Bancos centrais antes dos Bancos Centrais: book review - Ulrich Bindseil, Central Banking before 1800: A Rehabilitation (2019) - review by Anthony C. Hotson

 Published by EH.Net (November 2020)

Ulrich Bindseil, Central Banking before 1800: A Rehabilitation. Oxford: Oxford University Press, 2019. xiii + 322 pp. $80 (hardcover), ISBN: 978-0-19-884999-5.

Reviewed for EH.Net by Anthony C. Hotson, Centre for Financial History, University of Cambridge.

 

It is not clear who coined the term “central banking” but it came into common usage in the 1920s with the emergence of national monetary institutions serving an explicit public purpose. Many of these institutions had antecedents as commercial banks and the term provided a means of distinguishing them from the generality of private banks. M. H. De Kock’s influential book published in 1939 suggested that the origins of central banking could be traced back to the nineteenth century with the Bank of England and the Riksbank of Sweden as leading models.

Mainstream views about the function of central banks remained largely unchanged until the 1990s when increased emphasis came to be placed on their role as bulwarks against financial instability. Deregulation in the 1980s had rendered the banking system more competitive and more exposed to the risks of maturity transformation. Central banks were seen to be the saviors of a potentially fragile system, providing liquidity in times of crisis. Modern-day lender of last resort (LOLR) facilities were said to have developed from arrangements established in the late nineteenth century, a key historical antecedent being Walter Bagehot’s advocacy of the Bank of England’s role as LOLR in Lombard Street (1873).

Ulrich Bindseil’s book provides an important contribution to a revisionist history of central banks, suggesting that their origins can be found in institutions sponsored by European city governments — Barcelona, Genoa, Naples, Venice, Amsterdam, Hamburg, Stockholm — from the fifteenth century. Notwithstanding its name, the Bank of England operated as the City of London’s bank during its early years and was popularly known as the Bank of London. The national banking model came later with Napoleon’s creation of the Banque de France in 1800.

Bindseil and the revisionist school argue that proto-central banks set up before 1800 had a civic purpose, usually being owned by a municipality or a charitable foundation. In many cases, these banks enjoyed municipal guarantees. Private ownership developed later, most notably by the Bank of England in the late seventeenth century. The civic banks issued banknotes and pioneered the creation of paper money of undoubted credit standing. Their banknotes were to be distinguished from other forms of mercantile paper — bills and promissory notes issued by the generality of merchants. Banknotes started to displace specie as the main means of mercantile payment and provided a more resilient settlement asset, particularly during credit crises.

A number of civic banks started as full-reserve banks, but fractional reserve banking offered the benefits of a more elastic supply of money and credit. From time-to-time, some banknotes ceased to be convertible (at par) into specie and this could lead to insolvency. There were multiple reasons for a loss of confidence leading to failure, but a well-known one was political pressure to fund the state and favored corporations, beyond prudent bounds. The holy grail was to build and maintain fractional reserve banks that retained public confidence and paper convertibility.

Bindseil demonstrates that civic banks took an eclectic approach to stabilizing credit and facilitating payment. A recurrent theme was the protection of sound merchants from usurers in distressed markets, e.g. the Nürnberg public bank charter of 1498. The Banco di Rialto was established in Venice in 1587 to help stabilize credit. The Bank of Amsterdam was founded in 1609 to facilitate mercantile payments. It was meant to be fully reserved, but it was drawn into municipal lending and loans to the Dutch East India Company. Examples of systemic LOLR support during the eighteenth century include the response of the Hamburg authorities to the financial crisis of 1763, the role of the Bank of England in 1772 and Bank of Amsterdam in 1773. Bindseil’s book includes an excellent annex that provides a catalogue of 25 pre-1800 civic, public and chartered banks that operated as proto-central banks. The overriding point is that there was a longstanding tradition that predates the nineteenth century whereby civic authorities and their banks were willing to pre-empt and mitigate credit crises.

Bindseil cites arguments presented by Ralph Hawtrey (1932) and Paul Tucker (2014) to the effect that “LOLR operations should define central banking.” This is a popular contemporary view, but is it a step too far? By the late nineteenth century London’s commercial banking sector had grown to the point where the Bank of England’s balance sheet lacked the capacity of stabilize credit markets by resort to LOLR alone. The century of stability of London’s money markets from the 1870s until 1971 depended not just on Bagehot’s LOLR but also on an elaborate system of market demarcations between sectors — discount houses, accepting houses, clearing banks and building societies — each with their own trade association with responsibility for maintaining market discipline and cartelized prices. The exponents of deregulation in the 1980s discarded market demarcations and came to rely on state guarantees for LOLR facilities with an overlay of balance sheet regulation focused on capital requirements.

