In The Art of Central Banking, Sir Ralph Hawtrey declares that "central banking is practical in that it teaches how to use a power of influencing events." Since his classic treatise appeared in 1932, both scholars and practitioners have expanded our understanding of central banking and examined its economic underpinnings. Yet with few exceptions, this body of analysis has ignored the political context in which all central banks must operate. The omission is notable, and my purpose in writing this book has been to help repair it. I argue that the setting of monetary policy is greatly shaped by the political environment within which central banking takes place. In practice, much of what a central bank can do is determined by the degree of its independence from the national government, as well as by the extent of its integration into the world economy. Nowhere has such interdependence become more apparent than in Europe, where three countries that earlier had established different patterns of central bank autonomy— France, Italy, and Germany—are now engaged in increasing monetary coordination. Their stories and their interaction provide the subject matter of this volume.
While writing this book, I have incurred numerous obligations. My early research was made possible by generous support from the Krupp Foundation, the Fulbright-Hays Fellowship Program, the National Science Foundation (grant SES-84087), and the Richard D. Irwin Foundation. Subsequent research and writing were funded by the Division of Research at the Harvard Business School. Earlier versions of some of the ideas presented in this book have appeared as " The Politics of Central Bank Independence," Comparative Politics 23 ( April 1991),