Skip to main content

Bank of England Nur Photo/Getty Images

The Promise of Fiscal Money

One of the few remaining sacred cows of Western capitalism is the independence of central banks from elected governments. But in an age when fiscal policy has become an essential factor in determining the quantity of money lubricating the system, an independent monetary authority no longer makes sense.

ATHENS – Western capitalism has few sacred cows left. It is time to question one of them: the independence of central banks from elected governments.

The rationale for entrusting monetary policy fully to central banks is well understood: politicians, overly tempted during the electoral cycle to create more money, pose a threat to economic stability. While progressives have always protested that central banks can never be truly independent, because their autonomy from elected officials increases their dependence on the financiers they are meant to keep in check, the argument in favor of removing monetary policy from democratic politics has prevailed since the 1970s.

Setting aside the political controversy, central bank independence is predicated on an economic axiom: that money and debt (or credit) are strictly separable. Debt – for example, a government or corporate bond that is bought and sold for a price that is a function of inflation and default risk – can be traded domestically. Money, on the other hand, cannot default and is a means, rather than an object, of exchange (the currency market notwithstanding).

We hope you're enjoying Project Syndicate.

To continue reading, subscribe now.

Subscribe

Get unlimited access to PS premium content, including in-depth commentaries, book reviews, exclusive interviews, On Point, the Big Picture, the PS Archive, and our annual year-ahead magazine.

https://prosyn.org/JctTkhm;

Handpicked to read next

  1. drew47_Drew AngererGetty Images_trumpgiulianasmiling Drew Angerer/Getty Images

    Will Trump Be Removed from Office?

    Elizabeth Drew

    Assuming the US House of Representatives votes to impeach President Donald Trump, the fact remains that there are far fewer votes in the Senate than will be needed to convict him and remove him from office. But the willingness of Congress – including the Senate – to continue tolerating his dangerous conduct is now truly in question.

    0
  2. rudd9_Darrian TraynorGetty Images_climateprotestburningaustralia Darrian Traynor/Getty Images

    Unsustainable Australia

    Kevin Rudd

    Before the current conservative government came to power in 2013, Australia was well-positioned to make the necessary transition to a low-carbon economy. But now, the country is heading in reverse, and has already fallen behind most developed countries, and even China, on reducing emissions and building resilience against climate change.

    1

Cookies and Privacy

We use cookies to improve your experience on our website. To find out more, read our updated Cookie policy, Privacy policy and Terms & Conditions