Abstract
This chapter examines the evolution of central banks as powerful institutions in the international economic system, and reviews the political and economic context of international policy cooperation since the ‘first globalization’ in 1876–1914. The chapter claims that central banks’ cooperation has led to a new paradigm of ‘monetary peace’ in the aftermath of the ‘Great Recession’ in 2007–9. Assuming that the ‘Great Depression’ of the 1930s has taught hard lessons to the world, this chapter examines the institutional arrangements that shaped monetary policy and led to the successful implementation of ‘monetary peace’ by the leading central banks (mainly Fed and ECB) following the Great Recession.
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Notes
- 1.
See Psalidopoulos (2014, p. 5).
- 2.
See Bernanke (2013, p. 4).
- 3.
- 4.
For an excellent overview of the idea of independence of C.B. (‘The Case for Central Bank Independence’) see Bernanke (2010a, pp. 2–7); Mishkin (2007, pp. 37–42) summarizes ‘seven basic principles that can serve as useful guides for central banks to help them achieve successful outcomes in their conduct of monetary policy.’ These are: price stability, fiscal policy in line with monetary policy, avoiding the problem of time inconsistency between short and long period, forward-looking monetary policy in advance of long lags from actions to their intended effects, accountability as a basic principle of democracy, monitoring of fluctuations in production and prices, prevention and maintaining of financial instability.
- 5.
See Bernanke (2009): ‘This strong and unprecedented international policy response … averted the imminent collapse of the global financial system …’; Greenspan (2013, p. 149) characterizes the financial crisis ‘in the immediate aftermath of the Lehman bankruptcy’ as ‘a once-in-a-century-event ’ and ‘once-in-a-lifetime-event’.
- 6.
See Touffut (2008, p. 1). However, the number of central banks has increased not only because of changes in the international financial and monetary system. Geopolitical developments also played an important role. According to Pollard (2003, p. 11), at the time of the creation of the Federal Reserve of the United States of America (US Fed) in 1913, there were only twenty central banks in the world. Due to two important geopolitical factors, firstly, decolonization which took place in the period after the second world war, and secondly, the collapse and disintegration of the Soviet Union in the early 1990s that led to the establishment of separate former Soviet republics, the number of central banks around the globe reached 172 by the year 1997. One year later, in 1998, the European Central Bank (ECB) was founded as the institutional independent monetary authority for the entire Eurozone.
- 7.
See Psalidopoulos (2014, p. 6).
- 8.
According to Boulding (1972), ‘the uncertainty principle in quantum mechanics (Heisenberg’s Uncertainty Principle) can be generalized and transferred also in the social space. This means that the neoclassical hypothesis for an economic world that is independent (not affected) by the science is completely non-existent. In truth the economic (social) science does not explore just the knowledge of the object, but it also manufactures it.’ (Karantonis 2006, p. 191).
- 9.
For an introduction in Monetary Peace, see our recent paper Vliamos and Gravas (2016).
- 10.
See Karantonis (2006, p. 119).
- 11.
Psalidopoulos (2014, pp. 6–9) summarizes the relevant discussion about the question ‘How to Write a History of a Bank’ based on an academic conference with the participation of the most respective economic and central bank historians who shared their arguments on methodological and research issues.
- 12.
Ibid.
- 13.
The Dodd-Frank Wall Street Reform and Consumer Protection Act is ‘an act to promote the financial stability of the United States by improving accountability and transparency in the financial system, to end “too big to fail”, to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and for other purposes.’ (Congress, Public Law 111–203); ‘The Federal Reserve’s post-crisis efforts to strengthen its regulation and supervision of large banks have focused on promoting the safety and soundness of these firms and on limiting the adverse effects that their distress or failure could have on the financial system and the broader economy. This orientation is consistent with section 165 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), which directs the Board to impose enhanced prudential standards on large banking organizations “in order to prevent or mitigate risks to financial stability”’ (Yellen 2016).
- 14.
See Vliamos (1992, p.5).
- 15.
See Bordo (2007, p. 1).
- 16.
See Buiter (2007, p. 3).
- 17.
In this context, ‘transparency …’ (with the meaning of ‘information disclosure’) which is ‘…the most dramatic difference between central banking today and central banking in earlier historical periods’ (Dincer and Eichengreen 2008, p. 1), led to the strengthening of the institutional role of central banks as a crucial factor preserving financial stability within the International Financial System. ‘Transparency is seen as a key element of accountability in an era of central bank independence’ (Dincer and Eichengreen 2013, p. 2); For an excellent focus on the ‘world’s two most prominent central banks—the Federal Reserve System and the European Central Bank’, see Pollard (2003) and especially for the differences between their respective statutes, monetary goals and tools, see ibid., pp. 19–21.
