Central Banking in the Twentieth Century Central banks are powerful but poorly understood organisations. In 1900 the Bank of Japan was the only central bank to exist out- side Europe but over the past century central banking has prolif- erated. John Singleton here explains how central banks and the profession of central banking have evolved and spread across the globe during this period. He shows that the central banking world has experienced two revolutions in thinking and practice, the first after the depression of the early 1930s, and the second in response to the high inflation of the 1970s and 1980s. In addition, the cen- tral banking profession has changed radically. In 1900 the pro- fessional central banker was a specialised type of banker, whereas today he or she must also be a sophisticated economist and a pub- lic official. Understanding these changes is essential to explaining the role of central banks during the recent global financial crisis. JOHN SINGLETON is Reader in History at Sheffield Hallam University. His previous publications include Innovation and Independence: The Reserve Bank of New Zealand, 1973–2002 (2006). .
Contents List of illustrations page i x Acknowledgements x List of abbreviations xi 1 A beginner’s guide to central banking 1 2 Very boring guys? 17 3 Wind in the willows: the small world of central banking c . 1900 34 4 Something for everyone: new central banks, 1900–1939 50 5 A series of disasters: central banking, 1914–1939 69 6 The mysteries of central bank cooperation 91 7 The fi rst central banking revolution 110 8 No time for cosmic thinkers: central banking in the ‘Keynesian’ era 128 9 Rekindling central bank cooperation in the Bretton Woods era 147 10 The goose that lays the golden egg: central banking in developing countries 165 11 The horse of infl ation 184 12 The second central banking revolution: independence and accountability 204 13 Reputations at stake: fi nancial deregulation and instability 222 14 Infl ation targeting: the holy grail? 241 vii.
Illustrations Figure 1 A three-dimensional profession page 18 Table 1 Founding dates of banks of issue and central banks 35 Table 2 Central bank personnel, 1950–90 141 Table 3 Average annual infl ation in selected countries, 1960s to 1990s 186 ix.
Acknowledgements I should like to thank a number of people and institutions who offered help of various kinds during the writing of this book. Liz Castle and the staff of the Knowledge Centre at the Reserve Bank of New Zealand pro- vided congenial library facilities and, importantly, somewhere to hide from other calls upon my time. Members of staff at the Bank of England Archive were also very helpful. Mark Casson and his colleagues at the Centre for Institutional Performance, in the Henley Business School, University of Reading, kindly offered a base of operations in the UK during the winter of 2008–9. As part of my stay in Reading, I organ- ised a workshop on central banking, at which the other speakers were Forrest Capie, James Forder, Alexander Mihailov, Catherine Schenk, and Richard Werner, and I thank them for their contributions. Victoria University of Wellington provided a measure of funding during my research leave in the UK. I presented papers arising from this project to seminars or conferences at the LSE, the RBNZ, Queensland University of Technology, and the University of Wolverhampton. I also had a num- ber of interesting conversations on central banking with Muge Adalet, Michael Bordo, Mark Casson, Gary Hawke, Alexander Mihailov, and Michael Reddell. I am grateful to Michael Watson and Chloe Howell of Cambridge University Press for their efforts and to Rob Wilkinson (Out of House Publishing Solutions) and Alison Walker. I apologise to anyone omitted inadvertently from this list. x.
Abbreviations BBC British Broadcasting Corporation BCCI Bank of Credit and Commerce International BCEAO Banque Centrale des États de l’Afrique de l’Ouest BdL Bank deutscher Länder BEAC Banque des États de l’Afrique Centrale BIS Bank for International Settlements BNB Banque Nationale de Belgique CAMA Central African Monetary Area CBA Commonwealth Bank of Australia CBBH Central Bank of Bosnia-Herzegovina CBC Central Bank of China CBM central bank money CCC Competition and Credit Control CEMLA Center for Latin American Monetary Studies CFA Colonies Françaises d’Afrique CHIPS Clearing House Interbank Payments System CLCB Committee of London Clearing Bankers CPI consumer price index CPSS Committee on Payment and Settlement Systems DCE domestic credit expansion DFC Development Finance Corporation DM Deutsche Mark DNS deferred net settlement ECB European Central Bank EEA Exchange Equalization Account EEC European Economic Community EMI European Monetary Institute EMS European Monetary System EMU Economic and Monetary Union EPU European Payments Union ERM Exchange Rate Mechanism ESCB European System of Central Banks xi.
1 A beginner’s guide to central banking When I went to Washington in 1979, most people thought the Federal Reserve was either a bonded bourbon or a branch of the National Guard. Frederick H. Schultz, Vice-Chairman of the Board of Governors of the Federal Reserve System, 1979–82 (Schultz 2005: 343) Central banking is a strange profession little understood by mem- bers of the public whose interests it exists to protect, by governments with which it shares responsibilities, or by financial institutions whose activities it to some degree controls. Those who practise it often feel themselves to be members of an international freemasonry, a kind of ‘ mystery’ in the medieval sense of a group who possess some exclusive knowledge or skill, and indeed there has always been an element of mystery … about what central bankers do. H. C. (Nugget) Coombs , Governor of the Australian Central Bank 1949–68 (Coombs, H. C. 1981 : 141) Most central banks nowadays claim to abide by the principle of trans- parency , yet the world of central banking retains an element of inscrut- ability. This partly reflects the nature of the subject. Central banking is a weightier and more technical business than chicken farming or run- ning a bus company. Though central banking might not be as delicate as brain surgery, or as complicated as the exploration of space, it is evi- dently a highly skilled trade. Until transparency became fashionable in the late twentieth century, central bankers did little to promote a wider understanding of their role. Shunning the limelight, their rare pub- lic statements were notable for brevity and calculated vagueness. Such reticence was often excused by referring to the (central) banker’s duty to respect client confidentiality. The public knew that central banks were important and powerful even if they did not fully understand them, and this created a problem. As Dan Brown readers will understand, there is a market for blockbusters on powerful and esoteric organisations. Some years ago, William Greider ( 1987) , a journalist, published an 800-page exposé of the Federal Reserve System entitled S ecrets of the Temple . Greider argued that the Fed was a 1 9780521899093c01_p1-16.indd 1 9/29/2010 9:50:40 AM.
