Why do independent central banks exist in the modern economy? According to J. Keith Horsefield, it was originally thought independent central banks would “prevent [governments’] extravagance from creating inflation and thus leading to financial crashes.” It is almost like the state itself was confessing its ineptitude to intervene in the economy.

Among other interventionist methods, the state participates in the market itself supposedly as a normal market agent (but with all its state privileges). For instance, it injects “new money” into the economy, directly spending “public money” or creating artificial demands for products and services which would not be demanded otherwise (see Patrick Barron on that matter). The state also puts into use its monetary policy, creating and retrieving official money from the market. These situations cause a series of market disturbances, such as inflation.

Take Brazil’s example: since its most recent monetary plan called “plano real” (1994), the monetary unit created then has now a fraction of its original value, having depreciated over 90 percent in 30 years and significantly distanced itself from the US dollar. While the Brazilian money unit was worth even more than the dollar unit in 1994, it now is worth less than $0.20 US dollars. Of course, the US dollar itself also suffers inflation effects and loses value against other monies and against commodities and goods, although this depreciation is much more limited when compared with the Brazilian money.

To prevent these effects, states implemented a central bank system which serves to counter inflation and other state intervention effects in the economy. Article 10, XII, of Brazilian Federal Law No. 4.595/1964 states that: “It is the exclusive responsibility of the Central Bank of the Federative Republic of Brazil: […] XII – to execute, as a monetary policy instrument, buy and sell of federal public bonds operations […]”. This allows the Brazilian Central Bank to control an official interest rate for the economy, in order to “stabilize” it and “counter” the negative effects of its economic intervention previously mentioned.

According to the minutes of a recent monetary policy meeting, the Brazilian Central Bank stated that it

…continues to monitor how developments in fiscal policy affect monetary policy and financial assets. The scenario remains characterized by unanchored expectations, elevated inflation projections, resilient economic activity, and labor market pressures. To ensure the convergence of inflation toward the target in an environment of unanchored expectations, a significantly contractionary monetary policy stance is required for a prolonged period.

If there were no public spending (meaning no state intervention in this regard) or at least much less of it, and no official currency, monetary policy would be unnecessary.

In other words, the very existence of central banks may be seen as confirmation of the Austrian economics thesis—articulated by Hayek, as explained by Marcos Giansante—regarding the impossibility of the state to accurately interpret economic signals and, therefore, to regulate the economy effectively. It represents an intervention intended to mitigate the negative effects of a prior intervention, which may, in turn, generate further distortions, since market reactions to central bank actions are themselves unpredictable.