Following the Peter Principle, we should expect people to be promoted to the level of their incompetence. It may be unfair, but that thought crossed my mind in a week in which the Bank of England has been given unprecedented responsibilities. It retains the operational independence for monetary policy conferred on it by Gordon Brown in 1997 as chancellor. In addition, it regains all the responsibilities for financial oversight of which it was deprived by the Labour government – and then some more. These aspects are not confined to the UK, although the thoroughness and relentlessness of the operation are perhaps typical of the not-very-pragmatic British.

Central bank independence was one of the theme songs of the end of the 20th century. It became associated with – although it was not necessarily the cause of – what became known as the Great Moderation, that is the combination of steady growth with low inflation throughout the industrialised world.

If policy were conducted by benevolent and knowledgeable dictators, monetary and fiscal decisions would be run together. The academic case for central bank independence was avowedly a second best one, in response to what was called the credibility problem. The full inflationary effects of an excessive stimulus might be delayed for a few years, while the favourable effects on output and employment might come much sooner. There was therefore a powerful incentive for governments to overstimulate in the run-up to an election, all statements to the contrary notwithstanding. The central bank, by controlling the monetary tap, could make sure that a government behaving in this way was punished by high interest rates that would inhibit the boom.