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Towards the Next
Revolution in
Central Banking
A Radical Framework
for Monetary Policy

Burkhard Wehner
Towards the Next Revolution in Central Banking
 Burkhard Wehner

Towards the Next

Revolution in Central
Banking
A Radical Framework for Monetary Policy
Burkhard Wehner
Horst, Germany

ISBN 978-3-030-85765-3 ISBN 978-3-030-85766-0 (eBook)

https://doi.org/10.1007/978-3-030-85766-0

Translation from the German language edition: Eine neue Logik der Geldpolitik by
Burkhard Wehner, © Burkhard Wehner 2020. Published by Springer Gabler Verlag. All
Rights Reserved.
© The Author(s), under exclusive license to Springer Nature Switzerland AG 2021
This work is subject to copyright. All rights are solely and exclusively licensed by the
Publisher, whether the whole or part of the material is concerned, specifically the rights of
reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in
any other physical way, and transmission or information storage and retrieval, electronic
adaptation, computer software, or by similar or dissimilar methodology now known or
hereafter developed.
The use of general descriptive names, registered names, trademarks, service marks, etc.
in this publication does not imply, even in the absence of a specific statement, that such
names are exempt from the relevant protective laws and regulations and therefore free for
general use.
The publisher, the authors and the editors are safe to assume that the advice and informa-
tion in this book are believed to be true and accurate at the date of publication. Neither
the publisher nor the authors or the editors give a warranty, expressed or implied, with
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Cover illustration: © John Rawsterne/patternhead.com

This Palgrave Macmillan imprint is published by the registered company Springer Nature
Switzerland AG
The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland
 Preface

The concept of monetary policy developed in this book was first intro-
duced in 1995, in a chapter of a volume covering a much wider range
of political and economic topics (Wehner, 1995). Given the sociopolitical
landscape of the time, however, that was not the right moment to draw
attention to such an idea.
In 2020, I finally presented a more developed, more detailed, and
more concrete version of the original concept (Wehner, 2020). The
present book is the substantially expanded and improved English version
of that publication. This book does not aim to thoroughly engage in
recent literature in the field, none of which clearly relates to or exhibits
close similarities to the concept presented in 1995. Rather, this book is
an extension of the original concept intended to make the content—at
least in part—more accessible to readers only marginally concerned with
monetary policy issues.
Above all, this book is an attempt to give a clear account of the radical
implications of reconceptualizing monetary policy. This includes devel-
oping a new understanding of the interrelated roles of fiscal and monetary
policy and a radical critique of the design of conventional monetary
and fiscal institutions including the European System of Central Banks.
This new framework also offers means of overcoming many controversies
between traditional orthodox and heterodox positions on central banking,
while also dealing with merits and shortcomings of the so-called Modern
Monetary Theory.

v
vi PREFACE

In sum, this book demonstrates that current institutions, rules, and

instruments relating to monetary policy are certainly not those that would
exist if they could be reconfigured from scratch. This book aspires to
modernize the theory and the practice of central banking—and thus to
make economic and financial stability and even full employment easier to
sustain.

Horst, Germany Burkhard Wehner

References
Wehner, B. (1995). Die Logik der Politik und das Elend der Ökonomie.
Grundelemente einer neuen Staats- und Gesellschaftstheorie. Wissenschaftliche
Buchgesellschaft.
Wehner, B. (2020). Freedom, Peace, and Secession. New Dimensions of Democracy.
Springer.
 Introduction

What do central banks do to keep the value of money—and thereby the

economy—stable? What is the best way for them to achieve this goal,
using what instruments, with which principles and rules?
Consensus on these questions is important for the stability of the
economy and financial markets, by way of fostering trust in the system.
Monetary policy will fail if perceived by the public as an inscrutable or
even occult science, as has been the case for the recent past. Of course,
this has not always been the case. Central banks long enjoyed a repute
of nearly incontestable wisdom, following rules that, however intuitive,
seemed reasonably effective.
Institutions and their principles can over time mold ideology, enabling
the aura of their wisdom to persist for decades even if the theoretical
and empirical foundations of their policy concepts have long since crum-
bled. That is, in the absence of convincing alternatives, the public tends
to believe in the wisdom of their central bank. However, conventional
wisdom in central banking has continually eroded in recent times. A great
deal of energy is still being devoted to predicting policy measures of
central banks, partly because successful bets on these measures can be
very profitable, but even the professionals that do this are increasingly
puzzled by central banks’ self-imposed rules and principles.
This ambiguity about the scientific principles of modern central
banking leads to confusion among economists, financial markets, citizens,
and policymakers regarding the prospects for economic growth as well as

vii
viii INTRODUCTION

the future performance of financial assets, real estate, bonds, and equities
relative to inflation.
Meanwhile, monetary policy has even become a subject of populist
conspiracy theories that accuse the central bank, for example, of a plot
to the detriment of savers and the benefit of indebted states, deliber-
ately expropriating parts of the citizenry and illegitimately favoring certain
interest groups. Such perceptions fuel social strife and poison political
debates.
The erosion of central banking principles also weakens central banks
in disputes with governments and political interest groups seeking to
influence monetary policy to fit their interests. In the long run, central
banks can only become truly independent if their decisions are based on
plausible scientific principles. Otherwise, central banks cannot confront
financial markets, the economy, politics, and the general public in a
convincing manner, building and maintaining trust. To this end, central
banks will sooner or later have to redefine the target variable of monetary
policy and create a suitable new set of policy tools. This book proposes
an updated set of tools and rules and reconsiders the design of the
institutions responsible for this policy.
All in all, this approach may seem to many to be overly broad and
abstract or even utopian, but gradual—seemingly more realistic—reforms
don’t promise sustainable success unless they are guided by such a long-
term vision.
 Contents

