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Independence of Central Banks

  • By Flo Al Talabani
  • Updated on 19 January 2026

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Donald Trump’s pressure on the Fed Chair and the composition of its Board of Governors1 has brought the issue of central banks’ independence from political influence back into the spotlight. This issue must be analysed both from a legal perspective (what do the statutes say?) and from the perspective of political reality (how do things actually work?). The US President’s interference in the Fed’s governance reminds us that the Fed also has a crucial democratic dimension: is it desirable for a politician to have such monetary leverage? Ultimately, this raises important questions at the macroeconomic level. Should the central banks’ mandate be limited to inflation or should it incorporate economic activity, and if so, which objective should central banks prioritise? Can they incorporate other dimensions, such as the climate or the environment?

NB: This article does not address the current issues surrounding central bank digital currency.

A brief history: from the first central banks to the current debate

From the first central bank to the creation of the Bundesbank

Considered the oldest central bank in the world2, the Swedish Riksbank was established in 1668 to finance the war against Denmark and stabilise the Swedish monetary system. A public institution from the outset, it was the first to issue banknotes. The Bank of England (originally a private institution) was founded shortly afterwards, in 1694, partly to finance the government of William III during the war against France. The Banque de France was established in 1800 to stabilise the currency. The failure of the revolutionary assignats3 and the public destruction of the banknote printing press in Place Vendôme in 1796 was then on everyone’s mind. The unfortunate and somewhat earlier experiences of John Law4had also left deep marks in the public debate.

Originally, these banks were by no means independent of political power; on the contrary, they were a tool at the service of the state (and its military ambitions).

The idea of central bank independence emerged in the 1920s. It was promoted by the League of Nations and implemented in several Western countries, such as Austria in 1923 and Hungary in 19245 and, as we will see, in Germany in 1922. After a fairly long hiatus caused by the 1929 crisis, the Second World War and Keynesian reconstruction policies, it experienced a resurgence in the 1970s.

The scars of Germany’s history have shaped the approach of central banks

The German Central Bank, established in 1875, remained under government control until 1922. It gained independence under a law passed on 26 May 1922, which had no effect on the hyperinflation of the Weimar crisis , which was just beginning. The end of hyperinflation and the introduction of the Rentenmark – which replaced the Mark then in circulation, which had lost all value – were organised by Hjalmar Schacht in late 1923, and new statutes were adopted (under the Dawes Plan in 1924).

Hitler’s rise to power left a very distinct mark on monetary policy. He appointed Hjalmar Schacht – a figure of great renown, whose name was associated with the resolution of the Weimar crisis – as Governor of the Central Bank and subsequently as Minister of Economics. The independence of the Reichsbank was a thing of the past. Hitler entrusted Schacht with the task of financing Germany’s reconstruction and subsequent rearmament programme. He did so by devising a clever mechanism (the Mefo notes6) that allowed for covert ‘quasi-monetary’ financing, even as the country lay in ruins due to Chancellor Brüning’s deflationary policy in the face of the exceptionally severe 1929 crisis. In a covert manner, the Central Bank served as the instrument of the Third Reich’s power.7

When the Bundesbank was established in 1957, governance issues such as those highlighted by this episode – the fact that a dictator could use currency for monstrous purposes – played a significant role in the decision to grant it independence, as historians have pointed out8. Contrary to popular belief, it is not based solely on the trauma of the Weimar Republic – especially since, as we have seen, independence had no effect on hyperinflation.

The monetarist shift of the 1980s

The 1980s marked an ideological turning point. The Central Bank is required to be ‘neutral’: its actions must not disrupt the functioning of the market and, in particular, must not favour any particular sector. According to monetarist economists9 and the quantity theory of money, inflation – which they regard as the biggest macroeconomic problem – is always of monetary origin and caused by excessive money creation. Central banks must therefore be independent of governments, which are deemed incapable of resisting clientelist public spending, as this is the only institutional means of controlling inflation.. 