2 Very boring guys? Rogoff’s [conservative central b anker] … is a splendid illustration of the humorous definition of an economist as someone who sees that something works in practice and asks whether it can also work in the- ory. Is there any doubt that central banks in general … have been dominated by quite conservative people? Alan Blinder ( 1998: 47) Felipe Pazos has been replaced as President of the National Bank of Cuba following disagreement with Fidel Castro. He has been replaced by Ernesto G uevara … Guevara, aged 31, is an Argentine, a commun- ist, and is neither an economist nor a banker … He has been a prom- inent leader of the revolutionary movement and may be regarded as a fellow conspirator of Castro … By this latest move Castro has swept away the last vestige of orthodox authority in the financial field. (Report on National Bank of Cuba, 1 December 1959, Bank of England Archive, OV162/5) Che Guevara , whose reign at the National Bank of Cuba was relatively brief (Yaffe 2 009) , is the most iconic exception to the general rule that central bankers are rather cautious and conservative people. One of the messages of this chapter is that central bankers come in a number of varieties. Some are headstrong, others compliant. Some have strong economic views (whether orthodox or unorthodox), while others are opportunistic. Thus, when Jean-Pierre Roth, chairman of the Swiss National Bank , describes central bankers as ‘very boring guys’ (quoted in Baker and Singer 2006: 64), he is being rather modest. Though the spotlight will be on selected chief executives – gover- nors in most cases – it is not implied that other central bankers did not matter. Some governors have been dictators, whereas others have acted as members of a management team. In some instances authority within the central bank has rested not with the governor but with the board of directors or with the government. However, directors, espe- cially part-time directors, have rarely been an obstacle to a determined central bank governor. Central bank chief executives have tended to be 17 9780521899093c02_p17-33.indd 17 9/29/2010 9:52:18 AM.
3 Wind in the willows: the small world of central banking c . 1900 At the end of the nineteenth century … ‘central bank’ meant scarcely more than a single bank distinguished from others by unique public responsibilities eclipsing its commercial interests. R. S. Sayers ( 1976, vol. I: 1) To mark the 100th anniversary of the publication of ‘The Wind in the Willows’ on 8 October 1908, the Bank [of England]’s Museum has opened a new, permanent display celebrating the career of its author, Kenneth Grahame , who worked at the Bank for thirty years … John Keyworth, Curator of the Museum, said ‘Grahame’s Bank career is little-known, but it is very likely that his thirty-year career had some influence on his writing; either the direct influence of colleagues on the famous characters he created or the atmosphere of life at the grand old institution imbuing his work.’ Bank of England ( 2008) The central banking world was small and rather stuffy at the start of the twentieth century. But there were interludes of excitement. T he Times of 25 November 1903 reported a ‘Shooting Outrage at the Bank of England’. A visitor asked for the previous governor, and was taken to see the Bank’s secretary, none other than Kenneth Grahame. He subsequently pulled out a gun and fired several times at Grahame. The shots missed, and the plucky central banker overpowered his assailant and locked him in a waiting room. According to The Times the gun- man expressed ‘Socialistic views’ when interviewed by police, and was charged with ‘Wandering, deemed to be a lunatic’. Central banking was still an overwhelmingly European phenomenon in 1900, with a single offshoot in Japan (see T able 1 ). The USA did not have a central bank until 1914. This chapter describes the origins, own- ership, governance, and management of selected central banks, and discusses their main functions and policy tools. Rather than attempting an exhaustive coverage, four case studies are presented, dealing with the Bank of England, the Banque de France, the German Reichsbank, and the Bank of Japan. This is not to deny the excellent work that has been done on central banks in other countries including Belgium, Portugal, 34 9780521899093c03_p34-49.indd 34 9/29/2010 9:52:41 AM.
4 Something for everyone: new central banks, 1900–1939 It has generally been agreed … that when the direction of public finance is in the hands of a ministry responsible to a popularly elected Legislature, a ministry which would for that reason be liable to fre- quent change with the changing political situation, it is desirable that the control of currency and credit in the country should be in the hands of an independent authority which can act with continu- ity … indeed the only practical device for securing this independence and continuity is to set up a Central Bank, independent of political influence. Sir George Schuster , Finance Member of the Viceroy’s Council, 1933 (Simha 1970: 38–9) The central banking gospel was spread far and wide between 1900 and 1939. The Federal Reserve System, which came into operation in 1914, has pride of place in this chapter. However, in the 1920s and 1930s central banks were established in a range of countries in central and eastern Europe, the British empire, and Latin America. The motives of those who set them up were many and various, and indeed they often disagreed over the nature of the benefits that they would confer. Questions of institutional design, governance, and goals proved equally controversial. After 1918, central banking proliferated in the context of global pol- itical and economic turmoil. Post-war instability and reconstruction lasted until the mid 1920s. Following a brief respite, the world economy plunged into depression in the early 1930s, and had barely recovered by the outbreak of the Second World War in 1939. The next two chapters concern the activities of central banks between the wars. Origins of the Federal Reserve System Nineteen thirteen was a decisive year in the history of central bank- ing, the Federal Reserve bill being passed in December. The Federal Reserve System (the Fed), which consisted of twelve regional Reserve 50 9780521899093c04_p50-68.indd 50 9/29/2010 9:53:11 AM.