For many an economics enthusiast, central banks are seen as custodians of order, guardians of growth, and arbiters of the all-important interest rate. Yet this prestige-laden institution, steeped in independence and neutrality, operates in the more subdued language of credibility. This credibility has been well-trodden, as numerous central bank operations – saturated equally by a forward-looking disposition and anachronistic neutrality – afford an institutional gravitas to the term. Yet, this status of the institution is not due to the whims of certain governors or chairs at the helm, nor is it a consequence of the covert hand of capital in an otherwise militarised world order, but rather the result of legitimacy unto itself. Through a long and uneven evolution, no other institution in modern economic history has enjoyed such a curious combination of insulation and influence.

Yet, this legitimacy has never been inherent, with the authority of central banks being conditioned across decades and centuries by political and economic forces. The present moment, evidenced increasingly by the question of Federal Reserve independence in the U.S. and rising economic contestation globally, compels us to return to these original waves that founded the institution. In doing so, one finds that their evolution has been shaped not only by vacillating ideological consensus, but more crucially by historical contingency.

In classic Kierkegaardian fashion, where we must understand our life backwards but live it forwards, grasping the power of the central bank in the present lies in retracing the shifting boundaries between its economic and political anchors across economic history.

The Origins of Central Bank Power

The institutional logic of central banking began to take shape in the late 17th century, as states confronted the pressures of sustained fiscal mobilisation in an increasingly interdependent and militarised world. The Bank of England, chartered in 1694, was conceived within this environment ­– not as a monetary authority in the modern sense, but as a vehicle to enhance sovereign creditworthiness to finance military exploits across the globe. By converting private capital into public expenditure, the Bank laid the foundations for a novel kind of fiscal architecture at the time whereby monetary credibility would be firmly tethered to state authority. This model, fusing state power with market trust, proved not only remarkably adaptive, but also foundational to the evolving relationship between public institutions and private capital – a relationship that would shape central banking’s global diffusion in the centuries to follow.

The Technocratic Turn

In the aftermath of this dual function of early central banking, newly sovereign and reconstructing states began to emulate and adapt the institutional architecture of the central bank to align with national development goals. Institutions such as the Bundesbank, the Bank of Italy, and the Reserve Bank of India operated within broader political-economic compacts that positioned monetary governance as a strategic instrument of economic transformation. Their mandates extended beyond price stability to encompass employment generation, credit allocation, and support for industrial policy.

For example, emerging from the collapse of fascism post-WWII, the Bank of Italy was repositioned as a key actor in Italy’s reconstruction and democratic consolidation. While formally maintaining a degree of operational autonomy, it became institutionally embedded within a political consensus that prioritised economic recovery through instruments such as directed credit and close coordination with the Ministry of the Treasury. In this context, the bank ceased to function as a passive custodian of currency and began to operate as an active participant in the global political economy, adapting inherited institutional forms to meet the demands of a transformed global and domestic economic order.

However, by the late 1970s, the very conditions that had underpinned the developmental central banking nexus began to unravel. The collapse of the Bretton Woods system, coupled with the onset of stagflation, destabilised the macroeconomic assumptions that had legitimised central banks as instruments of coordinated state-led growth. As the broader political-economic landscape shifted toward liberalisation and global integration, these disruptions precipitated a deeper reconfiguration in the epistemological and ideational foundations of monetary governance. Credibility – once embedded within domestic interrelations that linked monetary stability to developmental objectives – was increasingly reframed as a signal to international markets.

Subsequently, central bank independence ushered in a new paradigm, where embedded autonomy within state-led structures gave way to disembedded neutrality, increasingly aligned with transnational financial norms. Essentially, as the political and economic upheavals of the late 20th century converged, central banking relocated from the contested terrain of political economy to the ostensibly objective domain of financial technocracy. Yet, with the dawn of the 21st century, a succession of compounding polycrises would draw these institutions back into the gravitational field of politics, forcing a reengagement with the very dilemmas they were designed to apprehend.

The Return of Monetary Politics

The 21st century has exposed the structural limits of a technocratic model for the central bank. The dual crises of the 2008 GFC and the COVID-19 pandemic highlighted the insufficiency of rule-bound governance in moments of systemic rupture. By undertaking expansive stabilisation functions – from absorbing sovereign risk to underwriting corporate credit markets – institutions such as the Federal Reserve and the European Central Bank moved beyond the constrained logics of inflation targeting and into domains historically associated with fiscal discretion and distributive policy decisions. What emerged was not a straightforward re-politicisation, but a more complex re-entanglement that situated the central bank within overtly political terrains, albeit with its institutional foundations of neutrality. This evolution does not imply the erosion of central bank authority, nor its subordination to the political, but it does mark the return of the central bank as a site in which foundational tensions between public legitimacy and private interest take hold.

More recently, targeted refinancing operations into asset purchases have further eroded the traditional boundary between monetary and industrial policy. While these interventions remain couched in the language of financial stability, and (as Draghi put it in 2012) in doing “whatever it takes” to preserve the Euro, their distributive and allocative implications are unmistakably political. What this reveals is that the modern central bank, even under the dictate of neutrality, has increasingly reacquainted itself with its foundational identity as a political institution – one tasked with navigating the dilemmas of modern state-led governance.

Not Beyond Politics, But Within It

Paradoxically, however, it is through this very re-entanglement with the political that central banks have renewed their institutional legitimacy. In an era marked by fragmented fiscal authority and deepening scepticism toward political governance, the central bank has assumed an increasingly crucial role within this ideological shift: its interventions are no longer perceived merely as technocratic adjustments, but as symbolic affirmations of sovereign coherence and macroeconomic credibility. This reconstitution of central banking within a public–private integration does not signal the undoing of its much-valued neutrality, but rather its transformation from a politics of insulation to a politics of credibility, where the language of expertise becomes inseparable from the political dilemmas of our time.

However, while expanding central bank mandates to encompass more political issues may appear intuitive, or even necessary, doing so without considering the underlying structures of accountability would be a categorical error. As a result, the challenge these institutions must grapple with is functioning as institutions situated within broader fiscal, historical, and ideological configurations, without becoming politicised arms for particular officials, which jeopardises both the well-earned neutrality and credibility of the institution. Having said that, to narrow the remit of these bodies to neutral custodians of wealth and independent arbiters risks obscuring the crucial nature of credibility – that it is earned through active stewardship in moments of profound economic change.

If the legitimacy of central banks is to endure, not only in markets, but in societies, their power must be brought into view. Not to diminish their independence, but to understand it as part of the broader political economy they both shape and are shaped by. To examine central banking through this lens is to move beyond technical mandates and assess the deeper institutional, distributive, and ideological foundations of economic governance