German ordoliberalism, the dominant economic doctrine in Germany, is in line with this approach, which is enshrined in the Maastricht Treaty and the ECB’s statutes – modelled on those of the Bundesbank – as German leaders would only agree to abandon the Mark in return for this ‘guarantee’. The independence of the national central bank also became a condition for entry into the eurozone.

Major democracies (the United States, New Zealand, the United Kingdom, Sweden, etc.) are implementing reforms that grant their central banks greater independence.

A brief history of the Banque de France

In 1800, Napoleon Bonaparte founded the Banque de France, which was granted the privilege of issuing banknotes in Paris in 1803, and throughout the country in 1848. Its shareholders were private individuals (they would be referred to as ‘the 200 families’ in 1934 by Édouard Daladier). Napoleon retained control of the bank (he appointed its governor) but set monetary stability as the Banque de France’s primary objective.

From the Second Empire to the Second World War, the Banque de France, which remained a private institution, acted as the financial arm of the State. It was a pillar of the stability of the gold franc during the gold standard period (1870–1914). It financed the Treasury during both world wars.

In 1945, it was nationalised and placed at the service of the Treasury and the Plan for Reconstruction and Growth. It was at the heart of the Treasury’s financial system, where, in effect, the Treasury had the functions and money-creating powers of a bank.

The Treasury financial system was gradually dismantled under pressure from neoliberal economists. The law n°73-7 of January 3, 1973 on the Banque de France, prohibited unlimited advances to the Treasury and marked the first step towards the separation of fiscal and monetary policy. The 1980s saw the financial deregulation of the market for government securities and the growing prominence of the price stability objective. Under the Act of 4 August 1993, in accordance with the Maastricht Treaty, the Banque de France became independent of the government and was entrusted with the primary objective of price stability. This also marked the end of advances to the Treasury. The Banque de France is part of the European System of Central Banks (ESCB). It implements the policy decided by the ECB and its Governing Council: key interest rates, the money supply and asset purchase programmes are decided in Frankfurt. It retains national functions (banking supervision via the Prudential Supervision and Resolution Authority (ACPR), statistics, financial stability, management of currency in circulation (banknotes), public services (over-indebtedness, financial inclusion, company ratings)).

How independent are central banks around the world today?

Let’s start with the G20. There are four different scenarios.

  1. Central banks that are independent in law and in practice; this is the case in Western democracies or similar systems (including South Africa).
  2. Central banks that are not independent in law: China and Saudi Arabia.
  3. Countries where they are not independent in practice, although they are in law: Russia, Turkey, Argentina, Mexico. 
  4. Countries where the statutes provide for a degree of autonomy: Indonesia, South Korea. 

The case of the African Union, a member of the G20, is complex. Within the African Union, these four scenarios are present. This nuanced situation is also found in the rest of the world. 

It should be noted here that even in cases where the central bank is independent in law and in practice, this independence cannot be interpreted as absolute autonomy. Eric Monnet makes this point in relation to the Fed10. He quotes Alan Greenspan, former Chair of the Fed: “The Federal Reserve is a ‘creature of Congress’. Its independence ‘is contingent upon the pursuit of policies acceptable to the American people and their representatives in Congress’.” In the case of the eurozone, the ECB is accountable to the European Parliament; it submits an annual report to the European Council; it is subject to the jurisdiction of the CJEU and, finally, it communicates with the press and the general public. The functioning of the Eurogroup shows that, even though the ECB remains legally independent, its decisions are informally shaped by an ongoing dialogue with European financial leaders, creating a practical influence on the direction of monetary policy. We come back to this in 4.1.2.

The mandates of central banks around the world

The core functions of central banks

A central bank performs certain key functions within the economy: it holds a monopoly on the issuance of fiat currency11; it ensures and supervises the smooth functioning of the banking and payment systems, including the settlement12 of interbank payments; it ensures the liquidity of the national economy by providing refinancing to banks; it manages the official foreign exchange and gold reserves of member states and effectively influences exchange rates (whether or not it is responsible for maintaining a specific exchange rate). Finally – as the first central banks did – it may (or may not!13) directly finance governments by making the money it creates available to them.

