Central banks have started to react to inflation. In February, the Bank of England raised its key rate for the second time in two months, and the US Federal Reserve is expected to do the same at its March meeting. (Interestingly, the Bank of Russia did the same – even the threat of war cannot break the prevailing consensus on contemporary central banks.) Along with this change in monetary policy, the Governor of the Bank of Russia England’s Andrew Bailey has asked workers not to push for a pay rise despite Bailey himself being on a sizable annual salary.

The discrepancy between Bailey’s own income and his demand is a dissonance that many have liked to point out, in part because it smacks of class conflict: let workers suffer while I sit in my castle full of gold bullion. The problem with this particular site of class conflict, as it stands, is that there is no way for the working class to win. It’s heads, the asset owners win, heads, the working class loses.

The heads, in this case, would be the central banks which would raise interest rates to avoid inflation and achieve low and stable prices. This action plan is designed to support a strong private financial sector, which many believe is good for everyone – no one wants another 2008-style financial meltdown. Higher interest rates, however, make it more difficult for the working class to afford mortgages and other loans and, importantly, higher rates lead to lower private investment and hiring, which increases unemployment. In general, rising rates are likely to worsen living conditions.

Central banks have started to react to inflation. In February, the Bank of England raised its key rate for the second time in two months, and the US Federal Reserve is expected to do the same at its March meeting. (Interestingly, the Bank of Russia did the same – even the threat of war cannot break the prevailing consensus on contemporary central banks.) Along with this change in monetary policy, the Governor of the Bank of Russia England’s Andrew Bailey has asked workers not to push for a pay rise despite Bailey himself being on a sizable annual salary.

The discrepancy between Bailey’s own income and his demand is a dissonance that many have liked to point out, in part because it smacks of class conflict: let workers suffer while I sit in my castle full of gold bullion. The problem with this particular site of class conflict, as it stands, is that there is no way for the working class to win. It’s heads, the asset owners win, heads, the working class loses.

The heads, in this case, would be the central banks which would raise interest rates to avoid inflation and achieve low and stable prices. This action plan is designed to support a strong private financial sector, which many believe is good for everyone – no one wants another 2008-style financial meltdown. Higher interest rates, however, make it more difficult for the working class to afford mortgages and other loans and, importantly, higher rates lead to lower private investment and hiring, which increases unemployment. In general, rising rates are likely to worsen living conditions.

Tails, the central bank does not raise rates, allowing inflation, as it is, to continue. This means increases in the prices of food, energy and housing, resulting in a crisis in living standards that will hit the poorest hardest. But remember, maintaining your standard of living as prices rise is only seriously painful if you can’t get a pay rise to match.

This leaves us in a dilemma. Even if we all agreed that we want to do what is best for the working class, what course should we take? We don’t just want to let inflation run wild, but “doing something about inflation” seems to be synonymous with raising interest rates, which would hurt the poorest among us.

So what should are central banks doing? Some have suggested abandoning the conventional interest rate mechanism and adopting price controls. It caused a lot of aggressive and demeaning chatter in the economic community. But why? If Bailey can ask workers not to push for wage increases, why is it so ridiculous to suggest that the government is asking companies not to raise prices, especially in light of recent record profits? As economist Dominik Leusder said, “The message seems clear: price controls are good, but only for labour.”

For now, the main concern of central banks is to avoid the wage-price spiral. The idea is that, assuming workers have enough power, in the face of rising prices, they will demand higher wages to maintain their standard of living. When wages rise, prices will rise again, which will lead to a larger increase in wages, and so on the spiral continues. In other words, dangerous runaway inflation is the fault of workers demanding higher wages. Hence Bailey’s comments.

But if we go back to basics, we can quickly see just how strange this story is. Inflation is commonly understood as a general rise in prices. This does not happen by chance. Prices rise when companies decide to raise them. The relationship between inflation and business decisions is therefore much clearer and closer than the relationship between inflation and workers demanding higher wages to meet the rising cost of living. So again why is the default reaction to inflation asking workers to suffer as prices rise faster than wages rather than asking corporations to sacrifice some of their record profits ?

What the strength of the history of the wage-price spiral and the vehement rejection of the suggestion of price controls reveal is simple: our current limited monetary policy framework serves the interests of one group in society: private finance. .

The dominant contemporary monetary policy regime is dedicated to preserving the stability of the private financial system, by guaranteeing stable prices (in the form of 2% inflation) and, since 2008, by financial regulation. From a historical point of view, this shouldn’t come as a real surprise, because that’s what it was designed for. In the United States, the Fed was created after the financial panic of 1907 to ensure the stability and success of the private banking system. In the United Kingdom, the Bank of England has been a private, profit-making institution for most of its history, created to serve the private banking sector and finance war.

Today the Fed and the Bank of England are the monetary policy authorities in their respective countries, designing and executing public policy to govern the money supply. As the sharp end of democratic politics, public policy should be by, for and of the people – all the people. However, in acquiring their public policy powers, neither the Fed nor the Bank of England abandoned their fundamental infrastructural connection to the private financial system or their fundamental purpose of serving the private financial system.

This is what makes this situation delicate. What we have today are independent central banks designed to serve the interests of one sector of society, private finance, using the immense powers of public Politics. That’s why Bailey is asking workers not to push for wage increases rather than asking companies not to raise prices. This is also why, when it comes to the contemporary monetary policy system, we have a situation of heads, the rich win, heads, the poor lose.

What would monetary policy look like if it served all parts of society equally? The short answer is that such monetary policy would be much more like other types of public policy – ​​it would be more political. Implementing such an approach to monetary policy would mean expanding the set of possible policies beyond the current binary – high inflation or high interest rates – to incorporate policies that might not prioritize interests of asset owners.

Some find it hard to imagine that there are policy options other than traditional short-term interest rate adjustments. This, in itself, is evidence of the power of the dominant monetary policy-making framework. But, of course, alternatives exist: price controls, credit guidance and provision, and public banking (of various flavors), to name a few.

Adopting a more democratic approach to monetary policy-making does not necessarily require adopting any of these specific policy alternatives. However, a democratic approach to policy-making requires that the process not be rigged so that whatever the outcome, the resulting policy will serve the interests of a (minority) group in society. Just as a fair toss – tails, I win, tails, you win – affords both of us the opportunity to advance our own interests, establishing a fair and democratic approach to the conduct of monetary policy will require consider alternatives beyond contemporary heads, the rich win (high interest rates), and tails, the poor lose (high inflation).