The experience of 2007/8 has led some, including this reviewer, to conclude that reliance on LOLR for maintaining stability is insufficient. Mervyn King’s The End of Alchemy (2016) has suggested a replacement role for central banks as pawnbrokers for all seasons (PFAS). Under the King plan, collateral rules for central bank borrowing would eventually replace bank capital requirements. In some respects, this brings us back full circle to Bindseil’s world of pre-1800 civic banks that lent for the most part against security or self-liquidating bills. A key difference between then and now is the dominance of residential mortgage lending with its heroic levels of maturity transformation. Solving the problem of home finance may require a further evolution in the role of central banks and possibly the reintroduction specialist mortgage lenders subject to their own rules.

Bindseil’s history of early central banking is a refreshing corrective to the mannerist orthodoxy that still prevails. He resists formulaic views about financial developments and embraces the vagaries of market practice, perhaps reflecting his experience as a practitioner in the European Central Bank. There are some editorial lapses — for example, specie money is systematically referred to as “species money” and the metallic fineness of specie as “finesse” — but the thesis of the book is important and the message is clear.

 

Anthony C. Hotson is Deputy Director of the Centre for Financial History and a member of Darwin College, Cambridge. His book, Respectable Banking: The Search for Stability in London’s Money and Credit Markets since 1695, was published by Cambridge University Press in 2017.

Copyright (c) 2020 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator (administrator@eh.net). Published by EH.Net(November 2020). All EH.Net reviews are archived at http://www.eh.net/BookReview.

Autonomia dos Bancos Centrais sob ataque - The Economist editorial

The independence of central banks is under threat from politics

That is bad news for the world

The Economist, Apr 13th 2019

CRITICS OF ECONOMICS like to say that its abstract theories lack real-world pay-offs. There is a glaring counter-example: the global rise of central-bank independence in the past 25 years. In the 1970s it was normal for politicians to manipulate interest rates to boost their own popularity. That led to a plague of inflation. And so rich countries and many poorer ones shifted to a system in which politicians set a broad goal—steady prices—and left independent central bankers to realise it. In a single generation billions of people around the world have grown used to low and stable inflation and to the idea that the interest rates on their bank deposits and mortgages are under control.

Today this success is threatened by a confluence of populism, nationalism and economic forces that are making monetary policy political again. President Donald Trump has demanded that interest rates should be slashed, speculated about firing the boss of the Federal Reserve and said he will nominate Stephen Moore and Herman Cain, two unqualified cronies, to its board. Brexiteers rubbish the competence and motives of the Bank of England, while in Turkey President Recep Tayyip Erdogan has been in a tug-of-war with the central bank. India’s government has replaced a capable central-bank chief with a pliant insider who has cut rates ahead of an election. And as we report this week, many top jobs at the European Central Bank (ECB), including the presidency, are up for grabs, and some could become part of a wider political struggle over who runs Europe’s institutions (see article). There is a genuine need for reflection on central banks’ objectives and tools. But dangerous forces are afoot that could have alarming consequences for economic stability.

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The problem of politicisation last became acute in the 1970s. After the post-war Bretton Woods currency system collapsed, central banks failed to tame racing inflation because politicians, who pulled the strings, were reluctant to bear the short-term cost of higher unemployment. Two decades of runaway prices and crises led to a new orthodoxy that central banks should be given operational autonomy to pursue an inflation target. In the euro zone, Japan and Britain central banks became legally independent in the 1990s. In America the White House refrained from even publicly discussing Fed policy (see Free exchange). This consensus survived the crash of 2007-08 and is one reason why global inflation has been only 4% a year on average over the past two decades.

The fraying of central banks’ independence has several causes. One is populism. Leaders like Mr Trump combine the politician’s desire for low interest rates with a reckless urge to undermine institutions. Another is the scope of central banks’ activities, which expanded after the financial crisis. Most now hold huge portfolios of government bonds while, at the same time policing the financial industry. And the record of central banks is far from perfect. Because they have probably been too hawkish (despite their unconventional policies) the recovery from the crisis has been slow, undermining voters’ faith in the technocrats whose loyalty is supposedly to the public interest. All this makes it easier to view them as political. Meanwhile, the memory of the crises that led to independence has faded.

