Summary
- Q: What is Bank of England Governor Andrew Bailey proposing?
- A: Bailey wants central banks to reframe financial stability as inseparable from the core job of safeguarding the value of money – not as a vague, secondary mandate, but as the flip side of keeping inflation low. By unifying both under one clear objective, the stability of money’s valu, he argues central banks can build stronger, more resilient independence in an era of recurring financial shocks.
- Q: Why does this idea matter for the global economy?
- A: Financial stability has long been treated as harder to define and easier to politicise than inflation targeting. Bailey says this has made policy pro-cyclical: risks are ignored in booms, then tackled aggressively in busts. A money-centric approach would anchor regulation, bank oversight, and non-bank supervision more firmly, reducing uncertainty for markets, lending, and growth worldwide, especially as new forms of money like stablecoins test the system.
- Q: What could change if central banks adopt this view?
- A: It would give financial stability a sharper public and political mandate, similar to the 2% inflation target, making it harder for governments or lobbyists to dilute. For investors and businesses globally, this could mean more consistent macroprudential tools, better protection against banking crises or liquidity squeezes, and a clearer framework for handling future stresses in an interconnected financial system.
Article
Bank of England Governor Andrew Bailey has a provocative idea for strengthening central bank independence. Stop treating financial stability as a separate, fuzzy mandate and start calling it what it really is – all about preserving the value of money.
In a speech delivered Tuesday (14 April) at Columbia University in New York, Bailey argued that modern central bank independence works well for monetary policy but falls short when it comes to financial stability. His solution is to anchor both under one clear, unifying objective: the stability of money’s value.
The problem with the status quo
Central bank independence (CBI) gained widespread acceptance in the fight against the high inflation of the 1970s.
For monetary policy, it’s relatively straightforward: governments set an inflation target, and independent central banks use interest rates and other tools to hit it.
This setup helps manage the classic time-inconsistency problem, politicians might be tempted to juice the economy with loose policy ahead of elections, only to trigger inflation later.
Financial stability, however, is messier. Its objective is harder to measure and it’s often defined as the absence of crises.
Decisions cut directly into private sector interests, such as bank capital requirements or the regulation of specific firms. It interacts with other government policies and can feel more political.
As a result, financial stability efforts tend to be pro-cyclical: regulators and politicians often neglect risks in good times, then scramble to act aggressively after a crisis hits.
Bailey drew on historical thinkers like 18th-century philosopher John Locke, who called money “the measure of commerce… (that) ought to be kept as steady and invariable as may be,” and early 19th-century economist Henry Thornton on the Bank of England’s independence rooted in long habit and mutual convenience rather than rigid statutes.
One narrative, focused on “the value of money”
Bailey’s core proposal is to create “a single overarching narrative with a strong focus on the value of money.”
- Monetary policy protects the real value of money by keeping inflation low and stable.
- Financial stability protects trust in money, particularly the assured nominal value of bank deposits.
Most of the money in the economy sits on commercial bank balance sheets, not as physical cash or central bank reserves. A stable banking system ensures that a pound in your account is worth the same as a pound in mine, and that it remains convertible at par.
When that trust breaks, as in bank runs or liquidity crises, the damage to lending, investment, employment, and growth is immediate and severe.
“Financial stability on the other hand has a more immediate and direct effect on the level and growth of real output, employment and investment,” Bailey noted. A stable banking system supports growth; instability disrupts it.
By framing financial stability explicitly as safeguarding the value of money, Bailey believes central banks can make their independence in this area more robust and less vulnerable to lobbying or political pressure.
It removes the perception that financial stability is “tangential” to the main mission or even in conflict with price stability. Instead, the two become complementary parts of the same goal.
Why this matters now
The speech comes amid ongoing debates about the boundaries of central bank mandates.
Non-bank financial institutions have grown significantly, creating new interconnections and liquidity risks – the “dash for cash” during the early COVID-19 pandemic illustrated how quickly money-like instruments can come under strain.
Emerging issues like stablecoins also raise questions: for them to function as money, they must pass the “test of assured nominal value.”
Bailey acknowledged that financial stability may involve elements beyond pure money, such as the provision of critical services or cyber resilience, but he argued that a money-centric anchor provides a stronger, clearer foundation for independent action.
It helps central banks explain and justify their interventions more effectively to the public and politicians.
Critics might worry that broadening the lens could politicize central banks further or blur lines with fiscal policy.
Bailey presented it as a way to make independence stronger, not weaker, by giving financial stability a firmer intellectual and public anchor similar to the inflation target.
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