Why Do We Still Need Central Banks?

Imagine putting $100 in a drawer in 1913.

You do not invest it. You do not lend it. You do not spend it. You simply keep it safe.

More than a century later, the notes would still say $100. But they would no longer buy anything close to what they could buy when they were first put away.

The comparison is striking. The US consumer-price index was 9.9 in 1913. A recent 2026 estimate puts it at 334.4. On that measure, general prices are about 34 times higher than they were in 1913. Put another way, the purchasing power of $100 from 1913 is now roughly equivalent to $2.96.

There is an irony in the date. The Federal Reserve Act of 1913 created the US central bank to provide a safer, more flexible and more stable monetary and financial system.

This is not a claim that one institution caused a century of rising prices. Wars, productivity, government spending, energy shocks and countless other forces shape inflation. Nor is keeping cash in a drawer a sensible saving plan.

But the thought experiment exposes a question we rarely ask plainly.

If central banks exist partly to provide monetary stability, why do we accept the long-term decline in a currency’s purchasing power as normal?

And a larger question follows:

Why do we still need central banks at all?

Start with the strongest case for central banks

Before criticising central banks, it is important to understand why they exist.

Banks perform a useful but inherently fragile job. They accept deposits that people can demand back today, then make loans that are repaid over years. Most of the time, that arrangement works. But if too many people try to withdraw money at once, a bank can run out of ready cash even when its longer-term assets are sound.

That is a bank run.

In a panic, private lenders often withdraw at exactly the moment a bank most needs funding. A central bank can then act as a lender of last resort: it provides emergency liquidity when other sources of funding have disappeared.

In the euro area, national central banks can provide Emergency Liquidity Assistance to a bank that is solvent but temporarily short of cash. The arrangement is not intended as an unconditional rescue. It is temporary, collateralised, carries a cost and is not available to a bank that is fundamentally insolvent.

This matters far beyond the bank in question. If one large institution collapses in a panic, businesses can lose access to credit, customers can lose access to deposits and fear can spread quickly through the financial system. A lender of last resort can stop a short-term liquidity problem from becoming a broader economic breakdown.

Central banks also help keep the plumbing of finance working. Commercial banks settle large transactions with one another using central-bank money—reserves held at the central bank. The Eurosystem describes this as the safest and most liquid settlement asset, because it reduces the risk that the failure of one bank disrupts payments between many others.

So the case for central banks is not superficial. They do not merely set interest rates. They help prevent payment systems and credit markets from freezing when confidence disappears.

The harder question is whether their role has expanded so far that the financial system has become reliant on their support.

Why do central banks aim for 2% inflation?

The European Central Bank’s primary objective is price stability. Yet it defines price stability as aiming for 2% inflation over the medium term.

At first glance, that can sound contradictory. How can a policy aimed at price stability also accept prices rising every year?

The central-bank answer deserves to be presented fairly.

When households and businesses can reasonably expect inflation to remain low and stable, they are able to make sound decisions regarding saving, borrowing, and investment.— Board of Governors of the Federal Reserve System.

In this view, the key issue is not whether every individual price remains fixed. It is whether people can make plans without fearing sudden and unpredictable changes in the overall price level.

The ECB makes a related argument. Inflation that is low, stable and predictable can help households and businesses plan their spending, saving and investment. It also argues that a small positive target provides room to reduce interest rates in a downturn and reduces the risk of deflation becoming entrenched.

Deflation means prices falling across the economy. It may sound welcome at first: who would object to lower prices? But persistent deflation can make debts harder to repay in real terms. It can also lead households and businesses to delay spending and investment if they expect prices and incomes to fall further.

Former Federal Reserve Chair Ben Bernanke described inflation targeting as a form of “constrained discretion.” The idea is that central bankers should have room to respond to recessions and shocks, but within a clear commitment to keep inflation and inflation expectations under control.

That is the strongest case for the current framework. It is not that 2% inflation is perfect. It is that a known, modest target may be less damaging than either high and unpredictable inflation or a deflationary spiral.

That case is serious. It should not be dismissed with slogans.

The trade-off that needs to be named

Still, a 2% target has a consequence that is easy to overlook.

If prices rise by 2% every year, something costing €100 today would cost about €199 after 35 years, €269 after 50 years and €399 after 70 years. The original €100 would lose roughly 75% of its purchasing power over seven decades.