1 Historical and Current Backgrounds 1

1.1 From the Gold Standard to Checkbook Money
and Beyond 1
1.2 The Institutions of Monetary Policy 7
1.3 The Mandate of Monetary Policy—Multiple Goals
or Clear Focus? 10
1.4 Focused Policy by Conventional Means 14
References 17
2 An Alternative Model: Stabilizing the Long-Term
Interest Rate 19
2.1 Benefits of the Fixed-Rate System 21
2.2 The Mode of Functioning of the Fixed-Rate System 24
2.3 Prerequisites for a Successful Fixed-Rate Policy 27
2.4 Fixed-Rate Rule and Business Cycles 30
2.5 A Formalization 32
2.6 Which Interest Rate is Fixed in the Fixed-Rate System? 33
References 36
3 New Instruments for Monetary Policy 37
3.1 Stabilization Grants—Key Instrument
in the Fixed-Rate System 37
3.2 Stabilization Grants in the Downturn, Stabilization
Tax in the Upswing 41

ix
x CONTENTS

3.3 Fixing and Adjusting Stabilization Grants 44

3.4 Adjusting the Parameters 46
3.5 Deflation, Demography, and Neocracy 47
References 48
4 Paths to the Fixed-Rate Model—How, Where,
and When? 49
References 54
5 Global Perspectives and Ideologies 55
6 Some Supplements 59
6.1 The Use of Instruments in the Fixed-Rate System 59
6.2 Inflation Targets or Fixed Interest Rates? 61
6.3 Negative Real Interest Rates, Inflation, and Capital
Destruction 62
6.4 Fixed-Rate System and Optimum Currency Area 64
6.5 Fixed-Rate System, Full Employment, and “Modern
Monetary Theory” 65
6.6 A Conclusion 67
References 68

Postscript: On the Governance Structure of Fully

Independent Central Banks 69
References 73
 CHAPTER 1

Historical and Current Backgrounds

1.1 From the Gold Standard

to Checkbook Money and Beyond
The invention and dissemination of money in its early manifestations was
as ambivalent an affair as most revolutionary technological innovations.
The most obvious benefits of money were that trade transactions were
easier to calculate, that wealth could be formed more easily, and that the
social division of labor could unfold more thoroughly.1,2
As with most major innovations, the implications of money for the
economy and society were unforeseeable. Entrepreneurs, consumers,
workers, investors, and borrowers had an insufficient understanding of
the functioning of a monetary economy, and they were periodically
mistaken—namely too optimistic or too pessimistic—about the future

1 The rather sweeping historical summary of monetary systems in this subchapter is

primarily intended to put the following concepts in historical perspective. For detailed
accounts of the history and individual episodes of money and central banking see e.g.,
Cassel (1936), Triffin (1961), Bordo (1994), Triffin (1968), Coffey (1974), Eichen-
green (1992), Blinder (2013), Davies (2016), Bernanke (2017). For a comprehensive
introduction to monetary theory and policy see e.g., Walsh (2017) and Fender, John
(2012).
2 For an illuminating account of the history of money and credit from the perspective
of cultural anthropology see Graeber (2011).

© The Author(s), under exclusive license to Springer Nature 1

Switzerland AG 2021
B. Wehner, Towards the Next Revolution in Central Banking,
https://doi.org/10.1007/978-3-030-85766-0_1
2 B. WEHNER

value of their money including their wages, and of the burden of their
debt and interest.
The authorities responsible for the functioning of the monetary system
were equally overwhelmed. Politicians rarely managed currency in such a
way that the wealth-increasing benefits of the monetary system could be
reaped without painful side effects. Above all, policymakers were not able
to keep the value of money sufficiently stable and predictable. Where the
value and price of money remained so unpredictable, economic agents
were cautious in their handling of money and credit.
The shortcomings lay on the one hand, with the institutional design
of the bodies responsible for monetary policy, but of course also with
the choice of policy instruments. The state had to determine instruments
and rules to ensure the wealth-enhancing function of money. However,
relevant knowledge was inadequate, so policymakers and economic actors
were repeatedly surprised by inflation and deflation, hyperinflation, stabi-
lization crises, as well as by sudden rises or declines in the value of assets.
After the invention of money, it took several millennia to develop the
expertise to even begin to grasp the causes of these phenomena. As money
took on new and more diverse manifestations, new functions were poorly
understood. For example, the inventions of specie, paper money, and
checking accounts all led policymakers to reformulate their understanding
of monetary theory.
As long as money existed only in the form of silver and gold coins,
demands on monetary policy remained relatively manageable. Monarchs
had a coin monopoly (although they occasionally leased it temporarily to
private individuals), providing the economy with the necessary additional
money as the available stocks of precious metals allowed.
Due to the dependence on precious metal extraction, however, the
money supply could not develop continuously. The ups and downs in
the volume of mintage triggered alternating stimulating and dampening
impulses on the economy. Later, the so-called debasement of coinage,
i.e., the reduction of the precious metal content of the coins, also carried
the risk of intensifying economic overheatings and crises. By and large,
though, the handling of coin currency was relatively straightforward. In
essence, the coins were—aside from fraudulent clandestine coin debase-
ment on the part of monarchs—nothing other than precious metal objects
standardized by weight and shape. The scarcity of precious metals resulted
from natural limitations, so the scope for political manipulation of the
monetary system was accordingly limited. This system left no room for
 1 HISTORICAL AND CURRENT BACKGROUNDS 3

