otmar issing : should we have faith in central banks? speech by professor otmar issing, member of the executive board of the european central bank, held at st edmund ’ s college millennium year lecture, cambridge, on 26 october 2000. * * * ultimately, trust must be earned, it is granted temporarily, it must be checked, and it must be backed up by hard evidence, not be based purely on faith or belief. it is a great honour and a great pleasure for me to deliver the st. edmund ’ s college millennium lecture on the topic of faith in central banking. i must confess that when professor heap first invited me to give a talk on “ faith and finance in the new millennium ” as part of a series of lectures on the general theme “ faith in the future ” i suffered an initial instant of hesitation or lack of faith, if you will. as you can imagine “ faith ” is not a natural subject to discuss for a central banker and economist, who is trained to look at facts and hard evidence. to address such a difficult issue in such a distinguished seat of learning as cambridge university would seem to require a good measure of courage. but then, of course, courage - if not faith - is an attribute that central bankers should undoubtedly possess. i am also much reassured and grateful for the faith, if i may say so, that you put in me by inviting me to talk about this subject. to make my job a little bit easier - and pull the topic a little closer to my “ home turf ” - i have taken the liberty to change the title of the lecture. i have also turned it into a question : “ should we have faith in central banks? ” i should admit from the start that i do not have an obvious and clear - cut answer for you. if there was a simple answer it would not have been an interesting question to ask... and it would have been a very brief millennium lecture. so i will try to approach this question a bit in the spirit of how i presume that cambridge undergraduates might tackle their weekly essay questions, but hopefully - given my lack of practice - i will not be graded quite as harshly. 1. a look at the dictionary should we have faith in central banks? my answer to this question depends on what is meant by “ faith ”. a natural starting point is to take a look at the dictionary. the term “ faith ” is used in a religious context as well as in everyday

more than the mere sum of individuals. this is the very reason for the existence of institutions - otherwise there would be no need for them. institutions instil and reflect a sense of common purpose and responsibility. they provide a discipline on individual behaviour within such an institution. at the same time they provide support and strength to the individuals making up the institution. the strength of an institutional approach is particularly evident in the case of independent central banks. in this context, i believe, there are great merits in decision - making by committee. on the one hand, it allows diverse experiences, arguments and points of views being brought to the table. on the other hand, there is a shared responsibility for the common decisions taken. it is not a single individual but the entire institution which is behind these decisions. to my mind both aspects are crucial for a strong and independent central bank. for these reasons accountability and transparency are both more easily and more appropriately implemented in the relationship between the public and the central bank as an institution, rather than primarily with respect to individual central bankers. in this relationship the public acts as a principal who delegates the task of monetary policy to the central bank as its agent. the act of delegation can be one - off, of a constitutional nature, or it can be periodically renewed. in both cases it is crucial that the central bank can be held accountable for its performance by the public. this can be achieved in different - more or less formal - ways. even if no explicit contractual elements and specific sanctions are incorporated in this relationship the delegation of decision - making authority to an independent central bank establishes a kind of quasi - contractual relationship. the delegation of authority represents an act of trust on the part of the public and it represents a promise and an obligation on the part of the central bank to fulfil its mandate. so, should we - should you - have faith in central banks? the answer is yes and no. no, it would not be wise to always and everywhere trust central bankers with our money, but, yes, there are good reasons to trust central banks, if they are designed as solid and independent institutions with a clearly defined mandate. institutions limit the faith we need to place into the omniscience and benevolence of individual decision - makers and provide a more lasting and reliable basis for trust and credibility. 4. reputation and accountability : the role of central banks in society properly designed institutions provide the basis for trust and confidence. however, this trust must be earned