This chapter analyses the Federal Reserve’s mandate and statutory objectives and how they have evolved since the Fed was established in 1913, and considers the mandate in the context of environmental and social sustainability challenges. The chapter argues that the Fed’s mandate and statutory objectives historically were interpreted broadly to allow discretion for the Fed and its Federal Open Market Committee (FOMC) to manage monetary policy in support of Government policy. The chapter further argues that the legislative history behind the adoption of the dual mandate to achieve price stability and full employment allows the FOMC and the Board of Governors discretion to use their powers to mitigate the risks emanating from the broader economy and society that might impact the price stability and full employment objectives. Despite the conventional interpretation by Fed officials that the Fed ‘should stick to its knitting’ by focusing on short-to-medium term risks to price stability, the chapter concludes that the economic evidence is compelling that climate finance risks and other sustainability challenges can undermine price stability and full employment and therefore should be factored into the Fed’s monetary policy and financial stability strategy.

Proposals for deploying monetary policy to fight climate change and reduce inequality rely on the use of the nation state’s monetary authority to allocate capital to different parts of the economy. Against those proposals stands the publicly stated commitments of central bankers to avoid ‘allocating credit’ by implementing ‘market-neutral’ policies. A review of the financial empirics of central banks’ market operations shows a historically consistent pattern of using monetary authority to allocate debt and equity capital to different sectors of the economy at critical moments. Legal frameworks impose no effective constraints on that state-guidance of investment and, when necessary, the law of central banking actively facilitates capital allocation in ways that allow policymakers to fight deflation, provide emergency fiscal support, and rescue crisis-stricken parts of the financial sector. Against those empirics, commitments to avoid capital allocation appear as communication strategies rather than descriptions of the reality of central bank operations. Given the position of central banks as statutory public agencies, this creates various types of constitutional problems, notably concerning the protection of liberal property rights from government interference. Understanding these legal, market, and political dynamics provides a principled basis to debate reform proposals regarding the constitutional status and institutional functions of central banks in market economies responding to climate change and destructive inequality.

Central banks around the world are increasingly shaping, as well as following, broader climate policies, a development we theorize as policy coordination. In this chapter, we study how and why the European Central Bank (ECB), previously narrowly focused on its primary objective of price stability, has moved towards more extensive coordination with the political institutions of the EU. Based on an analysis of actual policies and views held by ECB top officials, we trace the evolution of the practice and ideological backing of ECB coordination with fiscal and climate policies. Our findings document an interesting paradox: although the ECB has increasingly engaged in policy coordination, it has done so on a unilateral basis by choosing on its own whether, when, and with which economic policies it coordinates monetary policy. We refer to this practice as “independent policy coordination”. Analysed against recent case law by the Court of Justice of the European Union, the legal limits to independent policy coordination are only vaguely defined. As it is notoriously difficult to distinguish independent policy coordination from autonomous policymaking by the ECB, we conclude that multilateral coordination, to the extent it remains compatible with the primacy of price stability, would be the next logical step.

The role of central banks has always evolved in response to political and economic events. In 2015, when the UN Agenda 2030 and the Paris Agreement were signed, awareness of the importance of climate change and other sustainability risks for their mandates began to grow in the central banking community. Physical risks and transition risks can act as powerful channels impacting banks’ businesses and balance sheets and the economy more broadly, affecting both price and financial stability. Laying the analytical groundwork for the following chapters of the book, this chapter embeds their recent concern for sustainability risks and policies in the dynamic role central banks have played historically. It also discusses how central banks have coordinated their policies internationally, such as through the Network for Greening the Financial System and the Financial Stability Board. While climate change and climate-related risks have been dominating these policies, central banks have started shifting their attention also towards other aspects of environmental sustainability, including biodiversity loss. Aspects of social sustainability have received significantly less attention in central banking policy circles. However, the potentially dis-equalizing side effects of extended periods of quantitative easing have fostered central banks’ interest in the inequality dynamics of monetary policy.

The chapter analyses how the climate change action plan developed by the European Central Bank (ECB) as part of its monetary policy strategy review in 2020-2021 is aligned with the ECB’s mandate set out in the Treaty on the Functioning of the European Union and the Treaty on European Union. The Treaties require the ECB to integrate climate change considerations into its monetary policy and to contribute to the EU’s objectives regarding climate change, as established by Regulation (EU) 2021/1119, the European Climate Law. However, there are also legal limits on the action the ECB can take in this field. The chapter examines the key measures proposed as part of the plan from a legal perspective, including measures related to macroeconomic forecasts and models, the collection of statistical information for climate change risk analysis, the enhancement of risk assessment capabilities, asset purchase programmes, and possible changes to the collateral framework. It also considers the questions regarding the ECB’s democratic legitimacy and accountability that arise in this context.

The chapter discusses the key elements of the Bank of England’s legal mandate and whether these can serve as a legal basis for supporting environmental sustainability policies as part of its monetary and financial stability objectives. Section 2.1 discusses central bank mandates and objectives generally by exploring the regime or legal formulation that authorises central banks to provide for policy decision-making and its implementation regarding managing climate risks. Section 2.2 considers the Bank’s mandate and environmental sustainability by examining the arrangements provided by the Bank of England Act 1998 for the Bank to take the government’s economic policy into account when pursuing its secondary objectives. Section 2.3 analyzes the meaning of ‘secondary objectives’ for the Bank and how these are set either via legislation or via remit letters. Section 2.4 discusses how central banks in practice can support secondary objectives whilst pursuing their primary objectives. Section 2.5 analyzes the problem of legal uncertainty regarding the Bank’s ability to support an environmental sustainability policy, given that this is only specified in remit letters, and argues that there would be greater legal certainty if there were an explicit reference to sustainable environmental policy as a secondary objective in its statutory objectives. Section 2.6 considers the general question of whether central banks should discriminate in favour of green assets. Section 2.7 concludes that the Bank has a duty to ensure that material physical and transition risks are incorporated into monetary and financial stability policy and that this should be clearly stated in its governing law.

