What is the purpose of central banks on earth?

Rens van Tilburg advocates climate mandate for European Central Bank

In his essay 'Give money-makers a climate mandate' (subtitle: 'Where are the central bankers when you need them?'), Rens van Tilburg describes the changing role of central banks over the years. He considers this development in a nutshell: from central banks that had to finance the wars of those in power, to independent institutions limited to monitoring price stability. Van Tilburg, who is director of the Sustainable Finance Lab (affiliated to the Utrecht University School of Economics), is particularly interested in their economic development role, such as during Roosevelt's New Deal and post-war reconstruction. He advocates an active role for the European Central Bank (ECB) in the energy transition. "Central banks have developed a rich history of coming to the aid of society." Below a  summary of the article that was published in De Groene Amsterdammer.

Meeting of the ECB Governing Council: "The central bankers have a rich history to draw from and now do what is necessary", Van Tilburg writes

If you look at the history of central banks from a wider perspective, you see a development in which they use the creation of money more and more for public purposes. Not only warmongering sovereigns and governments under threat have sought refuge in money creation. And central bankers have more than once proved willing to use money creation to pursue public goals other than maintaining the value of the currency. Central banks now have a rich history of coming to the aid of society.

"If you look at the history of central banks from a distance, you see a development whereby they increasingly use money creation for public purposes"

In the nineteenth century, central bankers undertook an important step in the expansion of their tasks. Since then, they have been responsible not only for the stability of the currency, but also for that of the entire financial system. Their role as lender of last resort has become a generally accepted core task of central banks, as was shown by the intervention after the collapse of the US merchant bank Lehman Brothers. The lessons of the nineteenth century are still alive and well, hardwired into the reptilian part of the central banker's brain, Van Tilburg writes.

The next expansion of the central bank's tasks came after World War I, when a lot of money was needed for reconstruction. In the 1930s, the worldwide economic crisis came on top of this. In the US, President Franklin Roosevelt succeeded in financing his New Deal with the help of the central bank. And after World War II, the economic development role of central banks was enshrined in the mandates of central banks. The US Fed was given responsibility for full employment in addition to price stability. And in the 1948 Dutch Central Bank Act, the goal, next to to price stability, also consisted of full employment and 'the creation of conditions for economic growth'.

The lessons of the nineteenth century are still alive and well, hardwired into the reptilian part of the central banker's brain. This is much less the case for the later lessons, those of the interwar period and reconstruction... which seem to have been blown away by the anti-government wind that came up in the 1980s

Rens van Tilburg in his essay in De Groene Amsterdammer

In the 1980s, however, an anti-government wind rose (according to Van Tilburg as a reaction to the ill-understood 'stagflation' of the 1970s) which necessitated the government to stand at greater distance from the central bank. This was an idea that fitted in perfectly with the spirit of the times, aptly expressed by then-President Ronald Reagan with his 'joke' that the nine most frightening words in the English language are: "I'm from the government and I'm here to help." It also became clear that the lessons of the interwar period and reconstruction, regarding the essential role of central banks in the long-term construction and transformation of the economy, are not yet as embedded in their 'reptilian brain' as the focus on financial stability.

"And so it happened: the zeitgeist solidified in the statutes of the ECB and then became enshrined in the EU Treaty, signed in Maastricht in 1992"

The spirit of the times - reinforced by the fall of the Wall and the 'victory' of private markets over command economies - was solidified in the Statute of the ECB (laid down in 1992). The ECB thus became the only central bank in the world whose Statute explicitly forbids 'monetary financing', the financing of the government by the central bank. As the euro crisis escalated in 2008, monetary support in the eurozone came later than elsewhere. The same was true of stimulus from governments struggling to meet the budgetary standards laid down in the Stability and Growth Pact. In the end, however, the ECB took the lead and, in the words of Mario Draghi, did "whatever it takes to preserve the euro".

Arriving in our own time, Van Tilburg writes that the orderly life of the central bankers has come to an end. The 2008 crisis exhausted the use of the interest rate as an effective instrument - the 'button' they formerly pressed to regulate the creation of money by private banks. Therefore, central bankers started to create more and more money themselves, and with it bought existing debt securities (bonds of countries and companies). This manifestation of power automatically triggered a call for accountability, because by supporting the many 'fossil intensive' companies that the ECB now has on its balance sheet, it goes directly against the efforts of the European member states to make their economies more sustainable. The favouring of fossil companies continues to this day; the obligation from the EU Treaty to support the energy transition is almost non-existent in the ECB's policy. 

"The EU treaty obligation to support the energy transition, is almost non-existent in ECB policy"

Climate change is a process with potentially major social and political consequences - which is why it is described as a 'threat multiplier' in relation to food security, conflicts and migration. Notwithstanding, economic forecasters invariably leave this aspect out of consideration, Van Tilburg writes. As a result, the national mobilisation of effort that would have been necessary for a war, natural disaster or pandemic, will not materialise. Unlike in a war, there is no clear enemy in sight. In his view, this is an important new task for central banks. 

Central banks have a long history of global cooperation and international coordination. For example, the international association of central bankers, the Bank for International Settlements, has been able to harmonise something as complex as bank capital rules. And the Network for Greening the Financial System now has over a hundred members from central banks and regulatory bodies, including the ECB, the People's Bank of China and the Fed. Besides, central bank mandates are much more similar to each other than those of governments, which range from the political far right to the left. Climate policy fits within those mandates as well, as almost all central banks have now established.

"The way out may be the creation of new money on a global scale: the climate coin"

The way out may be the creation of new money on a global scale: a climate coin which is accepted by all central banks and that you receive if you demonstrably contribute to a stable climate, for example by protecting a rainforest or closing a coal mine. Two Dutchmen find themselves close to the action: DNB president Klaas Knot has just taken office as chairman of the global Financial Stability Board, and ECB board member Frank Elderson is chairman of the Network for Greening the Financial System. 

The essay 'Geef geldmakers een klimaatmandaat - Waar zijn de centrale bankiers als je ze nodig hebt?' ['Give money-makers a climate mandate - Where are the central bankers when you need them?'] appeared in De Groene Amsterdammer nr. 2 published on 13 January 2022 

Rens van Tilburg is director of the Sustainable Finance Lab that is affiliated to the Utrecht University School of Economics