ABSTRACT
Among the main reasons for the emergence of central banks in Europe were the wars that ravaged the Continent from the seventeenth century onwards and the consequent pressure this exerted on government finance. In brief, governments granted monopoly power over the note issue to a commercial bank and in return were given privileged borrowing facilities. This marked the beginning of the ‘special relationship’ between governments and their central bank. However, in most cases, recent years have witnessed enormous changes in the nature of this relationship. In particular, since the beginning of the 1990s, many governments have become convinced that the way to ensure price stability is to sever the institutional links between government and the central bank, leaving the latter to manage monetary policy free from political interference. The focus of this chapter is on the historical developments, which have underpinned this new monetary orthodoxy.
