You Can Take a Horse to The River, But You Cannot Make It Drink: A Lesson for Central Banks

 

‘You can take a horse to the river, but you cannot make it drink’. Few proverbs describe the limits of power as effectively as this one. And few institutions embody this dilemma more than the central bank.

Central banks can slash rates, pump liquidity, tweak reserve requirements, and intervene in currency markets. They can lead the economy to the river of credit, but they cannot force businesses to borrow, consumers to spend, or banks to lend. Monetary policy can shape conditions, but it cannot dictate choices. That is the paradox at the heart of central banking: policy tools are powerful, but their impact depends on how people respond. And people - whether bankers, entrepreneurs, or households - are guided not just by equations, but by confidence, fear, and trust.

The 2008 global financial crisis proved this painfully. The US Federal Reserve and the European Central Bank cut rates to near zero and injected oceans of liquidity through quantitative easing. Yet recovery was painfully slow. Banks hoarded reserves, corporations sat on cash, and consumers tightened their belts. Money was cheap, but confidence was scarce. The horse stood at the riverbank, unmoved. The same pattern was visible again during the COVID-19 pandemic. Central banks acted swiftly to pump liquidity into economies, yet recovery depended far more on fiscal support, vaccine rollout, and restoring trust than on easy money alone.

Why does this happen? Because monetary policy works through transmission channels - interest rates, credit flows, asset prices, and exchange rates. If those channels are clogged, the signal weakens. Lower interest rates do not matter if businesses see no future demand. Abundant liquidity does not matter if banks fear defaults. Even zero rates do not matter in a liquidity trap, when everyone prefers to hold cash rather than risk spending or investment. Expectations become decisive. If people expect instability, they will not respond. If they doubt the credibility of the central bank, policy loses bite. Monetary policy is as much about psychology as about numbers. Keynes’s ‘animal spirits’ - optimism, fear, herd instincts - are often stronger than interest rates.

This lesson is particularly relevant for Bangladesh. The central bank often eases liquidity or cuts rates to stimulate credit. Yet private sector investment remains sluggish. Banks sit on cash, while businesses hesitate due to infrastructure bottlenecks, weak governance, and political uncertainty. The horse has water in front of it, but it is distracted by the mud around the pond. Inflation management tells a similar story. Raising rates is supposed to cool prices, but in Bangladesh inflation often comes from food supply shocks, logistics bottlenecks, or import dependency. A tighter monetary stance cannot fix broken supply chains or reduce onion imports from India. Here again, the central bank leads the horse, but the horse refuses to drink because the problem is not thirst - it is the quality of the water.

Foreign exchange management also reflects this dilemma. The central bank may sell dollars to stabilize the taka, but exporters, importers, and remitters make decisions based on their own incentives, not on official intent. If confidence is low, dollar hoarding continues regardless of intervention. A central bank can provide liquidity, but it cannot force economic agents to act against their perceived self-interest.

The danger lies in overestimating the central bank’s power. In times of crisis, people expect it to fix everything. But monetary policy cannot solve structural weaknesses, nor can it substitute for fiscal discipline or governance reform. When supply shortages, corruption, or inefficiency drive economic problems, monetary tightening or easing will at best buy time, not produce solutions. Overburdening the central bank only undermines credibility. If the public sees policy tools misapplied - tightening when inflation is supply-driven, easing when banks are too weak to lend - the central bank risks losing authority. And once trust erodes, even well-designed policies fail.

If the central bank cannot make the horse drink, then the logical alternative is to make the water more appealing. That requires a broader ecosystem of credible policies, sound institutions, and coordination with fiscal authorities. Clean governance makes credit safer, so banks lend more willingly. Better infrastructure reduces business costs, so entrepreneurs are more willing to borrow. Fiscal spending on productive projects amplifies monetary easing by creating real demand. Financial literacy helps households understand and trust financial opportunities. And above all, central bank credibility - built on consistency and independence - makes people believe that the water is indeed clean.

This is why the most effective central banks are those that recognize their limits. The US Federal Reserve, for example, repeatedly stresses the need for fiscal action alongside monetary easing during downturns. The European Central Bank has often emphasized that structural reforms in member countries are essential to complement monetary stimulus. Japan offers another cautionary tale. Despite decades of near-zero interest rates and repeated monetary expansion, weak demographics and structural rigidity limited growth. The horse was given water for years, but it barely sipped.

For Bangladesh, the stakes are high. Inflation is eroding purchasing power, currency pressures are straining reserves, and private investment is subdued. The central bank can intervene, but unless fiscal policy is disciplined and governance is strengthened, its actions will not go far. Injecting liquidity into banks with poor lending practices is like pouring water into a cracked jar - the water never reaches the horse.

The horse metaphor reminds us that economics is ultimately about human behavior. No formula or interest rate can bypass the psychology of fear or mistrust. Central banks can provide incentives, but people must choose to respond. That choice depends on the environment they face. A thirsty horse drinks when it sees clean water in a safe place. Businesses invest when they see opportunity in a stable system.

Monetary policy, therefore, must be seen as part of a larger puzzle. It can stabilize expectations, smooth volatility, and provide emergency support. But it cannot alone guarantee growth, investment, or inflation control. Those outcomes depend on trust, governance, and the credibility of the entire policy framework.

‘You can take a horse to the river, but you cannot make it drink’. Central banks cannot force the economy to respond. But they can help create the conditions where the water is clean, the environment safe, and the horse willing. The rest depends not on compulsion, but on trust.

          Mehdi Rahman works in the
development sector. He also
writes on foreign trade and
monetary issues.