The Central Bank’s willingness to control how money flows in the market is based on its intended function, which is to stabilize an economy when the market has become unstable or depressed. The Central Bank’s primary goals are to keep employment levels high, ensure stable market prices, and control interest rates, while also setting policies that regulate the banking system. The Central Bank is therefore essential to support a government economy, although this only applies to times of extreme economic instability. When the economy is doing well, the Central Bank’s influence on the market should be minimized. However, because economic crises are inevitably bound to happen, the Central Bank’s function is to help manage these crises when they occur.
Incidents when the Central Bank fulfilled its function are the Great Depression of the 1930s, and the Great Recession of the 2000s. When the stock market crashed in 1929, many banks failed and without insurance, many people lost their savings that were being held in the bank. This devastated the economy, and led to a decade long economic depression. The Central Bank took a series of steps to help get the economy back on track. First, it provided insurance to banks so that they would not be able to default on savings that were being held in the bank. This boosted consumer confidence, and people were able to use banks again knowing that it would be secure because it was backed by the government. Second, it funded a series of public works projects that employed many people that had lost their job due to the depression. Gradually, the economy was able to improve under these policies. The role the Central Bank in this regard was to stimulate overall economic growth.
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The Great Recession of the 2000s began in 2007 when the housing bubble began to burst. The housing bubble was caused by numerous banks giving out loans to people who could not afford them. The housing market became inflated as a result, as real estate prices first began to soar, and then later fall in value. Because this affected so many people, there were widespread ramifications, and banks that were considered stable were suddenly in danger of becoming bankrupt. The steps the Central Bank took to resolve this issue was to bail out the banks by giving them loans, while also regulating interest rates so that interest would not spiral out of control. In this instance, the Central Bank was able to prevent the recession from becoming even worse, as it was able to intervene before the economic situation became more widespread.
The Central Bank is mandated to be politically neutral, and therefore ideally would not be influenced in how it makes its decisions based on political power. However, it might differ in how it views economic policy based on interpretations of economic thought and strategy. These might be seen to have a political relation; for example, one economic theorist might believe that raising the minimum wage would boost the economy because people would have more money to spend, while another might believe that raising the minimum wage would force businesses to conduct layoffs, making the economy worse. This would be a difference of economic strategy, and while this may become a political issue, the political division would be based on a different understanding of how the economy works. In both instances, the goal of improving the economy would be the same, but the methods on how to achieve this goal would differ. The Central Bank’s decision to raise interest rates or keep them the same could also be considered similarly. Overall, the Central Bank designs policy based on what it believes will help achieve its goals, which is the stabilization of the economy in times of economic turmoil. Although its influence on the general public should be minimal when the economy is doing well, the inevitability of the economic crises make the Central Bank necessary for the long term functioning of government and society.
