This mechanism amplified the immediate effect of public spending on aggregate demand. Monetary policy – in charge of credit conditions – was entrusted with the task of alleviating, through a careful policy of accommodation, the impact that government borrowing  BIS central bankers’ speeches  3  would have exerted on the cost of private debt. The central bank was financing the Treasury by creating money. Under these conditions, an increase in public spending could “add demand”– where this would be lacking for the goal of full employment – without taking away resources from other uses. Since then, the theory of economic policy has followed two paths that have led it to invert the ranking of relative potential of tools and to enhance the definition and measurement of the objective. As for the instruments, a different theory of the formation of expectations – no longer extrapolative – has highlighted the strong impact of monetary policy and has weakened the expected effects of fiscal policy. In the models that we use today, agents, when formulating their expectations, are attentive to the sustainability conditions of the choices in the long term. Economic policies deemed unsustainable in the long run are ineffective. For example, an active deficit-financed fiscal policy is limited by fears about the government’s ability to refinance the debt from which that policy originates. These fears may lead to behaviours that weaken the private sector – or, at worst, completely neutralise – the impact of public spending as a means of controlling demand.
Those who accuse the ECB of an indirect violation of the prohibition on financing public debt with central bank money are making the same conceptual mistake as those who accuse the ECB of not having forced the banks to the use the funds acquired via the LTROs to supply credit to the private sector. In the first case, banks would have had to have been forced not to purchase government  BIS central bankers’ speeches  7  securities, and in the second case, to give credit to the private sector. Both groups of accusers forget that the policy of precise allocation of credit was a norm in various countries until the end of the 1970s. In the 1980s the operational system for monetary policy was radically redefined, principally on account of the heavily distorting effects of such an operational framework on economic activity. Moreover, legal arguments relating to the Treaty and to the current contractual form of repos underlying the LTROs, as well as considerations relating to feasibility, would make it difficult to reinstate such a framework. Finally, the behaviour of credit institutions with respect to households and businesses is not uniform across countries: while some countries saw negative credit developments, others saw growth in credit, in some cases even significant growth.