How_Money_Works_-_The_Facts_Visually_Explained

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KEY

INFLOWS

GOVERNMENT FINANCE AND PUBLIC MONEY

Managing state finance

THE CASE FOR INDEPENDENT CENTRAL BANKS

Many central banks were made independent of the government in the early

2000s, although they are still required to be both transparent and accountable.

The 2008 crash led some to question whether independent banks are desirable.

❯❯Money supply The total amount

of money circulating in a country,

from currency to less liquid forms.

❯❯Central bank An institution that

provides financial services to the

government and commercial

banks, implements monetary

policies, sets interest rates, and

controls money supply.

❯❯Currency in circulation Money

that is physically used to conduct

transactions between customers

and businesses.

NEED TO KNOW

“Monetary policy is not a panacea”

Ben Bernanke

OUTFLOWS

Pros

❯❯Monetary policy can be more

impartial as banks have no interest

in maintaining electoral popularity.

❯❯As they are unaffected by the

electoral cycle they can plan and

implement long-term policies.

❯❯Independent banks have tended

to maintain lower rates of inflation.

Cons

❯❯Unelected banks cannot be

voted out, arguably making

them less accountable.

❯❯Central bank controls may not

be enough to avert financial

crises without government aid.

❯❯Governments may blame banks

for recessions, so eroding trust.

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US_098-099_Government_and_the_money_supply.indd 99 13/10/2016 16:18