Pressure is manifesting itself in different ways in different places. Mr Trump has launched an attack on the Fed. Although his legal authority to sack Jerome Powell, its chairman and a Trump appointee, is not clear, if he wins re-election in 2020 he will be able to nominate a new Fed chairman and two more governors. In Europe a flurry of job changes threatens to lower the calibre of decision-making at the ECB and feed underlying disagreements. By the end of the year, three members of the six-strong executive board and eight of the 19 national governors, who also vote on rates, will have left. The most notable of these is Mario Draghi, its head. His departure in October will happen almost concurrently with elections and a change in leadership at the European Commission and Council, a once-in-40-years overlap. Behind the political game of revolving chairs is a battle between countries to control policy. Northern Europeans have been suspicious of the ECB’s bond-buying, seeing it as cover for subsidising southern Europe. Rather than win by force of argument, they are seeking an edge by getting their own people into the top jobs. That will store up problems.

Perhaps global inflation will rise again from its grave, in which case weaker central banks may struggle to kill it off. More likely is an economic downturn. The world economy has decelerated this year—on April 9th the IMF downgraded its forecasts. Central banks may find themselves needing to pep up their economies.

This is what makes today’s politicisation so dangerous. Technocrats face a difficult challenge. The rich world has hardly any room to cut interest rates before hitting zero, so central banks will once again have to turn to unconventional stimulus, such as bond-buying. The Fed and other central banks may also need to co-operate globally, as in the wake of the crisis. The ECB will have to convince markets that it will do whatever it takes to contain another financial panic on Europe’s periphery. The presence of political appointees, who are either ill-qualified or northern European hawks, would make all these tasks harder. It is not just that their votes count, but also that they would poison the public debate about what central banks should and should not do to deal with recessions.

The talking cure

It is right that the objectives and tools of monetary policy are subject to democratic scrutiny and that central bankers are accountable to legislatures. The Fed is reviewing its target in order to be prepared for a downturn. Other central banks should follow suit. In the long run, this secures their legitimacy and hence their independence. Yet in today’s political environment it is naive to think that politicians really want a considered debate. Instead, the more central banks are in the limelight, the more they will find their month-to-month decision-making subject to external pressure, or find themselves at the whim of boards packed with hacks. It is just that sort of politicisation that the theorists behind independent central banks wanted to avoid. Look back 40 years and you will get a flavour of what could go wrong.

This article appeared in the Leaders section of the print edition under the headline "Interference Day"

Bancos Centrais: book review by Gary Richardson

Michael D. Bordo, Øyvind Eitrheim, Marc Flandreau and Jan F. Qvigstad, editors, 

Central Banks at a Crossroads: What Can We Learn from History? 

New York: Cambridge University Press, 2016. xix + 697 pages. 

$155 (hardback), ISBN: 978-1-107-14966-3.

Reviewed for EH.Net by Gary Richardson, Department of Economics, University of California – Irvine.

This volume presents the results of a multi-team, multi-disciplinary research project that was inspired by the bicentennial of the Norges Bank, the Norwegian Central Bank. In the summer of 2012, the editors commissioned a broad range of research from fourteen teams of coauthors. The researchers included renowned international academics as well as policymaking experts. Representatives of all teams presented initial drafts of their research at a conference in Geneva in April 2013 at the Graduate Institute of International and Development Studies. After receiving comments and revising, the authors presented again in June 2014 at a Norges Bank conference titled Of the Uses of Central Banks: Lessons from History. The authors revised their papers once again, to accommodate comments by discussants and editors, and submitted final drafts for publication the following March.

The volume (and the research program which it encapsulates) asks broad questions about the past, present, and future of central banks. Why did the evolve? Will they continue to evolve in the future? What functions do they serve today? How are they structured as institutions? Why are central banks in developing nations so similar? In what ways do they differ? How are they structured as institutions? What are their roles in the international monetary system and among domestic political institutions? What lessons does history have for current and future practitioners of central banking and what does current practice reveal about central banks’ history and evolution?

The book divides the chapters into four groups. The first group provides historical perspectives on the central bank as an institution. This group includes five chapters.

