Monetary Policy and Central Banking: The Relevance of the Financial Revolution Today

Abstract

The aim of this article is to provide a discussion interface for historians and those that are in the present world of economics. The Global Financial Crisis set in motion a series of debates on the nature and scope of monetary policy. The role of monetary policy and the central bank since the 1980s has been clear – price stability, interest rate stability, political independence and the effective management of financial crises (mostly manifested as short term liquidity crises). Central banks recently have rediscovered that they are not managers or accountants but actors in a political power play. This manifests itself in the creation of money, the manipulation of interest rates, the changing of exchange rates, the reappraisal of the lender-borrower relationship and the assignment of economic rents to those in a position to be deemed worthy. As a wing of the State central banks are a creature of the executive, despite the need to present distance from the political fray, central bankers are members of a hyper elite where only presidents, prime ministers and finance ministers are invited guests. Financial innovation, whether generated through innovation, circumnavigation of regulations or outright deregulation causes revolutions in central banking practice. While finance remains sedate and the State is not under any form of duress central banking becomes technocratic, waiting and assumed superfluous but as a crisis breaks and the ability of the State to achieve its objectives or its survival is placed in doubt the central bank takes on an active role achieve what no other wing of the State can – create money and with redefine and defend the State.