Social Capital and Central Banks

13 April 2022 Blog
I believe social capital is essential to what central Banks do every day and why we do it

A couple of weeks ago, I spoke at a conference at the Banco de Portugal on ‘Rebuilding Social Capital: the role of central banks.’ The discussion covered issues beyond price stability, including labour market considerations, inequality and climate change among others. I found the discussion, and the wider conference, to be very interesting and I thought I would share some of my reflections and remarks in a blog post.

What is social capital?

The history of the concept of social capital goes back a long time, at least to Aristotle and has been the subject of economic research. I like to think of it as “the social connections, attitudes and norms that contribute to societal wellbeing by promoting coordination and collaboration between people and groups in society”. In brief, it’s about how people connect to one another.

I believe social capital is essential to what central banks do every day and why we do it. To understand why, it is worth going back to the beginning.

Central banks today have many functions but, fundamentally, they exist to provide monetary stability. Many of the early central banks were established to deal with monetary disarray. In 1668 the world’s oldest central bank, Sveriges Riksbank, was founded from the ruins of Stockholms Banco, a failed private bank. In 1694 the Bank of England began as a private bank that would act as a banker to the Government, primarily to fund the war effort against France. And in 1846, the Banco de Portugal was created to support the Portuguese State when it was on the verge of bankruptcy. More recent central banks – largely created in the twentieth century – were established to provide financial stability, acting as lenders of last resort in times of financial stress. And over time they were given explicit price stability mandates.

Central banks play an important role in maintaining the stability of money. And money (as a store of value, a unit of account and a medium of exchange) is an important instrument in how we connect with each other, through trade, commerce, and our everyday interactions. The stability of money helps to build social capital.

Institutions and Trust

Institutions matter for building social capital. If social capital is ultimately about how we connect with one another, it’s clear that institutions – essentially the frameworks in which societies live – play a critical role. In my view central banks are part of an institutional ecosystem that is interconnected, notwithstanding that the individual components may act independently. Central banks do not act in a vacuum, and we should not confuse independence with isolation.

One common thread that enables all institutions to work is trust.

Without the trust of the public that it serves, an institution will struggle to function. And trust matters to central banks as it is essential for the transmission of monetary policy. Trust affects the public’s (and financial markets’) inflation expectations which are an important anchor and determinant of price stability. So, as with all institutions, central banks need to build trust and build social capital.

How can central banks build social capital?

Social capital is stronger when institutions respond to, or even anticipate, key issues of the day. A society’s institutional ecosystem needs to adapt to a changing environment if it is to continue to be successful. Aiming to simply preserve institutions can lead to weakening them.

On the other hand, while all institutions need to change, we need to make sure expectations on institutions are not misaligned, as this would lead to an erosion of social capital.

Transparency, honesty and engagement help to build credibility for central banks and to set expectations. Expectation-setting requires a central bank to communicate clearly both its objective and how it intends to achieve it.

This requires, in turn, that the public understand the mission of central banks, recognises the importance of that mission, and trusts in its commitment to deliver. All this requires effective communication.

Growing social capital requires central banks to communicate in a way that is understandable to people, and to speak to issues that resonate with people and not just financial markets.

And in the modern era, we can no longer rely on ‘old intermediaries’ alone. Traditional communication channels are disappearing so we must navigate new channels effectively between central banks and the wider public to allow our views to be understood. Central banks need to adapt to new channels, new platforms, and new ways to target their communications and deliver their messages.

A time of rapid change increases the importance of trust, transparency, accountability, legitimacy. It underlines the importance of strong social capital.

Moreover, reflecting on the impact of the pandemic and the significant economic transitions that started before it and remain ahead of us (climate change and demographic change in particular), it is clear that they require long-term and more integrated thinking across a number of dimensions.

We need to be thinking broadly and over longer time horizons to fully capture the trade-offs we face, not least because many of these challenges also require a global policy response. And, most important of all, the trade-offs need to be understood by the public.

Policies to address climate change, for example, may appear costly in a short time horizon, but deliver large net benefits in a longer horizon that makes clear the benefits of avoiding catastrophic increases in global temperatures. Central banks cannot solve the problem of climate change (as the challenge requires action on the part of the whole community, businesses, households, as well as policymakers) but we do need to understand the nature and of financial risks it poses.

Similarly, for inequality central banks do not have the mandate or the tools to deal with societal concerns around the distribution of income or wealth but we do need to ensure we understand the effects our actions may have. Inequality has economic consequences as well as implications for social capital and the public’s trust in a state’s institutional ecosystem.


Central banks exist to provide monetary stability but they need trust to succeed. Trust is stronger where social capital is strong. Central banks can help build social capital through their actions.

Social capital does not grow on its own. An economy, a society and its environment are all complex systems that constantly interact with each other. Societies need to invest in economic, social and environmental infrastructures – including institutions such as central banks – to enable social capital to grow. And institutions must be capable of change. A core part of the Central Bank of Ireland’s strategy is to prepare for the rapidly-changing world that we operate in and ensure monetary and financial stability for the ‘welfare of the people as a whole’.

Gabriel Makhlouf

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