- 18.
See Vliamos and Gravas (2016, pp. 90 & 101). The crisis began in the United States and threatened the dominant status of the dollar as a global reserve currency. USA, China and Germany had a shared interest to preserve this currency regime. Firstly, the interest of the US to preserve greenback’s ‘exorbitant privilege’ was obvious. Secondly, for China, dollar stability has been vital regarding foreign exchange reserves and SAFE investments in US treasuries; a possible massive selling of both dollars and treasuries to hedge against the exchange rate risk would only accelerate the collapse of the global reserve currency. Thirdly, Germany shared the same interest to prevent the risk of a dollar collapse, because exports would have been significantly hit in case of an (abruptly) overvalued euro as a shadow Deutsche Mark; therefore, Germany cooperated with ‘Chimerica’, a neologism put by Ferguson (2008) to describe the close relationship between China and [the United States of] America.
- 19.
See Kindleberger and Aliber (2015, p. 102).
- 20.
See Psalidopoulos (2014, p. 11); According to Borio and Toniolo (2006, p. 5), ‘With the Reichsbank’s commitment to convert its notes into gold in 1876, the yellow metal became the unchallenged monetary standard of the developed “core” of the world economy. For the following 40-odd years, until the outbreak of World War I in 1914, the “classical gold standard” provided the background for a relatively efficient and stable system of international payments, in an epoch of rapidly expanding commodity trade, record-high labour migration, and free and growing capital mobility, often called the “first globalisation”.’
- 21.
See Eichengreen and Bordo (2002, pp. 3–4).
- 22.
See Eichengreen (1992, p. 5).
- 23.
Ibid., p. 4.
- 24.
See Bernanke (2013, pp. 3–4).
- 25.
See Padoa-Schioppa (2003, p. 272).
- 26.
See Federal Reserve Bank of Minneapolis. ‘A History of Central Banking in the United States’, available at: https://www.minneapolisfed.org/community/student-resources/central-bank-history/history-of-central-banking.
- 27.
See Akerlof and Schiller (2009, p. 206).
- 28.
See Psalidopoulos (2014, p. 58).
- 29.
See Goodfriend (2014, pp. 113 & 118).
- 30.
See Bordo (2007, p. 3).
- 31.
See Goodfriend (2014, p. 119).
- 32.
For a historical review of the political and economic developments that led to the Maastricht Treaty and the birth of the European System of Central Banks and the Euro, see Issing (2008, pp. 22–26).
- 33.
- 34.
See the ECB’s official website, https://www.ecb.europa.eu/ecb/html/index.en.html; For the ECB’s monetary policy strategy (general principles and key elements), see ECB (2011, pp. 62–64).
- 35.
Friedman, M., & Schwartz , A. (1963). A Monetary History of the United States, 1867–1960.
- 36.
See Borio & Toniolo (2006, p. 8).
- 37.
See Borio and Toniolo (2006, pp. 6 and 25–26).
- 38.
Eichengreen (2013a) discusses the issue of ‘Currency war or international policy coordination?’; See also other works of Eichengreen , Eichengreen & Sachs, Reinhart & Rogoff , Taylor; See references in Vliamos and Gravas (2016); Interestingly, in a recent blog-post , Bernanke (2016) finds ‘little support for the claims that the Fed’s monetary policies of recent years has engaged in currency wars’.
- 39.
They examine the average statistics across twenty-two advanced countries.
- 40.
See Lo and Rogoff (2015, p. 9).
- 41.
For an excellent analysis, see the chapter ‘Monopoly No More’ in Eichengreen (2011, pp. 121–153).
- 42.
See Mundell (2012).
- 43.
Bernanke (2016) separates Fed’s monetary policy to tackle the Great Recession, from the classic interpretation of ‘currency wars’.
- 44.
The Plaza Accord ‘was probably the most dramatic policy initiative in the dollar foreign exchange market since Richard Nixon originally floated the currency in 1973. [… ] US officials and their counterparts among the Group of Five largest industrialized countries [G-5] agreed to act to bring down the value of the dollar. Public statements from the officials were backed up by foreign exchange intervention, selling dollars in exchange for other currencies in the foreign exchange market. The Plaza is justly celebrated as a high-water mark of international policy coordination’ (Frankel 2015).
- 45.
See Eichengreen (2008, p. 147).
- 46.
See also King (2015a).
- 47.
