The conclusion draws comparisons between the 1920s and 1930s on the one hand, and the years after 1989 on the other. In both cases, Poland was reborn after years of bitter oppression. The national spirit was reasserted. The architects of the transformation were courageous and charismatic leaders, who gave a voice to a repressed and humiliated country: Marshal Piłsudski as the leader in a military struggle against the imperial systems that had ensnared Poland in the aftermath of the eighteenth-century partitions; and Lech Wałęsa as the voice of authenticity in a moral revolt of workers against a system that falsely claimed to represent them and their interests. In both cases an independent central bank appeared as part of the necessary institutional infrastructure of the political reform process. The search for monetary stability took longer in the 1990s, but when it was achieved, in the early 2000s, it proved more durable. Inflation had been a sign of the dysfunctionality of communist planning. Higher levels of inflation in the transformation and its aftermath allowed a new price and market structure to emerge. In both instances, Poland’s stability was buffeted by constant security threats.

The Introduction lays out the dilemma of modern central banks in terms of the “Odysseus contract” under which central bankers guide the ship of state safely through monetary turbulence, with wax stuffed in their ears so that they ignore calls for generosity and complaints about meanness, while the political master – Odysseus, the government, the people – agrees to be bound. Poland in the 1920s and again in the 1990s tried to establish such a central bank, in the wake of the reestablishment of the state. Important theorists conceptualized the central bank as part of an underground, alternative state, during moments of foreign rule: the nineteenth century division of Poland, the German occupation of 1939–45, and communist rule. Security considerations played a prominent role, and dictated the national importance of building up gold reserves, especially at moments of geopolitical strain.

How and why do economic policy regimes emerge and evolve over time? Chapter 1 lays out the book’s argument and analytical approach. The story of economic policy in Western democracies is commonly told in terms of the supersession of epoch-defining intellectual revolutions. The analytical and empirical shortcomings of this conventional argument indicate that we are in need of a different account. Using the United Kingdom as a case study, this book makes the case for a multi-layered understanding of policy regimes and illuminates processes of fragmented change before and after the 1970s. The book studies policymaking from the forward-looking perspective of government elites and theorizes the politics of economic policy as a series of overlapping economic-policy and bureaucratic framing contests. It shows how these framing contests drive policy decision-making, organizational hierarchies, symbolic state practices and, thereby, the evolution of policy languages. The book’s multidimensional analytical approach highlights how the politics of economic ideas, bureaucratic politics, and the evolving structural political-economic context drive the development of relatively (in)coherent policy regimes.

Chapters 5 and 6 offer novel explanations of the politics of shrinking policy space in the 1970s by tracing how (i) structural changes in the economic and institutional environments, (ii) strategic interactions between policymakers, civil servants, trade unions, financial investors, and international organizations, among others, and (iii) specific policy and cognitive devices combined to constrain government elites’ perceived menu of available policy options. Chapter 5 studies the strategic interactions between policymakers intending to legitimize an active fiscal policy and uncooperative financial markets. It argues that the institutional and cognitive underpinnings of the relational setting of sovereign debt shaped government elites’ (and financial investors’) understandings of economic policy options, and proposes the notion of an economic policy trilemma to explain and theorize the way in which financial confidence became a binding constraint to government policy.

The Epilogue summarizes the obstacles encountered, as well as the advances achieved, during the emergence of banking in Latin America from independence in the early nineteenth century down to the first decade of the twentieth century. This history is described as part of a long phase of slow capitalism that, eventually, led to faster economic growth and some convergence with more advanced nations, albeit subject to diverse trajectories. The Epilogue also raises questions regarding the building of authentic banking systems from the early twentieth century onwards, as well as the establishment of central banks from the 1920s and 1930s.

Chapter 5 argues that the new insights into economic expectation formation, revealed by survey data, formed the basis for not only the rational expectations hypothesis but also for a new approach in monetary policy. The use of published forecasts at the Federal Reserve since the late 1970s demonstrates this shift. The rational expectations hypothesis, which gained widespread acceptance in the economic discipline in the 1970s, challenged the prevailing faith in central bank secrecy. In the aftermath of the 1987 stock market crash, this led to a shift toward greater central bank transparency. Published forecasts gained new significance, becoming a vital monetary policy tool to anchor inflation expectations and influence inflation and output. While economists and sociologists have hailed this shift as a turn toward a new, “performative” role of forecasting, recent developments since 2008 and 2021–2022 suggest that the divergences between forecasts and actual future outcomes may, once again, reshape the theory of economic expectation formation and the role and use of forecasting.