Because of this “capacity to act”, it has an impact – whether it intends to or not – on major macroeconomic issues: inflation, economic growth, financial stability and the balance of payments. Unless required to do otherwise, it can influence industrial policy, climate policy or, more generally, environmental policies.

The five main types of mandate for central banks around the world

In light of these findings, legislators in countries around the world have mandated their central banks to regulate the rights and duties of the central bank, which are in fact quite diverse:

  • Fighting inflation 
  • Economic growth and employment
  • Financial stability and the stability of the banking system
  • Exchange rate stability and management of the currency peg
  • Government financing

These mandates are sometimes clearly prioritised. This is the case with the Fed14 which gives priority to inflation and employment. It is also the case with the European Central Bank. The ECB’s (and the European System of Central Banks’) primary objective, as set out in its statutes, is price stability and, secondarily, to contribute to the EU’s economic objectives (provided this does not undermine price stability). It also has a mandate for financial stability15. The financial crisis led to the strengthening of this mandate, which is managed independently of monetary policy16. In this area, the ECB acts much more like a legislator, being the primary drafter of prudential rules: if these rules are vague or lax, the ECB’s scope for action is limited.

As for the management of exchange rates, this is a central bank mandate in countries such as China, Saudi Arabia and Hong Kong, where the currency is not freely floating17. It is a political decision (in the case of Hong Kong, it is pegged to the US dollar). The central bank must ensure that the agreed exchange rate is maintained. In the case of the ECB and the Fed, exchange rate stability is not part of their de jure mandate but is de facto, as their decisions have an impact on exchange rates. Finally, it should be noted that the mandates of the People’s Bank of China, or the Reserve Bank of India, for example, are multidimensional.

Government financing through its central bank

Historically, central banks have taken on the role of financing the state during times of war, such as during the Second World War. Generally speaking, today this role is associated with a lack of political independence – to put it mildly. In China’s case, the central bank does not finance the state directly but acts indirectly by providing liquidity to commercial banks, which in turn lend to the state or state-owned enterprises.

This is particularly evident in the case of state funding, where questions regarding the scope of the mandate are closely linked to independence: if the bank is not independent, the political authorities can do as they please; if it is independent, the bank can only act within the framework of a mandate, subject to the oversight of stakeholders (in the United States, Congress18), which may be precisely defined in the statutes, and ultimately subject to judicial review. This is, in fact, what has been observed in recent years with regard to the ECB, following the quantitative easing operations19 undertaken by Mario Draghi in 2015, which were challenged in court.20

The benefits of central bank independence

The independence of the central bank from political influence has been treated almost as a dogma for decades, being presented as the best defence against inflation. This issue must be distinguished from another, political one: the risk of abuse of power when the central bank is controlled by an authoritarian government. Let’s look at this in a little more detail.

Tackling inflation

According to public choice theory, which has become the dominant view in economics, governments, in pursuing their electoral or political interests, tend to prioritise popular, or even clientelistic, spending, which can put pressure on monetary policy or deficit financing. They are assumed to be lax and to wish to finance this spending by ‘printing money’ – and, failing that, by cutting interest rates. The independence of the central bank from political power would, conversely, help to defend the credibility and value of the currency. In short, it would be THE bulwark against inflation, regarded as the fundamental economic problem.

This view of the Central Bank’s role is based on three questionable assumptions:

1, Inflation is said to be always of monetary origin (quantity theory of money).

This claim is highly debatable. Inflation can stem from the real economy due to supply-side pressures (such as energy shortages, for example, as seen during the oil crises of 1973 and 1979 or in the wake of the war in Ukraine). We detail why this myth is false in the Inflation and Money article.

