The Future of Central Banking

October 2012

‘To suffer either the solicitations of merchants, or the wishes of government, to determine the measure of the bank issues, is unquestionably to adopt a very false principle of conduct.’ 

– Henry Thornton, 1802.


The global financial crisis and the eurozone crisis have seen serious political interference in the activity of central banks. Is ground now to be ceded? Are gains to be reversed? Have we lost our nerve, or is it that we fall short of the Thorntonian ideal? What is the next step for central banking? Can it stand free not only of governments, but of the financial markets also? In the jargon, can central banking add goal independence (setting the inflation rate) to operational independence?

For many commentators this remains a political non-starter, but without it the future of central banking, the art and science of which are moving towards universal expression, seems likely to be caught up in a conflict between institutions based on free market precepts (World Trade Organisation, International Accounting Standards Board, etc.) and those born of political imperatives of an increasingly supernational and statist kind (European Financial Stability Fund, etc.).

Goal independence is not enough, however. It needs to be accompanied by central bank awareness on the part of every economic actor, by each and every one of us making our aim not only profitability, but also price stability. For this to happen, we need to allocate the societal role of ‘controlling authority’ to accounting. When used clearly, effectively, methodically and in accordance with its ineluctable inherent logic (to wit, double entry bookkeeping), rather than for purposes of managed reporting to tax authorities or shareholders, accounting has the potential to operate as a universal element, independently of both political interference and hidden transactions that have characterised much of the financial behaviour that central banks have had to ‘redeem’ in recent years.

Accounting can take to a new level the banks’ clearing-house function of yore. Of course, accounting can be, and often is, used to occlude the economic truth of a business (or a business from economic truth), but it can also be used to anchor a business, and by extension the economy as a whole, firmly in reality. Who issues money is then less important than that the money issued is accepted and thereby circulates. Issuance, by whatever agency, is then kept in service to and a function of circulation.

If, as seems likely, the euro is kept in place by political means rather than because it belongs to an optimal currency area (at least one of the kind that Keynes had in mind for sterling after WWII rather than the one of Mundell’s definition), then the very presence of the euro will force all other central banks to be similarly dependent, all rhetoric to the contrary notwithstanding. Either we acquiesce at this juncture, or we steel ourselves for the next part of humanity’s monetary journey.