Central Banking in Rawls’s Property-Owning Democracy

• DOI: 10.1177/0090591718810377
• Published date: 01 October 2019
• Date: 01 October 2019
• Subject Matter: Articles

https://doi.org/10.1177/0090591718810377

Political Theory

2019, Vol. 47(5) 674 –698

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DOI: 10.1177/0090591718810377

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Article

Central Banking in

Rawls’s Property-Owning

Democracy

Jens van ’t Klooster1

Abstract

The dramatic events of the crisis have reignited debates on the independence

of central banks and the scope of their mandates. In this article, I contribute

to the normative understanding of these developments by discussing John

Rawls’s position in debates of the 1950s and 1960s on the independence

of the US Federal Reserve. Rawls’s account of the central bank in his

property-owning democracy, Democratic Central Banking (DCB), assigns

authority over monetary policy directly to the government and prioritizes

low unemployment over price stability. I contrast DCB with Central Bank

Independence (CBI), which requires that the central bank is independent of

the government and pursues low inflation. I evaluate DCB by asking whether

justice as fairness requires democratic control of the central bank and argue

that it does not. Instead, so I argue, the choice between DCB and CBI should

be justified in terms of the difference principle. By reflecting on central

banking in a property-owning democracy, I cast new light on the Rawlsian

realistic utopia of a just capitalist society, while also investigating democratic

objections to today’s independent central banks.

Keywords

John Rawls, central bank independence, property-owning democracy,

political equality

1European University Institute, Fiesole, Italy and University of Groningen, Groningen, the

Netherlands

Corresponding Author:

Jens van ’t Klooster, European University Institute, Villa Paola, Via dei Roccettini 9, 50014 San

Domenico di Fiesole (FI), Italy and University of Groningen, Department of Economics and

Business, Nettelbosje 2, 9747 AE Groningen, the Netherlands.

Email: jens.vantklooster@eui.eu

810377PTXXXX10.1177/0090591718810377Political Theoryvan ’t Klooster

research-article2019

van ’t Klooster 675

Introduction

In the decades leading up to the Global Financial Crisis of 2007 and 2008,

countries around the world endorsed the ideal of Central Bank Independence.

This ideal is motivated by the belief that monetary policy should first and

foremost aim for a low and stable level of inflation. But, for reasons that I

will review in more detail below, governments are thought to do best in

achieving this goal if they leave monetary policy to an independent central

bank.1 Spurred on by these ideas, governments in advanced capitalist econo-

mies started forfeiting on their formal and informal means of influencing

monetary policy. Through diplomatic pressure and IMF conditionality, devel-

oping countries were often pressured into doing the same.2

The dramatic events of the crisis have reignited debates on the indepen-

dence of central banks and the scope of their mandates. The crisis led central

bankers to take up a much more prominent role in economic policy making.

They acquired new duties in regulating banks and new goals in safeguarding

financial stability. They also came to pursue their price stability mandate by

means of entirely new tools.3 But the dramatic expansion of the central

bank’s roles did not give rise to new constitutional structures of democratic

accountability.

Although many worry that central banks today are insufficiently demo-

cratic, debates on this topic take place in relative isolation from normative

democratic theory. Philosophical work on central banking remains scarce and

has focused mostly on substantive issues of justice, rather than democratic

legitimacy.4 This article turns to one of the few philosophical texts that deals

with the place of a central bank in a democratic state.5 While philosophers

have noted that John Rawls features surprisingly often in public statements of

central bankers, his comments on central banking have so far not been dis-

cussed.6 Reflecting debates on monetary policy and central bank indepen-

dence raging in the 1950s and 1960s, Rawls’s 1971 A Theory of Justice

contains a sketch of the central bank in a property-owning democracy.

Without explicitly rejecting CBI, Rawls suggests that final authority over

monetary policy should remain in the hands of an elected government, which

uses it to pursue low unemployment and to facilitate investment.7 This radical

proposal, which I refer to as Democratic Central Banking (DCB), is the topic

of this article. Interpreting and evaluating it allows me to investigate demo-

cratic objections to today’s independent central banks while also casting new

light on the Rawlsian realistic utopia of a just capitalist society.

I do three things. First, I interpret Rawls’s account of the central bank. I do

this by situating his views in the context of debates in the 1950s and 1960s on

the independence of the Federal Reserve. I show that Rawlsian DCB