Central bank capitalism: monetary policy in times of crisis

For central banks, every financial crisis is an opportunity to expand their authority. This is the key takeaway from Joscha Wullweber's Central bank capitalism, where the author argues that central bank responses to the 2007–8 and 2020 crises made them indispensable to the capitalist system.

The primary role of central banks is to manage a country's money supply to keep inflation in check. Since the nineteenth century, however, central banks have also been responsible for stabilizing the financial system, working as a ‘lender of last resort’ that provides funds to banks during a panic (p. 19). During more recent crises, central banks have stepped in to help support shadow banks outside the traditional banking system. Wullweber argues that, whereas these interventions can stabilize the system, they also increase its reliance upon central banks. This presumption of central bank support has resulted in excessive risk-taking in the shadow-banking sector, further reinforcing the importance of central banks in times of crisis. According to the author, this paradigm—which he terms ‘laissez-faire with a safety net’—marks a significant transformation of the financial system (p. 155).

The analysis in the book is premised upon the chartalist framework, which views the value of money as stemming not from its market exchange value but from its connection to the state (p. 34). This view stands in contrast to what Wullweber calls the hegemonic ‘market liberal’ logic of the financial system, which sees money as separate from the state and deems state intervention as undesirable (p. 53). During normal market functioning, this laissez-faire approach is tenable, but during a crisis, central bank intervention is necessary to prevent total financial collapse. The same applies to shadow banking, which enhances market function in normal times but exacerbates liquidity problems in a crisis, owing to the loss of confidence in shadow banks. Given the systemic important nature of shadow banking to financial markets today, it is no surprise that central banks have stepped in to stabilize the sector in times of crisis (pp. 101–2).

While Wullweber's argument is both provocative and persuasive, most of the book is dedicated to bringing readers up to speed with the current state of central banking. This means that those well versed in this literature may find some sections unnecessary. After laying out his argument, Wullweber goes through the history of central banking, theories of money and the state–money nexus. He then discusses the role that central banks have played in the management of financial crises, and the way that shadow banking has contributed to these crises. Finally, Wullweber connects the expanded role of central banking to what he views as the dominant ‘market liberal’ paradigm, arguing that it would be incorrect to view the growing importance of central banks as indicative of a turn towards state control over finance (p. 53). Instead, he argues that central banks have become guarantors of market liberalism at the taxpayer's expense. Given this perspective, Wullweber advocates for a change in paradigms, towards one in which central banks lean into their connection to the state, breaking the longstanding taboo against becoming vehicles for fiscal policy (p. 170).

The book is at its most engaging when it gets into the practical details of novel central bank tools and explores how these contribute to a new central bank-dependent financial system. For instance, the author ranks central bank money, quasi-money and shadow money on a spectrum of safety based on their relationship with the state that sheds light on how central banking has affected the credit hierarchy (p. 56). However, Wullweber's core argument, that the expanded role of the central bank constitutes a new era for capitalism, feels more like a matter of linguistic convenience than material reality. The invention of the central bank itself was a response to financial crisis, and it should not be surprising that contemporary crises have resulted in the ad hoc invention of new central bank tools. Rather than merely demarcating central bank capitalism as a new era of economic history, Wullweber could have examined the potential solutions to the growing fragility of the financial system and its corresponding heightened reliance upon central banks. I was expecting something akin to Mervyn King's bold advocacy for a complete phase-out of fractional-reserve banking (see The end of alchemy, London: Little, Brown, 2016). However, the closest Wullweber gets to this sort of systemic solution is in his call for a ‘green Bretton Woods’ system (p. 175).

Despite this shortcoming, the book makes for an informative read and a helpful introduction for anyone looking to learn about the integral role of central banks in contemporary finance.