payable in fifteen annual installments of $200,000 each. Chief among Jackson's objections to the Second Bank of the United States was governance--namely, the role of private individuals as shareholders and a lack of accountability to the states. But in the eighty years following Jackson's veto, much changed. By 1913 the concept of a central bank was greeted with a good bit of relief in the business community. The economy was in a miserable state, and many Americans were weary of periodic financial crises. The creation of the Fed in 1913 marked a new willingness on...