2. Monetary policy (in practice, the management of interest rates) would be an effective tool for curbing inflation.

Proponents of this view point in particular to the very sharp rise in interest rates implemented by Fed Chairman Paul Volcker in 1979, which quickly brought inflation under control. It is clear, however, that the effectiveness of this monetary policy stemmed from its recessionary impact. In other words, when inflation is not of monetary origin, credit tightening can affect it (rather than its causes) by slowing down economic activity.

Let’s dive into the details: in 1979, inflation was running at over 10% in the wake of the oil crises of 1973 and 1979, which had caused the price of crude oil to rise dramatically. To bring inflation under control, Volcker raised the Fed’s key interest rate to 11% in 1979 and then to 20% in 1981. These massive increases made credit extremely expensive, which severely curbed consumption and investment. The effectiveness of this monetary policy was clear: inflation, which stood at 13.5% in 1980, gradually fell to around 3% in 1983. However, the rise in interest rates triggered a severe economic contraction. US GDP fell in the early 1980s, with two consecutive recessions (1980 and 1981–1982). The unemployment rate rose to 10.8% in November 1982, a historic high for the time.

3. A government with this lever at its disposal would use it less effectively (in terms of inflation) than an independent agency.

This hypothesis has been the subject of numerous econometric studies (see box) since the 1980s. It should be noted, however, that the German Central Bank had become independent in 1922 – indeed, it was the first central bank to be legally independent – and that this did not prevent its president, Rudolf Havenstein, from printing money and fuelling the hyperinflation of the Weimar Republic…

The economists Jérôme Deyris, Gaëtan LeQuang and Laurence Scialom introduce the subject in A Past That Has Been Left Behind? The Independence of Central Banks in the 21st Century (Energy and Prosperity Chair, 2024) as follows: “Criticising the supposed tendency of governments to put pressure on the central bank to stimulate the economy in the short term, some researchers have, within a framework of rational expectations21, highlighted the ineffectiveness of such a policy, which leads to inflation without growth22. The verticality of the Phillips curve23 and the neutrality of money therefore justify entrusting monetary policy to an independent and conservative central banker24.There is thus a ‘science of monetary policy’ that can be insulated from all political decision-making25. Furthermore, the neutralisation of monetary policy practices constituted a second key argument in favour of independence. In the post-war European context, monetary policy employed various ‘selective’ instruments, resulting in a proliferation of exemptions, subsidies and rationing in line with political priorities. The turn of the 1970s and 1980s marked a turning point, characterised by a convergence of European monetary policies towards the Anglo-Saxon model, giving greater prominence to market mechanisms deemed to be more efficient.”26

Several academic studies have highlighted a strong link between central bank independence and inflation control. Notable among these are the pioneering studies by Alesina27 and that by Cukierman, Webb and Neyapti28, each of which developed an index of independence. These studies show that, across the countries and periods analysed, central bank independence leads to lower inflation without causing higher unemployment or affecting growth.

Further studies29 conducted in the 1990s support these conclusions. More recently, studies have highlighted issues of transparency and democratic accountability, emphasising that, in authoritarian regimes, laws on independence have no practical effect.

Since the 2008 crisis and the so-called unconventional practices of central banks, the nature of the academic debate has shifted. The massive interventions by central banks have put an end to the notion of monetary policy neutrality. Climate change has entered the debate, and the focus has shifted to questions regarding the legitimacy and effectiveness of these policies (without prejudice to the fight against inflation).

Preventing abuse of power

The independence of central banks is not merely intended to resolve technical issues of monetary stability; more fundamentally, it serves as an institutional mechanism to limit political power. When the central bank is placed under the direct control of the executive, the currency becomes a discretionary instrument of government, liable to be deployed for the purposes of political domination, social control or geopolitical projection.

