Central bank independence from the executive branch is a mechanism set in place in order to ensure that monetary policy is conducted with the long-term sustainability of the economy in mind. If monetary policy were subject to the cyclical shifts of different political terms, economic fluctuations would be much more volatile and concerned with political hot-topics such as expanding the national potential output of the economy as a means to gain more influence on the global political and economic stage, irrespective of it’s alignment with the contractionary or inflationary needs of the economy at hand. Or even concerned with unemployment reduction as the sole means of steering public opinion in favor or against the party in power. Let's take an example of an economy that is currently experiencing an inflationary gap in output and an unstable rate of inflation. If the central bank were putting the health of the economy first it would attempt to restrict the monetary supply and rain back on consumption. If on the other hand, the executive branch of government were in control of the monetary policy and faced an upcoming re-election, it would attempt to make the economy look more “competitive” by continuing to encourage consumption and lower the natural rate of unemployment, despite its adverse effects on the unstable rate of inflation, and thus on the long term of health of the economy. 

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In the 1951 Treasury-Fed Accord, it was agreed that the Federal Reserve of the US would regain the final say on interest rates. Not without its opposition however, Thomas Mccabe, the chairman of the Fed had to resign in order to give way to a chairman who agreed with the treasury-led policy: William Martin (Hetzel 2013). The US Fed although intended to conduct independent monetary and fiscal policies, is often the subject of bullying and manipulation by the executive branch of government. Sometimes the Fed can lay down its foot and fend off the requests of politicians. In 1965 for example, amidst the increased spending on the Vietnam War, exorbitant social welfare spending under President Johnson’s “Great Society” plan, and a tax cut in 1964, Martin and the Fed were staring down the barrel of unmitigated inflationary forces and sought to increase the prime rates (Fessenden 2016). While Johnson sought to preserve the image of a booming economy under his administration, he vehemently opposed the Fed’s policy trajectory, and yet, Martin’s decision was final (Fessenden 2016). In other cases, the Fed doesn’t have as much of a say.  Under the Eisenhower administration, the Treasury Secretary was instructed to put the “utmost pressure” on William Martin, to “get a greater money supply throughout the country” (Michel 2019). Martin saw this as an opposition to his role to “lean against the winds” of inflation or deflation, and refused, to which Eisenhower asked him to reconsider or resign. Martin reconsidered (Hetzel 2013).

While this relationship may have adverse effects on the economy, it carries with it some macroeconomic and democratic benefits. In the 2008-09 financial crisis, the Treasury erred from their cash management practices to support the Fed’s gargantuan injection of money into the economy (Federal 2017). Their less-than-independent relationship allowed for more aggressive economic policies in the case of crises. This executive oversight also has the benefit of maintaining inflationary or recessionary policies in the hands of elected individuals as Friedman argues (Taylor 2013).    

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As opposed to the flexible independence of the Federal Reserve, The People’s Bank of China (PBoC) was granted a high degree of independence by an act passed by the National People’s Congress in 1995. While the PBoC is protected from direct influence from political actors in China, its independence is subject to the indirect consequences of legislative policies (Chung 2004). Chinese adamance on defending the Renminbi/USD peg has undermined the independence of monetary policy conducted by the PBoC by synching their monetary stimulus policies with that of the Fed’s. While the PBoC has countered this constraint by attempting to sterilize inflows and using foreign exchange reserves to counter currency valuation pressures, the impacts of this political decision are obvious. Foreign exchange inflows are undermining the money market rates and have had a peculiar impact on the micro-economic forces in China. Namely that the build up of liquidity in banks, paired with the dwindling portfolio of alternative investment instruments and China’s small bond market, has created a gap between bank deposits and the capital assets available to invest in. As Yu Yongding argues, the scarce bond market has deprived the market of substitutes for money causing the “interest-elasticity of money demand [to] approximate to zero” consequently impeding on the profitability of banks (Green 2005).  

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Bibliography: 
Chung, C. W.-W., & Tongzon, J. L. (2004). A Paradigm shift for China's central banking system . Journal of Post Keynesian Economics, 27(1), 87–103.
Fessenden, H. (2016, July). 1965: The Year the Fed and LBJ Clashed. Federal Reserve Bank of Richmond. Retrieved from https://www.richmondfed.org/publications/research/econ_focus/2016/q3-4/federal_reserve
Green, S. (2005). Making Monetary Policy Work in China: A Report from the Money Market Front Line. Stanford Center for International Development, 245.
Hetzel, R. L. (2013, November 22). From the Treasury-Fed Accord to the Mid-1960s. Federal Reserve History. Retrieved from https://www.federalreservehistory.org/essays/treas-fed-accord-to-mid1960s
Michel, N. (2019, March 19). The Fed Has Not Been Independent - Perhaps It Should Be Restructured. Forbes. Forbes Magazine. Retrieved from https://www.forbes.com/sites/norbertmichel/2019/03/19/the-fed-has-not-been-independent-perhaps-it-should-be-restructured/?sh=206c5de7888c
Reserve, F. (2017, February 23). The Federal Reserve's response to the financial crisis and actions to foster maximum employment and price stability. Board of Governors of the Federal Reserve System. Retrieved from https://www.federalreserve.gov/monetarypolicy/bst_crisisresponse.htm
Taylor, J. B. (2013). The Effectiveness of Central Bank Independence Versus Policy Rules. American Economic Association Annual Meeting.