ABSTRACT
Mainstream economic theories attach great importance to a single institutional feature of central banks: their capacity to maintain price stability. This capacity became a defining feature of the independence of central banks. However, the practice of central banks over time and around the world demonstrates that central banks can and do pursue objectives other than price stability as independent institutions. This chapter traces the process of the formulation of the Bank of Israel Law (1954) and it presents the discussions and debates regarding the institutionalization of the independence of the Bank. It argues that whereas the government planned to use the Bank in order to tighten its control over the allocation of credit, it was also essential for the government to ensure the independence of the central bank vis-à-vis the traditional ally of the government, the Histadrut labor organization.