The July Crisis spanned just over five weeks, separating the assassination of Archduke Franz Ferdinand and his wife, Sophie, on 28 June 1914 from Britain’s declaration of war on 4 August. In the vast scholarship on the July Crisis, commercial and financial issues have received relatively little attention. This absence reflects the character of the July crisis, in which the key actors were a small number of men, in the chancelleries, foreign ministries, and general staffs of Serbia and the great powers. The crisis affected markets from early July in Vienna, but panic across European markets set in on Monday, 20 July, three days before the delivery of the ultimatum. In contrast to crises in September 1911 and autumn 1912, collapsing financial markets and rising food prices did not restrain leaders. Indeed, perceptions of opponents’ financial and commercial vulnerabilities led leaders, particularly in Berlin and Vienna, to adopt more assertive diplomatic and military strategies. This chapter examines why the July crisis culminated in great power war in contrast to previous crises.

A great power war remained a possibility in Europe in the early twentieth century and preparing for it remained the state’s most important responsibility before 1914. This chapter examines how states developed plans to fight under conditions of economic interdependence. Preparations sought to mitigate the risks to economic stability and exploit the enemy’s vulnerabilities. The lack of prior experience of a major European war in an interdependent global economy rendered planning extremely difficult. Some challenges went unforeseen; others required trade-offs that had to be balanced against the peace-time economy. These preparations imposed another interdependence dilemma on states – war preparations were costly, detracting from the economic basis of a state’s future power. Undertaking the preparations, inadequate and superficial as they proved, only served to underline the catastrophic consequences of war and spread knowledge about the high risks across bureaucracies and civil society. Planning for war, though dominated by military and naval leaders, included a wide range of civilian officials and experts from civil society.

This chapter analyses the Federal Reserve’s mandate and statutory objectives and how they have evolved since the Fed was established in 1913, and considers the mandate in the context of environmental and social sustainability challenges. The chapter argues that the Fed’s mandate and statutory objectives historically were interpreted broadly to allow discretion for the Fed and its Federal Open Market Committee (FOMC) to manage monetary policy in support of Government policy. The chapter further argues that the legislative history behind the adoption of the dual mandate to achieve price stability and full employment allows the FOMC and the Board of Governors discretion to use their powers to mitigate the risks emanating from the broader economy and society that might impact the price stability and full employment objectives. Despite the conventional interpretation by Fed officials that the Fed ‘should stick to its knitting’ by focusing on short-to-medium term risks to price stability, the chapter concludes that the economic evidence is compelling that climate finance risks and other sustainability challenges can undermine price stability and full employment and therefore should be factored into the Fed’s monetary policy and financial stability strategy.

Should central banks favour green assets in their operations? This question has caused an intense debate in the Euro area and the UK, focussed on corporate bond portfolios purchased by the Eurosystem and the Bank of England. It has been argued that their initial purchases supported economic activity that was not consistent with the stated targets of the EU and the UK governments to hit net zero carbon emissions by 2050. Sustainability issues are not a primary objective for central banks, and their independence could be damaged by exceeding their remits. Nevertheless, the risks arising are highly relevant to their existing primary objectives. Furthermore, central banks and all other institutions must do what they can if society is to deal with the growing existential threat. That draws on their secondary objectives. We argue that: (1) Not only is it permissible for a central bank to be involved in climate mitigation activities, but existing mandates require it. (2) The expansion of central bank balance sheets gives room for more action. (3) All market operations are in scope. (4) Central bank staff do not need to make capital allocation choices between businesses. (5) There is no trade-off with monetary policy objectives.

Proposals for deploying monetary policy to fight climate change and reduce inequality rely on the use of the nation state’s monetary authority to allocate capital to different parts of the economy. Against those proposals stands the publicly stated commitments of central bankers to avoid ‘allocating credit’ by implementing ‘market-neutral’ policies. A review of the financial empirics of central banks’ market operations shows a historically consistent pattern of using monetary authority to allocate debt and equity capital to different sectors of the economy at critical moments. Legal frameworks impose no effective constraints on that state-guidance of investment and, when necessary, the law of central banking actively facilitates capital allocation in ways that allow policymakers to fight deflation, provide emergency fiscal support, and rescue crisis-stricken parts of the financial sector. Against those empirics, commitments to avoid capital allocation appear as communication strategies rather than descriptions of the reality of central bank operations. Given the position of central banks as statutory public agencies, this creates various types of constitutional problems, notably concerning the protection of liberal property rights from government interference. Understanding these legal, market, and political dynamics provides a principled basis to debate reform proposals regarding the constitutional status and institutional functions of central banks in market economies responding to climate change and destructive inequality.