fundamental political failures leading to phenomena such as permanent

or galloping inflation and deflation.3
With the introduction of paper money, the monetary authorities were
presented with new challenges. Central banks had to preserve sufficient
confidence in the value of the banknotes to ensure their general accep-
tance as a means of payment and store of value. Building confidence in
paper money was initially achieved simply by treating it as a voucher for
a certain amount of precious metal that would be redeemed at any time
and in any amount by the monetary authority. The designations of curren-
cies such as lira, pound, or mark were initially nothing more than weight
specifications for gold.
As long as banknotes were generally recognized and accepted as
vouchers for gold, the value of money remained about as stable as the
value of gold. There were infrequent periods when money lost value,
though more commonly money gained value. This long-term monetary
stability ensured relatively stable interest rates. While the banknotes of
different countries represented different quantities of gold, exchange rates
also remained reasonably stable.
In the gold-backed paper money system, monetary theory was still rela-
tively easy to master. Central banks needed only to adjust their conditions
for lending money in the event of excessive outflows or inflows of gold
reserves. If, for example, confidence in paper money weakened and too
much money was exchanged for gold, central banks immediately reacted
by increasing the interest rates of loans to commercial banks, thereby
making the demand for and the amount of such loans fall. As a result,
money would become scarcer throughout the economy, confidence in
its value would increase, and demand for converting money into gold
decreased accordingly. In this system, there was no need for monetary
policy to be guided by complex macroeconomic data.
These were favorable conditions not only for the successful perfor-
mance of central banks but also for private business. Businesses and
households could make longer-term financial arrangements by trusting in
a reasonably stable monetary system. For instance, a business could decide
on long-term investments in tangible and monetary assets, on longer-term

3 The debasement of coinage was not necessarily a nefarious, fraudulent act by

monarchs. A prudent gradual reduction of the precious metal content of coins could
indeed be appropriate to let the money supply grow in accordance with the level of
economic activity, but monarchs were not in a position to do this effectively.
4 B. WEHNER

loans, and on longer-term supply, sales, and labor contracts without facing
major interest rate, inflation, and exchange rate risks. A better monetary
order was hard to imagine.
For many reasons, though, money could not remain a redeemable
claim to gold forever. One reason was that governments printed unrea-
sonable amounts of money, e.g., to finance wars and other economically
ruinous ventures, thereby fostering doubts about whether money would
remain redeemable in gold. The main reason, however, was that a rapidly
growing economy required a rapidly growing volume of money transac-
tions which could be well managed only with a rapidly growing money
supply. Due to the limited availability of gold, though, such a rapid
growth of the money supply could ultimately no longer be supported
by vouchers for gold.
The volume of money transactions could expand only if the value—
and thus purchasing power—of existing money continually rose. For
the purchasing power of money to rise, though, the prices of goods
purchased must fall. Thus, an increasing scarcity of gold and redeemable
gold vouchers could only be compensated by a general fall in prices,
i.e., by deflation, which is usually associated with economic stagnation,
recession, or depression.
As it became more and more difficult to treat paper money as a
redeemable claim to the gold reserves of the central bank, confidence
in checking accounts was negatively affected. Moreover, since the begin-
ning of the twentieth century, new challenges for monetary policy also
arose from the accelerating pace of globalization, resulting in accelerating
trade-to-GDP ratios, accelerating foreign debt, and increasing pressure
on fixed exchange rates. All these problems—above all, of course, foreign
debt—were further exacerbated during WW I, and thereafter the rigid
gold standard even became a contributing factor to the Great Depres-
sion.4,5 By that time, the inadequacy of the gold standard had become
widely apparent and irreversible.
As a result, money was finally detached from the value of gold, and
thereafter it was no longer subject to any natural restrictions. From that
point on, the scarcity—and thereby the value—of money was nothing

4 See Eichengreen (1992).

5 Cassel (1936).
 1 HISTORICAL AND CURRENT BACKGROUNDS 5

but an artifact of monetary policy. The state had to ensure that no infla-
tionary excess money came into circulation and that, on the other hand,
the money supply did not shrink, thereby inducing deflation. To this end,
appropriate rules had to be developed and enacted. However, govern-
ments and central banks unsurprisingly lacked the expertise necessary
to successfully deal with an international monetary system completely
detached from gold. The experiences with this system in the period up to
WW II were not encouraging, with one reason being that in this period
governments made ample use of their capacity to temporarily manipulate
exchange rates to the detriment of others. This manipulation resulted in
a pronounced desire to implement new rules in central banking which
would reestablish at least some of the simplicity and stability of the gold
standard system.
This series of events is exactly what happened with the Bretton Woods
Agreements before the end of WW II. Under these agreements, leading
industrial countries fixed their exchange rates relative to the US dollar,
and the US guaranteed that other central banks could exchange dollar
holdings into gold. At that time, this system fulfilled the need for
simplicity and stability as well as anyone could have hoped. In the longer
term, however, both the simplicity and the stability of this system were
deceptive. In the long run, the system proved inappropriate to sufficiently
curb inflation while maintaining exchange rates at their pegged levels.
This system repeatedly spurred attempts to keep or regain control of the
value of money through price and wage controls, currency controls, and
other symptomatic treatments within a broken system. When the Bretton
Woods system finally collapsed in 1971, this was the second fundamental
monetary system failure within 40 years.
Some 40 more years later, in the Global Financial Crisis of 2007–
2009, the world was at the brink of a similar failure. This crisis illustrated
the fragility—and the limited prospective life span—of the present mone-
tary system. This system has also failed to spare the world of creeping or
chronic inflation, stagnation, recession, spells of hyperinflation, deflation,
erratic developments of exchange rates and interest rates, and near-
collapses of the financial sector. Many of these issues arose within the
Eurozone again during the debt crisis of 2010, demonstrating that the
sustainability of the Euro system is also questionable. Moreover, the
Euro system is likely to become even more vulnerable when additional
European states join as is envisaged in the European treaties.
6 B. WEHNER