Let us consider a few examples. Hitler’s Germany provides a striking illustration of this drift: the subordination of the Reichsbank made it possible to circumvent parliamentary and budgetary constraints (via the Mefo notes30 mentioned earlier), facilitating the rapid militarisation of the economy and the consolidation of authoritarian power. In the case of China, the central bank’s lack of genuine autonomy forms part of a broader context of convergence between political power, the financial system and the state’s strategic objectives. Monetary policy and credit are used to support sectors deemed to be political priorities, to rein in certain economic actors, or to strengthen the regime’s control31. Last example, Turkey32, where several governors of the Central Bank were dismissed during their (short) terms of office because they did not toe the line set by the executive, a move that was seen as undermining the institution’s independence.

As the economists Aglietta and Orléan33, and the economist and sociologist Geoffrey Ingham34, have shown, money cannot be reduced to a technical instrument of macroeconomic regulation: it constitutes a central political institution, founded on sovereignty and legitimacy. Consequently, the question of the Central Bank’s independence must be analysed as an issue of the separation of powers and political control over money, beyond its mere economic effects.

The challenges posed by the independence of the Central Bank

The need for monetary and fiscal coordination

The two main instruments of macroeconomic management in a country are fiscal policy and monetary policy. The fiscal lever is rarely debated in principle (discussions tend to focus on the limits of its effectiveness depending on the circumstances). Monetary policy is more hotly debated: indeed, monetarist dogma views money merely as a ‘veil over trade’, whereas the ‘Volcker experiment’ or Schacht’s actions clearly demonstrate that monetary policy has a very significant effect on the economy.

The coordination of these two levers is therefore a key factor in stabilising the economy in the short term, as well as in determining its long-term direction.

In times of crisis or when there is a pressing need for investment, monetary and fiscal policies must work in tandem

During periods of recession or major crisis, the combination of automatic fiscal stabilizers and an accommodative monetary policy helps to limit the cumulative effects of the economic downturn.

Similarly, during periods of reconstruction or structural transformation — such as those brought about by the green transition — the ability to utilise both these levers simultaneously determines whether it is possible to finance large-scale investments without causing lasting macroeconomic imbalances.

More generally, when the economy requires a boost to demand or a reorientation of investment, the effectiveness of public policies depends on consistency between fiscal decisions and the stance of monetary policy, particularly with regard to interest rates.

The specific case of the Eurozone

The eurozone presents a specific challenge when it comes to coordination: it comprises 21 national budgets (including Bulgaria from early 2026) and a single currency. The European budget as such is marginal (around 1% of the EU’s GDP). The strict separation between a centralised monetary policy, entrusted to an independent central bank, and fiscal policies that remain largely national – even if they are governed by common rules – creates a risk of misalignment between the two instruments. The independence of the European Central Bank does indeed give it the ability to adopt a stance that does not necessarily coincide with the aggregate fiscal choices of the euro area, or even one that mitigates their effects.

This situation is not set in stone by the treaties. European legislation does not, as such, prohibit forms of structured dialogue, coordination or alignment of macroeconomic policies, provided that the Central Bank’s formal decision-making autonomy is preserved. A body such as a European Economic Coordination Council35 would not undermine the ECB’s independence, but could help to reduce inconsistencies between fiscal and monetary policies, and treat coordination not as a crisis-driven exception, but as a structural issue of macroeconomic governance within the Union. The Eurogroup, an informal body comprising the finance ministers of the eurozone and attended by the President of the ECB, discusses these issues. However, it publishes only summary statements, with its debates and positions remaining confidential; this body therefore lacks transparency and, furthermore, its members share a common economic perspective and culture.

Independence from politics and dependence on the markets?

In the event of a financial crisis, central banks are ‘obliged’ to bail out the banks

When a central bank acts to “bail out the banks”, as was the case with the ECB during the 2008–2009 crisis, it is, in effect, acting in their favour. Admittedly, the collapse of a systemic bank can, as we saw with Lehman Brothers, trigger a domino effect leading to a global crisis. The central bank’s action is therefore legitimate in order to prevent the destabilisation of the economy. Nevertheless, the central bank, in this case, is acting in the interests of the banks. This paradox is well known to economists and the executives of ‘too big to fail’ banks. This “moral hazard”36 can tempt these banks – which feel protected by their size – to take risks that are likely to be profitable.

