Introduction Between ‘a Science’ and ‘an Art’: Central Banks and the Political Economy of Money

  • Pierluigi Ciocca

Abstract

From the very beginning of industrial capitalism the evolution of the concept of monetary policy has clearly, though not always closely, paralleled that of both economic theory and central banking practice. The advances still considered fundamental for the regulation of money were coupled with equally important steps forward in monetary and credit analysis.

Keywords

Depression Europe Income Explosive Assure 

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Notes

  1. 1.
    The passage in question is well worth quoting in full: ‘If the subject of central banking is classed as an art and not as a science, it is not for that reason any the less scientific. The art of central banking is practical in that it teaches how to use a power of influencing events. It is concerned, not merely with the relation of cause to effect, but with the relation of means to end. But there is no less scope for systematic reasoning in the study of means than in the study of causes. The pursuit of wisdom is as scientific as the pursuit of truth. Economic theory, in every branch, deals with practical affairs. Its subject is human welfare, and it is never entirely dissociated from the practical question of how human welfare is to be promoted. But it is a special characteristic of the art of central banking that it deals specifically with the task of an authority directly entrusted with the promotion of human welfare. Human welfare, human motives, human behaviour supply material so baffling and elusive that many people are sceptical of the possibility of building a scientific edifice on so shifting a foundation. But however complex the material, and however imperfect the data, there is always an advantage to be gained from systematic thought. We may have to be satisfied with probabilities, but we can at any rate see to it that our probabilities make the most of the data we have’, R. G. Hawtrey, The Art of Central Banking (London: Longman, Green, 1932) pp. vi–vii.Google Scholar
  2. 2.
    The central bank was founded in Sweden in 1668, in England in 1694, in France in 1800, in Holland in 1814, in Austria in 1817, and in Belgium in 1850. The Reichsbank (since 1957 the Bundesbank) was set up in 1875, the Bank of Japan in 1882, the Bank of Italy in 1893 and the US Federal Reserve System in 1913. Among the many works in this field, see the summary comparative study by M. Fanno, Le banche e il mercato monetario (Rome: Athenaeum, 1912); see also V. C. Smith, The Rationale of Central Banking (London: King, 1936); M. H. de Kock, Central Banking (London: Crosby Lockwood Staples, 1974); R. S. Sayers, ‘Banking, Central’, International Encyclopedia of Social Sciences (New York: Collier & Macmillan, 1968) vol. II.Google Scholar
  3. 3.
    ′The case for giving to the central bank some special constitutional position rests on the fact that it is the creator of cash, and thereby offers standing temptation to improvident governments. The advantages which such governments enjoy, when they resort to easy finance at the central bank, are immediate and obvious; the disadvantages are not so readily perceived, but in the long run they are cumulative and can be disruptive to economic society. In recognition of this, most countries (including our own) have not been willing to reduce their central banks to the position of an ordinary department of government. The need to integrate the policy of the central bank with the broad economic policy of the government is generally accepted, but the central bank retains a special status which is something rather more than freedom to conduct its daily technical operations unhindered. It is rather, in the words of an outstanding Governor of the Bank of England, that the central bank has “the unique right to offer advice and to press such advice even to the point of nagging; but always of course subject to the supreme authority of the Government”, R. S. Sayers, Modern Banking (Oxford: Clarendon Press, 1967) p. 67.Google Scholar
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    R. S. Sayers, ‘Banking, Central’, p. 6.Google Scholar
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    For an interpretation in this sense of Thornton’s major work, see J. R. Hicks, ‘Thornton’s “Paper Credit” (1802)’, in Critical Essays in Monetary Theory (Oxford: Clarendon Press, 1967) especially pp. 181‐8.Google Scholar
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    D. Ricardo, ‘The High Price of Bullion: A Proof of the Depreciation of Banknotes’, in P. Sraffa (ed.), Works and Correspondence of David Ricardo (Cambridge: Cambridge University Press, 1951) vol. III, pp. 94–5.Google Scholar
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    See the survey by V. C. Smith, The Rationale of Central Banking, which, though full of sympathy for the pluralist view, is thorough and penetrating. This book does not deal with Italy, even though the debate there was no less exhaustive and actually lasted longer than in other countries because of the survival of several banks of issue and the strength of regional forces. A useful bibliographical guide to the period after the unification of Italy is to be found in E. Vitale, La riforma degli istituti di emissione e gli ‘scandali bancari’ in ltalia 1882–1896 (Rome: Chamber of Deputies, Historical Archive, 1972). Among the writings of the politicians involved, the most interesting and lucid is that by C. Cavour, Discorso sui progetto di Iegge per I’ affidamento del servizio di Tesoreria generale dello Stato alia Banca Naziona/e (14 novembre 1853), in Nuova Collana di Economisti Stranieri e Italiani, A. Garino Canina (ed.), Economisti italiani del Risorgimento (Turin: UTET, 1933) vol. II, pp. 214–29.Google Scholar
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    Quoted in W. Bagehot, Lombard Street: A Description of the Money Market (London: King, 1873) pp. 170–1. The data on the Bank of England’s loans on private securities are given on p. 62.Google Scholar
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    In his Lombard Street Bagehot actually talks of ‘raising’ and ‘very high’ interest rates ( cf., for example, the passage on p. 56 quoted above) exclusively as the means of countering a foreign drain. The view upon which this reasoning is based is that if the risk of capital outflows were eliminated, a domestic drain would require unchanged or lower interest rates. However, see T. M. Humphrey, ‘The Classical Concept of the Lender of Last Resort’, for the opposite view.Google Scholar