Over time, many important practical lessons for monetary policy have
been learned from the many failures following the departure from the
gold standard. In the end, though, in face of ever new challenges, past
experiences are only so valuable. One reason for this are the ongoing
fundamental changes in the manifestation of money. A new challenge
to monetary theory and policy in the past decades was the emer-
gence of electronically networked worldwide money and capital markets,
where speculative transactions such as exchanges between currencies and
between money deposits and longer-term financial assets are carried out
at previously unimaginable speed and magnitude. As a result, an ever-
decreasing proportion of monetary transactions are directly linked to
real economic transactions. Up to the present, central banks have not
succeeded in meaningfully adapting their rules, principles, and instru-
ments to this profound change. This challenge is likely to become even
more acute in the future, due to the foreseeable proliferation of cryp-
tocurrencies, central bank digital currencies, and other new financial
technologies beyond traditional banking.
Since the 1970s, with most exchange rates floating, monetary policy
has largely focused on managing inflation. In this time, a growing
consensus emerged that in principle, central banks command the neces-
sary instruments to achieve their goals. It still remained unclear, though,
how inflation could be reliably tempered without abrupt turnarounds and
the associated hardships for the economy and citizens. It also remained
unclear whether and how central banks can prevent future massive asset
price inflation and deflation and the associated risk of financial market
crises as in 2007–2009.
The crisis of these years has also raised new doubts as to whether the
institutions of monetary policy in their existing form are sufficiently inde-
pendent of governments and thus of political parties. One may suspect,
for example, that in the years leading up to this crisis, the US central bank
was tempted to practice an expansionary monetary policy to facilitate the
coverage of the enormous financial needs associated with the Iraq war.
Such practices largely discredit the principles and tools of the US central
bank, raising legitimate doubts about its steadfastness when confronted
with current interests of governments and pressure groups.
As may be expected, in past decades the focus of monetary policy has
repeatedly shifted in the light of current experience. The primary objec-
tive of monetary stability has often been overlaid or temporarily displaced
by targets such as securing bank liquidity or stabilizing exchange rates.
 1 HISTORICAL AND CURRENT BACKGROUNDS 7

In the longer term, however, central banks have primarily focused on

monetary stability. To this end, following conventional wisdom, they gave
top priority to preventing banks from making the money supply grow
excessively by uncurbed lending.
More recently, besides threats of inflation, deflationary scenarios have
also become a focus of monetary policy. Recently in the euro area and
previously in Japan, it has become apparent that central banks, even
when fully exploiting their tools and capacities, cannot always adequately
counter deflationary tendencies. In the recent past, for example, the
European Central Bank (ECB) easily managed to prevent overshoots of
inflation above the target of just under 2%. The ECB proved unable,
however, to sustainably prevent inflation from falling below this target.
This failure led to growing uncertainty as to whether the inflation target
was based on an adequate understanding of inflation—uncertainty, that
is, as to whether the target should relate to the current or the expected
rate of inflation, as well as uncertainty as to what goods should be taken
into account in measuring inflation.
In the face of such uncertainties, we face a serious crisis of monetary
policy and its institutions. To bring this crisis to an end, a new anchor is
needed for future monetary policy, hopefully providing as reliable orienta-
tion in a complex world as the gold standard provided in a much simpler
one.

1.2 The Institutions of Monetary Policy

Central banks have made progress over time in dealing with money in
its modern forms, developing the practical expertise necessary to save the
monetary system from the worst inflationary or deflationary turbulence.
At least in advanced countries, hyperinflation, as in Germany in the 1920s,
or a deep global economic crisis as in the early 1930s, are no longer to
be feared. But this progress was not sufficient to rule out financial market
crises and strong cyclical fluctuations.
For a long time, another unsolved conceptual problem stood in the
way of successful monetary policy. In theory, it became increasingly clear
how to prevent the worst inflationary turbulence and exchange rate and
interest rate swings, but it seemed unclear which political institution was
in best position to fulfill this role.
The question of whether adequate treatment of new political problems
might require a new institutionalization of the relevant expertise had been
8 B. WEHNER

largely ignored to this point. This issue was repressed by the conservative
reflex to assign new tasks to old institutions.
However, within the world of monetary policy, it was acknowledged
relatively early that existing institutions often make insufficient use of the
available expertise in their field of jurisdiction. Notwithstanding long-
standing ideas about how to stabilize the value of money, uncontrolled
inflationary upsurges still occurred in many countries, with various nega-
tive economic and social implications. This instability afflicted established
and young democracies alike. In many post-socialist states, for example,
the transition from socialist autocracy to democracy was also a transi-
tion to a highly inflationary, sometimes even hyperinflationary monetary
policy. New democratic institutions tended to make insufficient use of
the monetary policy expertise developed in the old capitalist world, being
unable or unwilling to adapt to the circumstances.6
One of the main reasons for this general tendency toward instability
was that in traditional democratic institutions, politicians are strongly
tempted to create money for their temporary benefit. Where democratic
governments had an influence on how much paper money the central
bank printed and how much fiat money it generated, they repeatedly
succumbed to the temptations associated with it. Various governments
have had, for example, additional money created to fix the state’s short-
term financial woes, to finance short-lived benefits for voters, and to
trigger short-term economic stimuli at potential long-run cost. Post-
poning overdue adjustments to the regulation of banking could also serve
such short-term political objectives.
The only way for democratic leaders to escape these temptations was
by entrusting the responsibility for monetary policy matters to indepen-
dent central banks. Such independent central banks were first established
in countries whose citizens had, as in Germany, longstanding interest in
monetary stability. In granting central banks such independence, govern-
ments guarded against the temptation to distract central banks from
safeguarding the value of money.
That independent central banks are better suited to pursue successful
monetary policy than democratically elected governments is, meanwhile,
a rarely disputed historical fact.7 This reality can be shown by comparing