Central banks around the world are increasingly shaping, as well as following, broader climate policies, a development we theorize as policy coordination. In this chapter, we study how and why the European Central Bank (ECB), previously narrowly focused on its primary objective of price stability, has moved towards more extensive coordination with the political institutions of the EU. Based on an analysis of actual policies and views held by ECB top officials, we trace the evolution of the practice and ideological backing of ECB coordination with fiscal and climate policies. Our findings document an interesting paradox: although the ECB has increasingly engaged in policy coordination, it has done so on a unilateral basis by choosing on its own whether, when, and with which economic policies it coordinates monetary policy. We refer to this practice as “independent policy coordination”. Analysed against recent case law by the Court of Justice of the European Union, the legal limits to independent policy coordination are only vaguely defined. As it is notoriously difficult to distinguish independent policy coordination from autonomous policymaking by the ECB, we conclude that multilateral coordination, to the extent it remains compatible with the primacy of price stability, would be the next logical step.

The role of central banks has always evolved in response to political and economic events. In 2015, when the UN Agenda 2030 and the Paris Agreement were signed, awareness of the importance of climate change and other sustainability risks for their mandates began to grow in the central banking community. Physical risks and transition risks can act as powerful channels impacting banks’ businesses and balance sheets and the economy more broadly, affecting both price and financial stability. Laying the analytical groundwork for the following chapters of the book, this chapter embeds their recent concern for sustainability risks and policies in the dynamic role central banks have played historically. It also discusses how central banks have coordinated their policies internationally, such as through the Network for Greening the Financial System and the Financial Stability Board. While climate change and climate-related risks have been dominating these policies, central banks have started shifting their attention also towards other aspects of environmental sustainability, including biodiversity loss. Aspects of social sustainability have received significantly less attention in central banking policy circles. However, the potentially dis-equalizing side effects of extended periods of quantitative easing have fostered central banks’ interest in the inequality dynamics of monetary policy.

The discourse and trials revolving around Central Bank Digital Currencies (CBDCs) stem from substantial shifts and advancements within the financial landscape of the past decade. Emerging within the broader sphere of Fintech, these technological strides, often linked to disruptive innovations, have been championed by entrepreneurs aiming to drive essential progress towards universal financial inclusion. Notably, initiatives like Libra Coin, once spearheaded by the now-defunct Libra Consortium, were specifically geared towards fostering financial inclusion globally, especially within economies grappling with inefficient payment infrastructures. Amid the surge of CBDC projects in response to private global stablecoins, a critical query arises: do they genuinely enhance financial inclusion compared to traditional fiat currencies reliant on established public-private payment frameworks? This chapter navigates this dilemma by scrutinizing pivotal attributes of CBDCs and the spectrum of design choices accessible to central bankers and governments. It addresses key challenges confronting CBDCs in advancing financial inclusion, analyzes potential alternatives to CBDCs — specifically, instant payment systems — and contextualizes CBDCs within the broader challenge of preserving the centrality of central banks and fostering financial inclusion. This assessment also considers the issues associated with upholding democratic values.

The chapter discusses the key elements of the Bank of England’s legal mandate and whether these can serve as a legal basis for supporting environmental sustainability policies as part of its monetary and financial stability objectives. Section 2.1 discusses central bank mandates and objectives generally by exploring the regime or legal formulation that authorises central banks to provide for policy decision-making and its implementation regarding managing climate risks. Section 2.2 considers the Bank’s mandate and environmental sustainability by examining the arrangements provided by the Bank of England Act 1998 for the Bank to take the government’s economic policy into account when pursuing its secondary objectives. Section 2.3 analyzes the meaning of ‘secondary objectives’ for the Bank and how these are set either via legislation or via remit letters. Section 2.4 discusses how central banks in practice can support secondary objectives whilst pursuing their primary objectives. Section 2.5 analyzes the problem of legal uncertainty regarding the Bank’s ability to support an environmental sustainability policy, given that this is only specified in remit letters, and argues that there would be greater legal certainty if there were an explicit reference to sustainable environmental policy as a secondary objective in its statutory objectives. Section 2.6 considers the general question of whether central banks should discriminate in favour of green assets. Section 2.7 concludes that the Bank has a duty to ensure that material physical and transition risks are incorporated into monetary and financial stability policy and that this should be clearly stated in its governing law.