‘One definition of an institution is a set of durable rules and understandings shaping expectations, interests, and behaviors—rules and understandings that can range from informal norms to formal obligations for what constitutes acceptable behavior and that are sometimes embodied in an organization, sometimes not’ (Eichengreen 2013b, p. 44).
- 48.
Ibid.
- 49.
In the following analysis we draw heavily on facts and arguments presented in Eichengreen (2013b, pp. 52–71).
- 50.
Ibid., p. 53.
- 51.
Ibid., p. 54.
- 52.
Ibid., p. 55.
- 53.
See Buiter (2007, p. 1).
- 54.
See Eichengreen (2013b, pp. 70–71).
- 55.
See Issing (2011, p. 748).
- 56.
Interestingly, Eichengreen (2013b, p. 61) refers to the Gold Pool arrangement at the beginning of the 1960s, ‘through which the European members committed to reimbursing the reserve-currency country, the United States, for a portion of its gold losses’. Although this ad hoc rather than fully institutionalized arrangement ‘did not resolve the fundamental contradictions of the gold-dollar system, it bought time to seek a permanent solution.’ As Eichengreen states, ‘the contrast with the early 1930s is apparent. On both occasions there was an established international monetary and financial system in whose preservation the leading countries had a shared interest. But, in contrast with the high tensions of the 1930s, the principals this time were allies in the Cold War’.
- 57.
See Federal Open Market Committee (2012, pp. 7–8).
- 58.
Particularly because this happened one year after the replacement of Jean-Claude Trichet, head of the ECB in 2011, by current ECB chairman Mario Draghi who is considered to belong to the same school of economic thought with both former Fed president Bernanke and his successor Janet Yellen.
- 59.
- 60.
See De Grauwe (2013, p. 520); For the pressure on the central bank to support government bond prices, see also Eichengreen et al. (2011, p. 24); From an alternative point of view, Kindleberger and Aliber (2015, p. 229) argue that ‘in effect, the ECB has moved beyond the role of a lender of last resort and become an informal deposit insurance agency.’ In this sense, one can assume that the ECB functioned as a hybrid of both the Fed and the FDIC (Federal Deposit Insurance Corporation).
- 61.
See Schadler (2016, p. 3).
- 62.
- 63.
See Xafa (2014, p. 14); ‘The Greek case is quite unique in the sovereign debt
Literature … The debt sustainability criterion was waived based on
the systemic concerns arising from spillover risks if the program was not approved.’ (Ibid., p. 12 & 14).
- 64.
See IMF (2010a).
- 65.
See Vliamos & Gravas (2016, pp. 100–101).
- 66.
See Goodhart (2010, pp. 5–6).
- 67.
Ibid., p. 15.
- 68.
Commenting on Goodhart (2010), Stanley Fisher stresses the benefits of having an independent central bank which can take an apolitical view of what is good for the economy longer term. ‘One interpretation is that even an independent central bank needs to get used to the idea of working cooperatively with the government in those areas that are of mutual concern, while jealously guarding its independent right to make key decisions according to the authority granted it under the law. If not, the benefits of having a central bank that can take a longer term and apolitical view of what is good for the economy and take actions in support of that view will be lost – and that would be a costly mistake’ (p. 19).
- 69.
See Vliamos and Gravas (2016).
- 70.
- 71.
The most influential expression of this view is Kindleberger (2013).
- 72.
See Bernanke (2015, pp. 417–421), where the former Fed chairman refers to the ‘US Treasury Large-Scale Asset Purchase Program’ which, in his view, defers in many respects from the classic term ‘quantitative easing’ known from Japan experience.
- 73.
For a detailed review of academic literature, see the paragraph ‘Monetary peace: the interest rate conundrum’ in Vliamos and Gravas (2016).
- 74.
For the international role of the dollar, see also Krugman (1984).
- 75.
See Mundell (1961).
- 76.
See European Commission (2014).
- 77.
- 78.
See ECB (2017).
- 79.
See Yellen (2017).
- 80.
‘…even as the Federal Reserve continues prudent planning for the ultimate withdrawal of extraordinary monetary policy accommodation, we also recognize that the economic outlook remains unusually uncertain.’
- 81.
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Vliamos, S., Gravas, K. (2018). The International Financial System and the Role of Central Banks in the Great 2007–9 Recession and the ‘Monetary Peace’. In: Vliamos, S., Zouboulakis, M. (eds) Institutionalist Perspectives on Development. Palgrave Studies in Democracy, Innovation, and Entrepreneurship for Growth. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-319-98494-0_10
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