6 See e.g., Kolodko et al. (1992)

7 Berger et al. (2001).
 1 HISTORICAL AND CURRENT BACKGROUNDS 9

performances of dependent and independent central banks. Equally

revealing are comparisons between monetary policy and other policy areas
such as fiscal policy. In countries with largely independent central banks,
monetary policy objectives have tended to be better met than fiscal policy
objectives. In particular, the stability of the currency tended to be better
preserved than the soundness of public finances. The faults of fiscal policy
lay, of course, mostly in excessive government spending, while excessive
austerity measures sometimes also played a part.8
This historical context suggests that monetary expertise is better
institutionalized in independent central banks than fiscal expertise is
in traditional governments. Thus, fiscal policy might also benefit from
being given increased independence, as has been explored in previous
literature.9
Even if independent central banks are relatively insulated from politics,
they are not necessarily prepared to meet new, unprecedented challenges
in monetary policy. In face of such challenges, it is easily conceivable that
even independent central banks struggle with monetary stability. That is,
even independent central banks cannot necessarily adequately control the
lending and money creation of commercial banks, however sophisticated
the banking regulation may be.
A possible remedy would then be to deny commercial banks the
capacity to create money on their own by granting credit. To this end,
banks could be obliged to hold deposits with the central bank in the same
amount as—and as collateral for—their customers’ demand deposits.10
Alternatively, it could be required that bank customers hold their demand
deposits not with commercial bank accounts, but directly with the central
bank. In that case, additional money could be put into circulation only if
provided by the central bank itself.11 In such systems, central banks would
have direct control over the money supply. There would be no need for
sophisticated rules concerning money creation by commercial banks.

8 For a short historical overview of sovereign defaults and other financial crises see
Kamalodin (2011).
9 On the concept of an autonomous fiscal policy see Wehner (1995, chap. 11, The
Logic of Fiscal Policy) and Wehner (1992).
10 See Fisher (1935).
11 Huber (2010), Gudehus (2016). Huber refers to the demand deposits in this system
as “Vollgeld" (full money).
10 B. WEHNER

While such reforms would allow the central bank to precisely manage
the money supply, that alone would not guarantee a more competent
monetary policy. If money creation were the sole power of the central
bank, then the central bank would always and solely be responsible for
ensuring that money is created in the right amount, at the right time,
and in the right manner. This responsibility would amount to a much
more complex and demanding task than in the past, and if central banks
are already overburdened in the existing system, they would, of course,
be even more so under such more demanding conditions.
The decentralized money creation by commercial banks in the tradi-
tional system may frequently deviate from the central bank’s objectives,
but it is nonetheless triggered by current credit needs of bank customers.
Resulting dynamic ups and downs of decentralized money supply there-
fore cannot be understood as deviations from a reliably calculated
optimum.
In sum, there is strong evidence that direct money creation exclu-
sively by the central bank would harbor more risks than opportunities.
A more promising approach would be to provide central banks with
novel instruments and rules for stabilizing the economy and the financial
system.

1.3 The Mandate of Monetary

Policy---Multiple Goals or Clear Focus?
Independence of central banks and improved understandings of new
forms of money were crucial but not sufficient to develop a truly
sustainable concept of monetary policy.
So far, there has been broad agreement only on the primary objective
of monetary policy. Central banks have a legal mandate to ensure, above
all, the stability of the price level. But here, too, there is room for inter-
pretation. There is general consensus that price stability does not have to
be absolute, such that a continuous moderate increase of the price level
should be tolerated, or even encouraged. This strategy facilitates market-
compliant adjustments in the wage and price structure, and it also allows
for the annihilation of excess financial capital through creeping devalu-
ation. Thus, moderate inflation should be allowed, but it should be as
continuous and as predictable as possible.
The ECB, for example, has in the past set itself the target of keeping
inflation in the eurozone at or very near two percent. But even with such
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caravan quickens somewhat its pace; for close under those
protecting walls the tribe of B’nai Jacob will shelter its flocks for the
night, safe alike from wolves and from marauding Arab bands.
But just as they reach the spot where the road to Bethlehem
branches off to the left from the main caravan route, there is a
sudden change of plan. The hope of camping at the town is
abandoned, and one of the low, black, goat-hair tents is hastily set
up right by the roadside. Then there is an excited bustling among the
household servants, and a time of anxious waiting for Sheikh Jacob,
until Bilhah, the handmaid, puts into the old man’s arms his son
Benjamin, his youngest boy, who is long to be the comfort of the
father’s declining years.

