In 1951, an epic struggle between a US president who stood on the verge of a nuclear war, and a central bank that was seeking to establish its right to set an independent monetary policy, resulted in an improbable victory for the central bank. President Harry Truman, at war in Korea, failed in a brutal attempt to force the Federal Reserve to maintain a 2.5 per cent limit on treasury yields, thus implicitly financing the war effort through monetisation. This victory over fiscal dominance is often seen as the moment when the modern, independent Fed came into existence.

The idea that the central bank should place a cap on the level of bond yields is firmly back on the agenda, at least in the eurozone. This week, Italian prime minister Mario Monti said that he was increasingly optimistic that his country's bond yields might soon be capped. Although he stopped short of saying that this would be done by the European Central Bank, there really are no other viable candidates to achieve this. Furthermore, many economists are arguing that this is the right policy, since Italy is now following a sustainable budgetary policy which deserves to be rewarded by ECB action in the bond market.

I have no dispute with Mario Monti, but this is dangerous territory, which lies right at the heart of a government's relationship with its central bank. Let's go back to the 1940s in the US.

David Fuller's view The central banks of established democracies have a great deal of power but none of them, including the US Federal Reserve, has complete independence. This is because in the US instance, the President nominates the Fed Chairman and that choice must then be confirmed by the Senate.

The Fed has independence within the government to the extent that its monetary policy decisions do not require approval by the President or anyone else in the legislature. However, the Fed's authority is derived from statutes created by Congress and the central bank is subject to congressional oversight.

Congressman Ron Paul, a Republican candidate for president, favours abolishing the Fed. This is a bad idea in my opinion as it would presumably hand over control of monetary policy to the legislative and executive branches of government controlled by Congress and the White House.

Meanwhile, the Fed's current chairman, Mr Bernanke, was appointed because of his scholarly papers on how the US could avoid deflation. Interestingly, the ECB's new president, Mr Draghi, faces both deflationary and insolvency problems which is presumably why he is pursuing his own version of quantitative easing.