Abstract
AbstractToday’s central banks wield extraordinary powers, both monetary and regulatory, and with a capacity to substitute for elected governments tempted to pass the buck. Debates about central banking’s powers and legitimacy barely touch, however, on whether and how monetary independence fits with the values that drive constitutionalism. It turns out that, for modern economies using fiat money, independence is a corollary of the higher level separation of (fiscal) powers between the legislative and executive branches. Even though independence is necessary, it needs to be carefully constrained by a “money-credit constitution.” Those general arguments, applicable in liberal democracies, do not carry across cleanly to the euro area. A principled case can be made for the ECB’s mandate being specially tight, but that is in tension with its de facto role as the emergency economic actor for the euro area. Facing up to that will be necessary sooner or later.
Highlights
“The centre or pivot, for enabling [the monetary and credit] machine to perform.”2 Francis Baring, founder of the English banking dynasty, on the Bank of England, 1796
Should the question of whether the gigantic purchases of government bonds by central banks in March 2020 are properly viewed as regular monetary policy, unscripted market maker of last resort operations, or emergency financing for governments trying to cope with Covid-19.10 In both cases, the roots lie in questions of power and durable constitutional design, in what institutional structure will deliver the best results for citizens’ welfare
Where do we find ourselves today? Compared with the aftermath of the banking crisis, monetary disorder and economic slump of the 1920-30s, when central banks were stripped of authority, standing and power, things could hardly be more different
Summary
“The centre or pivot, for enabling [the monetary and credit] machine to perform.” Francis Baring, founder of the English banking dynasty, on the Bank of England, 1796. If, overcoming factional rivalry, the various complainants found common cause in their distaste for discretionary technocracy, the upshot could be substantive legislative reform or, alternatively, less visible actions that diluted the political insulation of today’s central banks This is the realm of legislators and lobbyists. Section B opens with an account of why people across the world are becoming uneasy about independent monetary authorities This partly reflects the extraordinary reach—in domain, and purpose—of their balance-sheet policies. The ground clearing complete, Sections F and G apply our constitutionalist values and the Principles to modern central banking, revisiting the quotations at the head of the Article from Baring, Friedman, Summers, and citizen Witt in the course of doing so. Section G concludes with where all this leaves the European Central Bank (ECB), given its new prudential powers and the incompleteness of the EU’s economic constitution—which does not provide instruments for sustaining its own existence
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