THE TOMB OF RACHEL

In the background the town of Beit Jala

Soon, however, the cries of rejoicing are hushed. From the

women’s quarters comes a loud, shrill wail of grief. And before the
B’nai Jacob break camp again the leader raises a heap of stones
over the grave of Rachel—his Rachel—a gray-haired woman now
and bent with toil, but still to him the beautiful girl whom he loved and
for whom he labored and sinned those twice seven long years in the
strength of his young manhood.
Many years afterward, when Benjamin was a grown man and
Jacob lay dying in the distant land of Egypt, the thoughts of the
homesick old sheikh dwelt on the lonely grave by the roadside.
“I buried her there on the way to Bethlehem,” he said.
Her tombstone remains “unto this day,” the Hebrew narrator adds.
Indeed, even to our own day, a spot by the Bethlehem road, about a
mile from the town, is pointed out as the burial place of Rachel.
Probably no site in Palestine is attested by the witness of so
continuous a line of historians and travelers. For many centuries the
grave was marked by a pyramid of stones. The present structure,
with its white dome, is only about four hundred years old. But there it
stands “unto this day,” revered by Christians, Jews and Moslems,
and the wandering Arabs bring their dead to be buried in its holy
shadow.
Such is the first Biblical reference to Bethlehem. A son was born
there! More significant still, there was a vicarious sacrifice—a laying
down of one life for another.
THE GIRL FROM BEYOND JORDAN
 III
THE GIRL FROM BEYOND JORDAN

I N the Book of Judges are recounted the adventures which befell

certain Bethlehemites in those lawless days when “there was no
king in Israel and every man did that which was right in his own
eyes.” But the people mentioned in this history were no longer
dwelling in the city of their birth; and we are glad of an excuse to
pass by the tale of reckless crime and merciless vengeance. Yet
here, too, if the story were not too cruel to repeat, we should find a
woman dying for one whom she loved.
Even in that rough frontier period, however, there were interludes
of peace and kindliness; and like the cooling breeze which blows
from snow-capped Lebanon upon the burning brow of the Syrian
reaper, is the sense of grateful refreshment when we turn from the
heartrending monotony of scenes of cruelty and lust and treachery to
the sweet, clean air of the whitening harvest fields of Boaz of
Bethlehem.

When the two strange women entered the square there was great
excitement among the chattering busy-bodies who were waiting their
turn to fill their earthen jars at the public well; for one of the travelers
was seen to be no other than old Naomi, who long years before had
gone away across Jordan with her husband Elimelech to better their
fortunes among the famous farm-lands of Moab. Now the wanderer
has returned to the old home, poor and widowed and childless—no
doubt to the secret gratification of the more cautious stay-at-homes,
who had never dared tempt fortune by such an emigration to distant
Moab, and who were still no richer and no poorer than their fathers’
fathers had been.
 The other woman was younger, a foreigner, a widow, so the gossip
ran, who had married Naomi’s dead son. The women at the well
smiled at her quaint accent, for the dialect of Moab is quite different
from that of the Bethlehem district. But many a stalwart young farmer
dreamed that night of the lonely, appealing eyes of the stranger from
beyond Jordan.
Even middle-aged Boaz is stirred when the next morning he finds
the slender Moabitess among the women who are gleaning in his
barley field; for romance is not always dead in the soul of a mature
and wealthy landowner. Boaz, for all his grizzling hair, is a hero who
makes us feel very warm and comfortable about the heart. He is so
generous, so thoughtful, so humble in his final happiness. He has
already been touched by the story of the faithfulness of the young
widow who said to her mother-in-law,
“Entreat me not to leave thee, and to return from following after
thee; for whither thou goest, I will go; and where thou lodgest, I will
lodge; thy people shall be my people, and thy God my God.”
So the rich man drops a hint to his servants to let fall carelessly
little heaps of grain where the new gleaner can easily gather them.
He remembers the rough, dissolute character of the itinerant
harvesters, and warns them to treat the young woman with respect
and courtesy. At noontime he invites her to share the simple
luncheon provided for the farm-hands. A few weeks later the lonely
rich man discovers her affection for him, and our hearts beat in
sympathy with his as, with characteristic modesty, he exclaims,
“Blessed be thou of Jehovah, my daughter: thou hast shown more
kindness in the latter end than at the beginning, inasmuch as thou
followedest not young men, whether poor or rich.”
But as well might one attempt to retouch the soft colorings of the
Judean sunrise as to re-tell the beautiful idyll of Ruth. Old Josephus
quite misses the delicate beauty of the story; for he concludes his
smug paraphrase by saying, “I was therefore obliged to recount this
history of Ruth, because I had a mind to demonstrate the power of
God, who, without difficulty, can raise those that are of ordinary
parents to dignity and splendor.”
 They lived together happily ever afterward. Even sad Naomi found
a new interest in life when she took into her lonely old arms the form
of little Obed. For this bit of Bethlehem history, like the first, and like
the greatest later on, ends with the coming of a baby boy. And
doubtless, if the whole of the tale were told us, we should some day
see grandmother Ruth crooning over Obed’s son Jesse, who was to
be the father of a king.
THE BOY WHO WAS TO BE KING
 IV
THE BOY WHO WAS TO BE KING