This happens because inflation compounds. Each year’s increase is applied to prices that already include all previous increases. It is similar to compound interest, except the compounding works against the purchasing power of money held in cash.

Over one year, 2% may feel small. Over a working life, it is not.

The distinction is important. A 2% inflation target does not promise that money will preserve the same purchasing power indefinitely. It promises that the erosion should be gradual, predictable and low enough to support a stable economy.

That may be a defensible policy choice. But it is still a choice with winners and losers.

Someone with a long, fixed-rate mortgage may find that modest inflation reduces the real burden of repayment over time. Someone who holds substantial cash savings may find that the same inflation quietly reduces what those savings can buy.

The ECB itself recognises the distributional issue. Unexpected inflation can reduce the value of savings and debt at the same time, transferring wealth from savers to borrowers. Its case for low and stable inflation is partly a case for reducing such unexpected transfers.

The real debate, then, is not between people who understand economics and people who do not. It is between different views of what kind of monetary compromise is most fair, most stable and most sustainable.

Inflation is an average, not a universal experience

Inflation is often discussed as though it were a single price recorded somewhere in the real world. It is not.

In Europe, the ECB uses the Harmonised Index of Consumer Prices, or HICP. It tracks a broad basket of goods and services and is designed to make inflation comparable across European countries.

The basket cannot remain frozen forever. What households buy changes. Technology changes. Products appear and disappear. For that reason, HICP product weights are updated each year and the index is chain-linked over time.

That is sensible rather than suspicious. An inflation measure based on the spending habits of people decades ago would soon become detached from modern life.

But a sensible average is still an average.

A renter whose rent rises sharply, a family facing higher food and energy bills and a retiree spending heavily on healthcare can all experience inflation differently from the published headline figure. Housing makes this especially clear. The ECB acknowledges that including costs related to owner-occupied housing in the HICP would better represent inflation relevant to households.

This does not mean official inflation figures are fabricated. It means that an inflation index is a carefully constructed measure designed for a specific task: tracking the general price level across a large and varied economy. It cannot perfectly describe every person’s cost of living.

That distinction allows two things to be true at once: the official measure can be useful, and many people can reasonably feel that it does not capture the pressures they face.

When emergency intervention becomes normal

The role of central banks changed visibly after the global financial crisis.

Before that crisis, the Federal Reserve’s balance sheet was under $900 billion. By June 2020, after the pandemic shock, it had grown to about $7.17 trillion. It reached close to $9 trillion in 2022.

Those figures reflect extraordinary periods. During the financial crisis and the pandemic, credit markets were under severe stress. Central banks supplied liquidity, purchased assets and tried to prevent financial disruption from becoming a prolonged economic collapse.

It would be simplistic to say that they should have stood aside. The alternative may have involved more business failures, higher unemployment and deeper hardship.

But every intervention also teaches markets something.

When a crisis becomes dangerous enough, central-bank support becomes likely.

That expectation can be helpful during a panic. It can also create moral hazard: the temptation to take greater risks because someone else may carry the worst consequences.

A healthy market economy includes profit and loss. Investors who take a risk and are wrong should sometimes lose money. Businesses that fail should sometimes fail. Banks that are poorly managed should not assume that public institutions will always protect them.

Yet allowing failure is difficult when pensions, jobs, payments and ordinary deposits are tied to the institution at risk. Some firms become so interconnected that their failure seems too dangerous to tolerate.

This is the dependency problem. The concern is not that central banks intervene in every loss. They do not. It is that the system can gradually be built around the expectation that the largest losses cannot be allowed to happen.

Then the safety net is no longer only an emergency tool. It becomes part of the architecture.

Who feels monetary policy most?

Monetary policy does not affect everyone in the same way.

When central banks lower interest rates, borrowing can become cheaper. Mortgage rates may fall. Businesses may find it easier to invest. Governments may pay less to service debt. At the same time, lower rates can raise the value of shares, bonds and property because future income from those assets is worth more in today’s money.

The ECB itself monitors financial conditions through measures that include interest rates, government and corporate bond spreads, equity valuations and exchange rates.

That is not a conspiracy. It is how monetary policy reaches the wider economy.

But its effects are uneven. A household that already owns a home or financial assets may benefit when financial conditions ease. Someone whose wealth consists mainly of wages and €50,000 sitting in a savings account may instead experience low interest income, rising asset prices and a gradual loss of purchasing power.

