You cannot in a democratic society have an institution which is either fully or partially disassociated from the electoral process, and which has the powers that central banks inherently have.
This chapter explores the relationship between processes of democratization and the establishment and/or reinforcement of trustworthy and credible systems of monetary authority, with particular emphasis on central banks. As elsewhere in this book, a long historical perspective is included, and the evolving experiences of old democracies are used as reference points for assessing the more recent and incomplete experiences of neo-democracies. Some theoretical issues are considered, but the emphasis is placed as much on recent experience. The 'delicate balance' between monetary authority and democratic legitimacy, the underlying rationale for central bank independence, the scope and limits of 'consent' in monetary affairs, are all theoretical issues of relevance to new democracies. This chapter is equally concerned with the need for feedback from experience to theory, as when the granting of central bank independence is followed by unanticipated financial crises that inflict heavy redistributive costs on the society, and may even weaken the legitimacy of its fledgling democratic institutions.
The governments of many new democracies are heavily dependent upon access to international capital markets in order to maintain the economic stability necessary to address the other demands of the electorate. In such conditions it becomes a high political priority to design and manage a system of monetary authority that can command 'credibility' in financial markets. Inherited monetary arrangements are seldom adequate for this purpose, since most pre-democratic monetary systems were prone to the abuses of power that are characteristic of authoritarian rule, and many displayed additional dysfunctionalities from a global market perspective—interventionism and financial repression, etc. Thus, new democracies