A N ancient Hebrew commentary on First Samuel says that Jesse

became “a weaver of veils for the sanctuary.” This may be why
the story of David and Goliath compares the giant’s staff to “a
weaver’s beam.” Whatever his occupation, the grandson of rich Boaz
must have been a man of some means, and influential in Bethlehem
society. Also he had seven fine, stalwart sons. Indeed, he had eight
sons; but, as we all know, the youngest was out tending the sheep
when Samuel came.
The rough and ready era of the Judges, when every man did that
which was right in his own eyes, was now gone forever. Israel had a
king; and a tall, handsome figure of a man King Saul was. And for a
while he was a king who defeated foreign invaders on every side.
But Saul’s character could not stand the test of the sudden elevation
to a position of power and responsibility. His strength lay in brilliant,
spectacular efforts, rather than in a patient, well-organized rule.
Quarrels arose between the jealous tribes of Israel. Conquered foes
prepared new and better equipped forays against the poorly
protected frontier of the new kingdom. Worst of all, Saul broke with
his tried advisers and became prey to an irrational, suspicious
melancholy, which prevented him from coping with dangers which a
few years earlier would only have aroused his ambitious energy.
Saul had failed; so Samuel, the veteran prophet, judge and king-
maker, went quietly to Bethlehem to select a new leader who should
direct the troublous destinies of Israel.
It was doubtless the same farm where the young stranger from
beyond Jordan had gleaned the sheaves of barley almost a century
before. How proud Naomi would have been if she could have lived to
see those tall great-grandchildren of Ruth and Boaz! How excited we
boys used to get as we saw the seven sons of Jesse standing there
in a row, and waited for old Samuel to tell us which one was to be
the king! Surely it must be the eldest, Eliab, who is so tall and
handsome, the very image of what Saul was in his youth. No, it is not
Eliab, perhaps just because he is too much like King Saul. Abinadab
is rejected and Shammah, too; and the prophet’s eye passes even
more rapidly over Nethaneel and Raddai and Ozem.
Then Samuel turns to the father with a perplexed frown.
“Are these all your sons?”
“Yes—that is, all that are grown up. David is only a boy. He is
taking care of the sheep this morning.”
“Call him, too,” commands Samuel. “Let Abinadab mind the sheep
for a while.”
So in a few minutes David is brought in. He is fair in complexion,
like so many Judean Jews to-day, but his skin is burnt to a deep tan
by the sun of the sheep pasture. His eye has a captivating twinkle,
and he can hardly keep from humming a tune even in the presence
of the prophet.
We guessed it all the while! This is indeed a royal fellow; and the
old prophet touches the thick brown hair of the shepherd lad with a
strange, loving reverence as he tells him that some day he must be
his people’s king.
This time I think that Josephus is probably right. For he tells us
that while they were all sitting at dinner afterward, Samuel whispered
in the boy’s ear “that God chose him to be their king: and exhorted
him to be righteous, and obedient to His commands, for that by this
means his kingdom would continue for a long time, and that his
house should be of great splendor and celebrated in the world.”
Surely wise old Samuel must have given the boy some such
advice as that.
THE ADVENTURE OF THE WELL
 V
THE ADVENTURE OF THE WELL

I T was a long while, however, before David really became a king.

As his frame grew into a sturdy manhood, he fought with lions and
bears and Philistine champions. His sweet singing brought him to the
notice of Saul and he became the king’s favorite musician, until the
jealousy of the half-crazed monarch drove the young man into exile.
Then for years the former shepherd lived a wild, half-brigand life
among the caves of the rugged steppe-land south of Bethlehem,
gradually gathering around him a company of intrepid outlaws,
administering rough justice over a number of villages which put
themselves under his protection, making sudden forays into the
Philistine country just to the west, and again so hotly pursued by the
soldiers of the relentless Saul that he was forced to seek an asylum
among the enemies of Israel, who were always glad to forget old
scores and welcome this dauntless free-lance and his redoubtable
band of warriors.

It may have been during this outlaw period, or it may have been
shortly after David’s accession to the throne, when his kingdom was
still disorganized, and an easy prey to foreign invaders. At any rate,
David and his band were hiding in the cave of Adullam, a few miles
from Bethlehem. The little company was for the moment safe, but
the country all around was overrun by foreign troops, and even
Bethlehem, the scene of so many happy boyhood memories, was
occupied by a Philistine garrison.
No wonder that David felt very weary and discouraged as he
thought of the old home town in the hands of heathen soldiers. No
wonder that he sometimes became irritable and petulant, and wished
for things that he could not have. There was a spring right by the
cave of Adullam. The inhabitants of Palestine, however, can
distinguish between water drawn from different sources, in a manner
which seems marvelous to our duller taste. Yet we need not believe
that the water in the City of David was any better than that of the
cave of Adullam in order to sympathize with the tired, homesick cry
—
“Oh, that one would give me water to drink of the well of
Bethlehem, which is by the gate!”
Then there was a little stir among David’s bodyguard. One soldier
whispered to another, who nudged a third; and soon three dark
forms slipped quietly away from the circle of lights around the
campfire. For those rough outlaws idolized their fair-haired young
leader, and they had been worried and grieved by his recent fit of
melancholy.
At midnight there was a sudden rattling of the well-chain in the
square by the Bethlehem gate—then a challenge from the startled
Philistine sentry—a rush of soldiers along the stony street. But the
three seasoned warriors slipped easily through the camp of the half-
awakened army. They turned and doubled through the familiar maze
of narrow, winding streets until they came to the steep terraces at the
south of the town, where they dropped out of sight among the
perplexing shadows of the olive orchards, through which they made
their way swiftly back to the wild steppe-land and the mountain
fastness where the band kept watch over their sleeping chief.
Mighty men they were, these three, and it is no wonder that their
exploit became one of the favorite tales of Hebrew history. But when
they offered David the water for which he had longed, there came a
lump into his throat and he said, “I can’t take it. My thoughtless wish
might have cost too much. It would be like drinking my brave men’s
blood, to drink that for which they have endangered their lives. It is
too precious to drink. I will pour it out on the ground—so—as an
offering to Jehovah.”
Surely the God of Battles esteemed that simple libation as holy a
thing as holocausts of bullocks and rams, and forgave many of the
sins of those rough, hard outlaws because of the loving devotion
they showed toward one whom He had chosen to be the deliverer of
Israel.