A structural dependence on financial actors

Outside these periods of crisis, central banks are structurally dependent on banks and financial institutions. As the economist Adriano Do Vale37 demonstrates, for example, central banks are not sovereign authorities acting above the markets, but are part of a system of close interdependence with commercial banks, particularly through refinancing mechanisms, the transmission of monetary policy and liquidity management.

Thus, within the European framework, the European Central Bank relies on the smooth functioning of the banking system to implement its decisions in these three areas, which gives major financial institutions structural bargaining power, or even the ability to exert pressure. This situation is also highlighted by Sebastian Diessner and Giulio Lisi38: the ECB tends to tailor its policy to the interests and stability of the financial markets, lest it disrupt monetary transmission. The authors demonstrate in particular that unconventional policies have reinforced the central role of financial actors, whose cooperation is indispensable. Thus, apart from moments of crisis when central banks can temporarily assert their primacy, the monetary order remains largely shaped by the balance of power with the financial sector, confirming the relational, historically situated and politically embedded nature of their independence.

The capture of the regulator

Central banks can even be “controlled” by private actors, as Laurence Scialom points out in her book La fascination de l’ogre (Fayard, 2019) ; the literature refers to this as “regulatory capture”. Let us illustrate this point using the example of the ECB. Under the Single Supervisory Mechanism (SSM), it is responsible for the direct supervision of around 120 large, generally systemic, banks in the eurozone. When it attempts to impose regulatory constraints, it finds itself under considerable pressure from banks that possess powerful lobbying capabilities, as well as analytical and information-processing resources that may exceed those of the ECB. For example, major banks have introduced internal risk analysis models39 to meet regulatory requirements. In its stress tests, the ECB relies on these models and on data provided by the banks themselves, which is difficult to verify fully. 

I […] was struck by the similarity in the methods used by the industrial and financial sectors to oppose regulations that are detrimental to their interests, even in cases where the public interest is seriously undermined […].

Laurence Scialom, La fascination de l’ogre, 2019

Scialom lists the following methods used in the banking and financial sector: “The systematic denigration of academics who oppose them […]; the placement of banking lobbyists in ministerial offices to make their undermining efforts more effective40 […]; the presentation of falsehoods as established facts and their relentless repetition […]; blocking the appointment of a ‘troublesome’ individual […]”.

The myth of monetary neutrality

The independence of central banks is based on the idea that monetary policy must be neutral. The underlying reasoning rests on the monetarist premise that money affects only prices and not real economic activity, which must be ‘entrusted’ to efficient markets. All monetary policy must adhere to this theory, which becomes a self-fulfilling prophecy. It is easy to demonstrate that, on the contrary, monetary policy has redistributive effects. Inflation creates winners and losers. It is also clear that it may be desirable for a country to pursue an industrial, sectoral or even comprehensive transformation policy (as is the case with the green transition) which requires a differentiated monetary policy.

Changing the governance and mandate of central banks is a necessity

The independence of central banks clearly addresses the issue of the separation of powers. However, for this independence to facilitate the democratic coordination of fiscal and monetary policies, it is desirable that its governance evolves. Several approaches have been put forward.41

When it comes to tackling inflation, we have seen that the conventional wisdom is beginning to waver. On the one hand, inflation can have non-monetary causes, linked for example to supply-side pressures; on the other hand, the priority given to inflation in the mandate of central banks (particularly the ECB) no longer addresses current challenges, in an increasingly uncertain world exposed to significant and multiple risks (such as climate change).

We must therefore now consider how the mandate of central banks and their degree of independence have evolved. For the EU, the creation of new coordinating bodies and a much broader interpretation of the ECB’s mandate as currently formulated could enable a more effective response to these issues, which are essential, indeed vital, for Europeans.

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