Central banks are promising a more climate-based focus on matters ranging from communication to prudential regulation and supervision, including monetary policy. The chapter examines the various arguments that analyze whether the European Central Bank (ECB) can tackle climate change, in light of its mandates. In our view, climate change fits within the narrower central bank mandates, focused on price stability, while other ‘peripheral’ mandates and ‘transversal’ environmental principles can play a supporting role. Prudential regulation and supervision can also be a main point for assimilation. Finally, we examine the considerations of courts of climate change when scrutinizing governmental action and compare them to the considerations of courts of ECB acts. We conclude that the integration of sustainability considerations, and especially climate change, into the ECB price stability mandate seems to be on relatively firm legal ground.

The hypothesis at the outset of this contribution is that the position of central banks as independent non-majoritarian institutions needs to be reconsidered to the extent that they actively engage in climate change mitigation activities. It is argued that greening monetary policy calls for a reassessment of the democratic legitimacy of central banks, where the constitutional position of central banks has been informed by the model of the conservative independent central banker and justified by the specificity of their mandate and the vulnerability of monetary policy to political tempering. This also applies to the European Central Bank, whereby the question arises whether climate change mitigation should be delegated to independent central banks in the first place and, if so, what the challenges are in securing their democratic legitimacy for engaging in such activities. It is argued that a clear task must be left for the democratic institutions to take the necessary political decisions and to undertake the necessary balancing of interests in making the distributional choices necessary to effectively address climate change. The latter must not be left to non-majoritarian institutions.

According to Dazai Shundai, the provision of food and goods to all the people is an essential element of good government. Wealth as measured in food and goods will then lead to a strong military. Some have considered the ideal of “enriching the country and strengthening the military” to be contrary to Confucian teachings, but this is mistaken. Currency should be seen as secondary to food and goods and does not in itself represent true wealth, a fact that many have lost sight of in Edo and other urban centers of Tokugawa Japan. In farming, it is crucial to extract the full productive potential of the land, which requires an understanding of the different types of land and the uses that each of these serves; an ignorance of these different uses has led to harmful policies that try to convert all land into paddies. The stabilization of prices is another important role for government and helps prevent merchants from exploiting price fluctuations for private gain. A system of government-managed granaries can be used to stabilize rice prices, provide relief in times of famine, and provide low-interest loans to samurai in times of need.

Climate change presents significant risks to economic and financial stability, compelling central banks to address its impacts on inflation and output. As climate-induced disruptions – such as extreme weather events and carbon taxes – affect price stability, central banks must adapt their monetary policies to mitigate these risks. Climate change can trigger inflationary pressures, alter labor productivity, and impact capital stocks, influencing the natural interest rate and overall supply. The ecological transition also poses challenges, potentially causing stagflationary episodes that complicate central banks’ dual mandates of price and output stability. Consequently, central banks are increasingly integrating climate risks into their frameworks, with the aim of maintaining their inflation-targeting objectives while supporting the green transition. Effective policy responses require a deep understanding of climate-related risks, enabling central banks to adjust their monetary tools and align their operations with sustainability goals. Addressing these challenges becomes essential to strengthening economic resilience in the face of climate change.

Chapter 3 tackles issues that are not necessarily directly related to the business cycle but will be important at various points in the historical section of the volume that covers every US business cycle since 1954. These include inflation, monetary policy, fiscal policy, tradeable securities, and secular stagnation. Because it is so poorly understood and since it will play a key role in the cycles of the 1970s and 1980s, more than half of this space is devoted solely to understanding inflation. The idea that it is a function of money supply growth is challenged, and a new set of definitions and classifications is offered.

Over the course of the American Revolution, the Continental Congress spent upwards of $170 million (valued in gold) to prosecute the war against Great Britain. Most of the money issued during the 1770s was not minted coin, but rather paper currency – Continental dollars, to be precise – whose value was based upon a future repayment in gold and silver. This chapter examines the longstanding colonial precedents for government-issued paper money, its effectiveness in prosecuting the war, and the reasons for its eventual failure. The turn to private banks in the 1780s to regulate the money supply ended up marking a fundamental transformation in American public finance.

This chapter surveys economic perspectives of supply chain management and discusses their practical implications. It compares Adam Smith’s view of self-functioning supply chains with Ronald Coase’s theory of the firm that leads to supply chain management being perceived as a factor of production. Supply chain management dominated by Coase’s perspectives suffers from misguided investments, network externalities, myopic monetary policies, and incomplete market analysis. This chapter argues that supply chain management must be at the center of economic policies to create wealth for nations. It shows how Switzerland prioritized supply chain management and became one of the wealthiest and most innovative countries in the world.

Financial flows and financial structures are fueling climate instability and worsening inequities around the world. A stable future now requires urgent change including transformative financial innovations. Yet the pandemic and recent financial disruptions reveal how financial architecture designed to promote stability in times of crises exacerbates economic inequities and vulnerabilities. Recognizing the division in climate politics among those advocating for stable policies and a smooth transition and those calling for more radical, disruptive politics, this chapter reviews the critical role of financial innovations, including central banks’ monetary policies, in redirecting society toward a more just and stable future. We propose a paradigm shift to reconceptualize stability and politicization in finance and central banking for climate justice. We argue that current depoliticized perspectives on financial stability are worsening climate instability, and that finance, central banks, and their monetary policies are an underappreciated part of climate politics. Transformative climate policy to promote stability requires repoliticizing finance and financial innovations.