An old legend says that after the mystic Star had guided the Wise
Men to the Saviour’s cradle, it fell from heaven and quenched its
divine fire in “David’s Well.” And surely, if the Star had fallen, it could
have found no more fitting resting place than the Well by the Gate,
whose water had been won by such unselfish adventure and
dedicated with such tender gratitude.
THE NIGHT OF NIGHTS
 VI
THE NIGHT OF NIGHTS

I N the short twilight of the winter evening a husband and wife are
trudging wearily along the road which winds past the high gray
walls of Jerusalem—no longer Jerusalem the proud capital of the
dynasty of David, but a mere provincial town of the mighty Roman
Empire, whose streets are dizzy with the shouting of a dozen
languages and thronged with crowds of Greeks, Romans, Persians,
Armenians, Ethiopians, and travelers from even more distant lands,
who rub shoulders carelessly with the fanatical Pharisees and
intriguing Sadducees whose mutual bickerings make them a
laughing-stock to their Gentile masters; while there sits upon the
throne of David a half-breed underling Edomite, through whose
diseased veins flow the cruelty and lust and cowardice and treachery
of turgid streams of unspeakable ancestry—Herod, called in grim
jest, “the Great.”
December in Judea is a cold, dreary month, with penetrating
storms of rain and sleet. It may even snow; and sometimes the drifts
lie knee-deep on that highroad from Jerusalem to Bethlehem. So
they hasten their steps, these footsore travelers who have come all
the way from distant Galilee at the command of their Roman rulers;
for darkness is coming on, and this night, of all nights, they must find
a safe, warm resting-place.
But when Bethlehem is at last reached, their cheerful anticipation
changes to utter, weary dejection; for the village inn proves to be
already overcrowded with other Bethlehemites who have returned to
their birthplace to be registered there for the census.
Only in the stable is there room; and this is a low, dark place, half
building, half cave. In front, it is walled up with rough stones; but at
the rear it extends far into what seems to have been originally a
natural opening in the hillside. Around three sides of the stable runs
a low, level shelf, with an iron ring every few feet, to which the beasts
are tied as they eat the fodder spread before them on the stone
ledge. This manger is not an uncomfortable resting place for the
hardy muleteers, who often sleep there on the straw. But it makes a
hard bed for Joseph—and for Mary.
The sky has cleared now, and through the open door can be seen
a square of twinkling stars, one of which shines with unusual
brilliancy. Within, however, it is very dark; for the lantern of the night-
watchman shines only a little way through the sombre shadows of
the stable. The cattle and horses have finished munching the grain.
The last uneasy lowing ceases. It is very still, except in one far
corner where the strangers cannot sleep.
And then there is a baby’s cry. And the bright star shines with
glorious radiance over David’s City. And upon the drowsy shepherds
in the fields where the Moabitess gleaned, there bursts a wondrous
light and the sound of heavenly singing.
For the fullness of time has come. Upon the humble Judean town
has burst that glory sung by the prophets of old. The long line of
Rachel and Ruth and royal David has at last issued in the King of
kings.
THE BLOSSOMS OF MARTYRDOM
 VII
THE BLOSSOMS OF MARTYRDOM

B UT even at that first Christmastide, Bethlehem must again be

the scene of innocent suffering in another’s place, as for the
Christ-child’s sake some twenty baby boys in the little town are put to
death by order of King Herod, whose diseased, suspicious mind
trembles at the thought of even an infant claimant for his throne.
Five hundred years before, when the strong young men of
Bethlehem had been sent away into Babylonian exile, the loud
wailing from bereaved, heart-broken homes had recalled to Jeremiah
that other sad mother buried there by the lonely roadside. So now
again, the awful outrage, perpetrated almost within sight of that
venerable tomb, seems to be linked across the long centuries with
the first Bethlehem grief; and once more, in the words of the
Lamenting Prophet, there is

“Weeping and great mourning,

Rachel weeping for her children;
And she would not be comforted,
Because they are not.”

The Blossoms of Martyrdom—so a fourth century poet calls these

little ones who were the first of all to suffer death for Christ’s sake.
And in that countless throng of those who “have come out of great
tribulation” there must surely stand in the foremost rank the little
band of Bethlehem children whose blood was shed because an
infant Saviour had been born into an unwelcoming world.
“And God shall wipe away all tears from
THE STORY OF THE STABLE
 VIII
THE STORY OF THE STABLE

B ETWEEN the years 1480 and 1483, Brother Felix Fabri, a

learned German monk of Ulm, made two voyages to Palestine,
during the course of which he collected information of all sorts about
the holy places, which he later published in a large and important
book. Some of his statements about Bethlehem are very accurate.
Others do not strike us as quite so convincing.
According to these stories told by Brother Felix, Boaz inherited
from his father Salmon, who had married Rahab of Jericho, a large
mansion built at the very edge of Bethlehem, so that part of the
house projected outside the town wall. In the rock underneath the
main building was a natural grotto which was used as a cellar, and
also as a dwelling room during the hot months. The house passed in
due time into the possession of Boaz’ grandson Jesse, whose son
David was born in the lower room. After David became king,
however, the family removed to Jerusalem, the deserted homestead
gradually came into a state of disrepair, and finally the part in the
rock was used as a public stable. This degradation of the once
splendid mansion was permitted by Providence, so that at last the
great Son of David might be born amid humble surroundings, and
yet in the very place where His famous ancestor first saw the light.
After our Lord’s Ascension, His mother lived for fourteen years,
dwelling in Jerusalem, whence every month she and her friends
made a pious pilgrimage to Bethlehem, that they might worship at
the cave of the Saviour’s birth. This so enraged the Jews that finally
they defiled the stable and blocked up its entrance with stones.
Following the destruction of Jerusalem by Titus, in a. d. 70,
Christians were again allowed to dwell in the Holy Land and to visit
the place of the Nativity, which they cleansed from the Jewish
defilement and hallowed by their worship. But in the year 132, the
Emperor Hadrian laid waste the city of Bethlehem, placed in the