• Chapter 2. “The Descent of Central Banks (1400-1815)” by William Roberds and François R. Velde.
• Chapter 3. “Central Bank Credibility: An Historical and Quantitative Exploration” by Michael D. Bordo and Pierre L. Siklos.
• Chapter 4. “The Coevolution of Money Markets and Monetary Policy, 1815-2008” by Clemens Jobst and Stefano Ugolini.
• Chapter 5. “Central Bank Independence in Small Open Economies” by Forrest Capie, Geoffrey Wood, and Juan Castañeda.
• Chapter 6. “Fighting the Last War: Economists on the Lender of Last Resort” by Richard S. Grossman and Hugh Rockoff.

The second group examines central banks as part of the international monetary system. This group includes four chapters.

• Chapter 7. “A Century and a Half of Central Banks, International Reserves and International Currencies” by Barry Eichengreen and Marc Flandreau.
• Chapter 8. “Central Banks and the Stability of the International Monetary Regime” by Catherine Schenk and Tobias Straumann.
• Chapter 9. “The International Monetary and Financial System: A Capital Account Historical Perspective” by Claudio Borio, Harold James and Hyun Song Shin.
• Chapter 10. “Central Banking: Perspectives from Emerging Economies” by Menzie D. Chinn.

The third group examines central banks as part of a system of regulatory, monetary, and fiscal institutions within a nation. A focus is delineating central banks from other institutions and describing central banks’ powers and limitations. This group contains three chapters.

• Chapter 11. “The Evolution of the Financial Stability Mandate from its Origins to the Present Day” by Gianni Toniolo and Eugene N. White.
• Chapter 12. “Bubbles and Central Banks: Historical Perspectives” by Markus K. Brunnermeier and Isabel Schnabel.
• Chapter 13. “Central Banks and Payment Systems: The Evolving Trade-off between Cost and Risk” by Charles Kahn, Stephen Quinn and Will Roberds.

The fourth group describes central banks from a practical perspective. It contains two papers that describe what central banks do well, what they do poorly, and how their successes and failures lead to gradual changes in central banks’ structure and mission.

• Chapter 14. “Central Bank Evolution: Lessons Learnt from the Sub-prime Crisis” by C. A. E. Goodhart.
• Chapter 15. “The Evolution of Central Banks: A Practitioner\’s Perspective” by Andrew G. Haldane and Jan F. Qvigstad.

The introductory chapter provides a clear and comprehensive summary of the chapters. You can read the introduction for free on the Cambridge University Press web site, so I will not summarize that material here. But, I will encourage you to read it. The introduction does a great job of discussing the big questions that still need to be answered about central banks. It explains that the basic story of central banks is to worry about monetary stability in normal times and about financial stability during crises. It also describes their evolution over the long term, hundreds of years, and explains that central banks’ structure and functions have co-evolved along with the structure of the economy.

The quality of the remaining chapters is uniformly high. Researchers interested in the history of central banks may be interested in the entire book. Specialists may want to focus on individual chapters. In my undergraduate course on the history of the Federal Reserve, I now assign portions of Chapters 2 and 4, which examine the evolution of central banking around the world from the fifteenth through the nineteenth centuries; Chapter 7, which discusses the structure of the international financial system and international currencies; Chapter 11, which discusses central banks’ role as a financial supervisor; and Chapter 13, which discusses central banks and payment systems. I have incorporated ideas and visuals from those chapters and several others into my courses’ power point presentations. An example comes from Chapter 15, which does a good job of discussing the dual long-run objectives of central banks, monetary and financial stability. The chapter highlights the interaction between the two, the value of policy independence in pursuing both, and the challenges that arise as the economy evolves and policy-makers struggle to find the right long-run balance and tradeoffs between their multiple objectives. Chapter 15 illustrates these issues with the history of the Bank of England and the Norges Bank. I teach a course on the history of the Federal Reserve, so I have taken ideas from this chapter and use them to frame material about the Fed which I present in my class.

I expect this volume will have lasting value because of the quality of its chapters. The chapters cover a broad range of topics, time, and geography, but return to consistent themes. The chapters are well written and suitable for a broad audience including researchers at universities and central banks but also policymakers and undergraduates who are interested in the topic.

Gary Richardson is the author of “Monetary Intervention Mitigated Banking Panics during the Great Depression: Quasi-Experimental Evidence from a Federal Reserve
District Border, 1929-1933,” Journal of Political Economy (2009). He was the editor for the Federal Reserve’s historical website, which can be found at www.federalreservehistory.org.