Monetary policy is only one influence on asset prices. Earnings, housing supply, taxation, demographics and investor expectations also matter. But the price of money matters too. When credit becomes cheap, markets can become increasingly sensitive to the next central-bank decision.

Debt creates a further tension. Inflation can reduce the real burden of fixed nominal debt over time, while deflation can increase it. This does not prove that central banks create inflation to help governments: direct monetary financing of governments is prohibited in the euro area.

It does show why heavily indebted economies are uncomfortable with sustained deflation. Savers want purchasing power preserved. Borrowers benefit when the real value of what they owe declines. Monetary policy operates between those interests.

One currency, many economies

Europe makes these trade-offs especially visible.

Germany is not Greece. The Netherlands is not Italy. Ireland is not Slovakia. Their debt levels, housing markets, banking systems, demographics and economic cycles differ.

Yet they share one currency and, ultimately, one monetary-policy stance.

The ECB sets policy for the euro area as a whole. A rate that is appropriate for a slow-growing, heavily indebted economy may feel too low in a country with a booming property market. A rate needed to bring inflation down in one region may put real pressure on another.

This is not necessarily a failure of competence. It is a structural feature of monetary union.

The more diverse the economies that share one currency, the harder it becomes to find a policy setting that feels right everywhere. Centralisation offers scale and stability. It also reduces each country’s ability to adjust monetary conditions to its own circumstances.

The democratic question

The issue is not only economic. It is also democratic.

A decision on interest rates can affect mortgages, business loans, pension values, exchange rates and public budgets. Asset purchases can influence the conditions under which governments, companies and households finance themselves.

These are not small technical choices. They shape the financial environment in which millions of people make decisions about work, saving, housing and retirement.

The ECB’s Governing Council makes the decisions. It consists of six members of the ECB’s Executive Board and the governors of the national central banks of euro-area countries.

The ECB is independent by design, but it is accountable to the European Parliament through reports, hearings and written questions. It would therefore be wrong to say that central bankers answer to no one.

But citizens do not directly vote central bankers in or out of office based on their view of interest rates, inflation strategy or asset purchases. That distance from elections has a purpose: it aims to shield monetary policy from short-term political pressure.

The cost is equally clear. Decisions with broad social consequences are deliberately placed at some distance from direct electoral choice.

This may be a necessary trade-off. But it should be openly discussed rather than treated as a purely technical detail.

Reform, not a false choice

The choice is not simply between today’s central banks and no central banks.

A world without a lender of last resort would still face bank runs. A world without a common settlement asset would still need safe ways for financial institutions to settle payments. Removing an institution does not remove the underlying problem it was created to solve.

The more useful debate is about boundaries.

How narrow should central-bank mandates be? What limits should apply to emergency asset purchases? How can failing institutions be allowed to fail without threatening everyday payments and deposits? How can banking rules reduce the chance that any institution becomes too interconnected to be allowed to collapse?

Technology adds a new dimension. The proposed digital euro would be a digital form of central-bank money intended to complement cash, not replace it. The ECB says it would not pay interest or be “programmable money,” while offline payments are intended to offer cash-like privacy.

Those safeguards matter. But so does governance. Who determines holding limits? What information can payment providers retain? Could the rules change in the future—and who would have to approve those changes? As money and technology converge, these are questions for citizens and legislators, not only central bankers.

Perhaps the future is not about abolishing central banks. Perhaps it is about making the financial system less fragile, central-bank interventions more clearly limited and monetary decisions more understandable to the people who live with their consequences.

The question beneath the question

Central banks have prevented financial panics. They have supplied liquidity when private markets could not. They have helped economies survive extraordinary shocks.

It would be dishonest to pretend otherwise.

But another reality deserves equal attention.

Our monetary system accepts gradual currency depreciation as normal. Asset markets have become highly sensitive to monetary policy. Governments, households and companies carry large debts. Financial institutions remain closely connected. And a small number of committees influence the price of money across much of the world economy.

Perhaps central banks are not the disease.

Perhaps they have become indispensable to a financial architecture that increasingly cannot function without them.

And that may be the more troubling conclusion.

If every major crisis requires another extraordinary intervention, eventually we have to ask whether those interventions are fixing the underlying weakness—

or making the system increasingly dependent on the next rescue.

So perhaps the real question is not only:

Why do we need central banks?

It is also:

Why have we built a financial system that appears unable to survive without them?

And after more than a century of modern central banking, savers deserve one final question:

This article is analysis and commentary, not investment advice.