The idea of a global central bank arises naturally out of the experience of individual nations which, in the centuries since the establishment of the Bank of England, have chosen to create institutions to exercise monetary authority, act as a lender of last resort and regulate other aspects of the economy. The exact duties and responsibilities of various national central banks vary widely from place to place, and for this very reason, a global central bank would either have to act differently from country to country, thereby obliterating the very idea that it is a single, central body, or it would be so incredibly unwieldy and ineffective at doing its job that no nation would want anything to do with it.

In many (but certainly not all) nations, the central bank has, as one of its explicit tasks, the maintenance of price stability. This means, in essence, that it is the task of those banks to manage the supply of money in such a way as to keep a low, but positive level of inflation. Although there has been very little experience of deflation in the post war era outside of Japan, fighting deflation is actually one of the most important if least discussed tasks assigned to a price-stabilizing central bank. Deflation has far greater negative effects on an economy than even very high inflation.

For a global central bank to be able to ensure "price stability" therefore, it would have to manage the supply of money in places as different as Switzerland and Lesotho, Mexico and Iran, or Greenland and Paraguay. In Switzerland, the duty of a central bank would be to ensure very low levels of inflation in order to support a mature, globally integrated and technologically innovative economy, while Lesotho requires a central bank that allows a much higher level of monetary availability to support investment, with the typically higher, but healthy level of inflation that goes along with a loose monetary policy.

Central banks which oversee large populations and geographical areas find that the larger, more populous, and more economically diverse the economy, the less well a "one size fits all" monetary policy meets the needs of the society. The European Central Bank serves the people of over a dozen European nations, from tiny Malta (all 316 square kilometers of it) to Germany (over three hundred thousand square kilometers). More important than size or even population, some countries in the euro zone are fully developed technology and service economies, which tend to grow slowly but steadily over time, while others are rapidly developing, lower GDP nations where growth is often very fast, but sometimes grinds to a temporary halt while economic stresses from rapid growth are corrected. Even in the few years it has operated, the European Bank has been heavily criticized by various national governments from time to time (not coincidentally, often when it served the political purposes of those governments) for being overly restrictive and insufficiently flexible in meeting national economic needs. Both France and Germany have exceeded the budget limits imposed as part of the negotiations around Monetary union, apparently feeling the need to address economic balances the Bank was unable to correct.

The simple truth is that the world economy varies greatly from place to place and time to time. A global central bank which actually imposed a single monetary policy on all these wildly different places would, inevitably, do enormous damage to economies of all types. One size, when it comes to economic policy and price stability, definitely does NOT fit all.

Learn more about this author, David Thill.
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