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    J. M. Keynes, The General Theory of Employment, Interest and Money (London: Macmillan, 1936) pp. 32–4. The only qualification to this view is that the critical approach which Keynes identified with the principle of effective demand survived, after Malthus, in the ‘clandestine’ analyses of Marx, Gesell and Douglas. See also N. Kaldor’s The Scourge of Monetarism (Oxford: Oxford University Press, 1982) p. 19.Google Scholar
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  44. 44.
    ‘I hold that prices vary directly with the volume of currency, if other things are equal; but other things are constantly changing. This socalled “quantity theory of the value of money” is true in just the same way as it is true that the day’s temperature varies with the length of the day, other things being equal; but other things are seldom equal’, A. Marshall, ‘Evidence before the Indian Currency Committee (1899)’, in Official Papers by Alfred Marshall (London: Macmillan, 1926) p. 267.Google Scholar
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    M. Desai, Testing Monetarism (London: Pinter, 1981) p. 35. Schumpeter had arrived at a similar conclusion: ‘ ... the chief progress of monetary theory in more recent times has been the result of a tendency to tear up the straitjackets and to introduce explicitly and directly all that the best presentations of the quantity theory relegated into the limbo of indirect influences’, History of Economic Analysis, p. 1106.Google Scholar
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    Committee on the Working of the Monetary System, Report (London: HMSO, 1959) paragraphs 514 and 389 respectively.Google Scholar
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    ‘I believe that negotiation of some kind of national wage structure, conceived in terms of relative wages, at least for the most important sections of labour, is an essential prerequisite to securing ... a tolerable behaviour of the absolute wage level . . . Essentially it would be a matter for negotiation between trade unions, and to some extent within trade unions. It ... would call for strong direction inside the trade‐union movement’, R. Kahn, Selected Essays, pp. 143–4 (my italics).Google Scholar
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    Any selection of critical surveys of the main results of the research in this field is bound to be arbitrary, even if its purpose is purely bibliographical. It is none the less impossible to omit those sponsored between 1957 and the early 1960s by the Royal Economic Society in the UK and the American Economic Association in the USA. For a summary discussion of the leading large‐scale econometric models constructed in the USA, see M. D. Intriligator, Econometric Models, Techniques and Applications (Amsterdam: North Holland, 1978) ch. 12. The most important example in Italy is the model constructed by the Bank of Italy; see the first description by Guido Carli in Vincoli nella politica economica italiana, a lecture given on 7 February 1970 at the Economics Faculty of the University of Parma in Brescia.Google Scholar
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    An overview of this vast subject together with a preliminary bibliographical guide is to be found in P. Ciocca, Interesse e Profitto (Bologna: II Mulino, 1982). Among subsequent works that by G. Nardozzi, Tre sistemi creditizi (Bologna: II Mulino. 1983) deserves mention for its comparative insights.Google Scholar
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    On the importance of tradition in the political and institutional ‘legitimization’ of central bank see the fine essay by K. E. Boulding, The Legitimacy of Central Banks’, in Reappraisal of the Federal Reserve Discount Mechanism (Washington: Board of Governors of the Federal Reserve System, 1971).Google Scholar
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    In this connection one of the most sensible and effective criticisms of the hypothesis of predetermined monetary rules is by a member of the Chicago School. See J. Viner, ‘The Necessary and the Desirable Range of Discretion to be Allowed to a Monetary Authority’, in L. B. Yeager (ed.), In Search of a Monetary Constitution. Google Scholar
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    Cf., for example, H. G. Johnson, ‘Should there be an Independent Monetary Authority?’, in W. L. Smith and R. L. Teigen (eds), Readings in Money, National Income and Stabilization Policy (Homewood: Irwin, 1965).Google Scholar
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    For an echo of this view in Italy, though primarily with reference to the institutional order of Western Germany, see M. Monti, ‘Più autonomia monetaria, meno poteri fiscali “occulti’”, Politica ed economia, no. 1, 1983., The case is based on an interpretation of the ‘constitutional’ position of the Bundesbank that a large part of German legal scholarship itself rejects or qualifies, especially since the promulgation of the Stabilitiitsgesetz in 1967. On the legal aspects of this question, see: R. Schmidt, ‘La banca centrale della Repubblica federale tedesca: aspetti costituzionali’, Rivista Trimestrale di Diritto Pubblico, 1982; F. Merusi, ‘L’indipendenza della banca centrale nel dibattito della dottrina costituzionale tedesca’, Scritti in onore di Ugo Caprara (Milan: Vallardi, 1975) vol. III; S. Ortino, ‘La Bundesbank e Ia Iegge sulla stabilità economica’, Economia Pubblica, April 1975.Google Scholar
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    ‘ ... independence, looked at practically, is a matter of degree, not of black and white’, G. L. Bach, ‘Federal Reserve Organization and Policy‐making’, in W. L. Smith and R. L. Teigen (eds), Readings in Money, p. 239.Google Scholar
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    ‘Viner after Aristotle’, in J. Viner, The Necessary and Desirable Range of Discretion’, p. 274.Google Scholar

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© Palgrave Macmillan, a division of Macmillan Publishers Limited 1987

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  • Pierluigi Ciocca

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