Copyright (c) 2018 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator (administrator@eh.net). Published by EH.Net (July 2018). All EH.Net reviews are archived at http://www.eh.net/BookReview.

Preocupado com o cambio? Aqui uma licao completa, com exemplos do dolar e do euro - Frank Shostak (Mises Daily)

With Currency, Everything Is Relative
by Frank Shostak
Mises Daily, April 27, 2016

At the end of March the price of the euro in terms of US dollars closed at 1.1378. This was an increase of 4.7 percent from February when it increased by 0.3 percent. The yearly growth rate of the price of the euro in US dollar terms jumped to 6 percent in March from minus 2.9 percent in February.


What Determines a Currency’s Value?

According to most experts currency rates of exchange appear to be moving in response to so many factors that it makes it almost impossible to ascertain where the rate of exchange is likely to be headed.

Rather than paying attention to the multitude of factors, though, it is more sensible to focus on the essential variable.

As far as the currency rate of exchange determination is concerned, this variable is the relative changes in the purchasing power of various monies.

It is the relative purchasing power of various monies that sets the underlying rate of exchange.

A price of a basket of goods is the amount of money paid for the basket. We can also say that the amount of money paid for a basket of goods is the purchasing power of money with respect to the basket of goods.

If in the US the price of a basket of goods is one dollar, and in Europe an identical basket of goods is sold for 2 euros then the rate of exchange between the US dollar and the euro must be two euros per one dollar.

The Money Supply and Purchasing Power

An important factor in setting the purchasing power of money is the supply of money. If over time the rate of growth in the US money supply exceeds the rate of growth of the European money supply, all other things being equal, this will put pressure on the US dollar.

Since a price of a good is the amount of money per good, this now means that the prices of goods in dollar terms will increase faster than prices in euro terms, all other things being equal.

Price Changes Do Not Occur All at Once, or Evenly

Changes in a local money supply affect its general purchasing power with a time lag, and this means that changes in relative money supply affect the currency rate of exchange also with a time lag.

When money is injected into the economy it starts with a particular market before it goes to other markets. This is the reason for the lag.

When it enters a particular market it pushes the price of a good in this market higher. More money is spent on given goods than before.

This in turn means that past and present information about the money supply can be employed in ascertaining likely future moves in the currency rate of exchange.

The Demand for Money

Another important factor in driving the purchasing power of money and the currency rate of exchange is the demand for money. For instance, with an increase in the production of goods the demand for money will follow suit.

The demand for the services of the medium of exchange will increase since more goods must now be exchanged. As a result, for a given supply of money, the purchasing power of money will increase. Less money will be chasing more goods now.

Various factors, such as the interest rate differential, can cause a deviation of the currency rate of exchange from the level dictated by relative purchasing power. Such deviations, however, will set corrective forces in motion.

The Role of Central Banks

We saw earlier that if the price of a basket of goods in the US is one dollar and in Europe two euros, then according to the purchasing power framework the currency rate of exchange should be one dollar for two euros.

But, let us now say that the Fed raises its policy interest rate while the European central bank keeps its policy rate unchanged.

As a result of the widening in the interest rate differential between the US and the euro zone, the resulting increase in the demand for dollars pushes the exchange rate in the market toward one dollar for three euros.

This means that the dollar is now overvalued when compared to the relative purchasing power of the dollar versus the euro.

Demand for a Currency Is Affected by Attempts to Gain from Arbitrage

As long as this situation endures, it will pay to sell the basket of goods for dollars, then exchange dollars for euros, and then buy the basket of goods with euros — thus making a clear arbitrage gain. For example, individuals could sell a basket of goods for one dollar, exchange the one dollar for three euros, and then exchange three euros for 1.5 baskets, gaining 0.5 of a basket of goods.

The fact that the holder of dollars will increase his/her demand for euros in order to profit from the arbitrage will then make euros more expensive in terms of dollars — pushing the exchange rate back in the direction of one dollar for two euros. An arbitrage will always be set in motion if the rate of exchange deviates, for whatever reasons, from the underlying rate of exchange.

All of these factors continue to affect the relative value of the US dollar to the euro. Relative to the euro, however, the US dollar is growing in value as the euro declines. After closing at 5.5 percent in June 2014, the money growth differential between the US and the euro zone fell to minus 4.8 percent in February this year. This means that relative to the euro zone, US money growth has weakened significantly. From a monetary perspective, this suggests the US dollar will continue to increase in value against the euro in the months ahead, all other things being equal.