A 1924 quote from John Maynard Keynes reflecting on events in Weimar Germany and Lenin’s Russia:
“A government can live for a long time, even the German Government or the Russian Government, by printing paper money.”
However, “In the last phase, when the use of the legal tender money has been discarded for all purposes except trifling out-of-pocket expenditure, inflationary taxation has at last defeated itself.”
The above quote was excerpted from a 1997 paper by the IMF’s Peter Stella titled ‘Do Central Banks Need Capital?’
Can Central Banks Go Bust?
Technically speaking, the answer according to Stella is no, central banks do not require a capital buffer to absorb losses in the same sense that a commercial bank does. However, Stella states:
“Weak central bank balance sheets invariably lead to chronic losses, the abandonment of price stability as a primary policy goal, a decline in central bank operational independence, and the imposition of inefficient restrictions on the financial system to suppress inflation.
…if society values an operationally independent central bank capable of attaining price stability without resorting to financial repression, the transfer of real resources to recapitalize the central bank becomes necessary when chronic losses are sizeable.”