Abstract
Today, central banks are independent agencies which make part of the public sector. This particular institutional arrangement is recent, and potentially fragile: other equilibria are arguably possible, ranging from complete “internalization” by the government to complete “externalization” to the private sector. In order to understand the determinants of changes in such institutional equilibria, it is appropriate to adopt a functional approach. This means focusing not on the evolution of central banks as organizations, but on the evolution of the provision of central banking functions. Central banking functions arguably consist of two microeconomic functions aimed at fostering financial stability (viz., the management of the payment system and banking regulation), as well as two macroeconomic functions aimed at fostering monetary stability (viz., money creation and monetary policy).
Whoever wants to come to a good and sound conclusion must not make up his mind before paying attention to all arguments, or (as the say goes) “bring the verdict to Senate from home”; rather, while leaving his judgment pending and not leaning more in one direction than in the other, he must listen impartially to everything that is being said, scrutinize every opinion, and – dispassionately and unbiasedly – invoke and embrace God’s enlightenment.
Tommaso Contarini , Speech to the Venetian Senate in Support of the Creation of a Public Bank, 28 December 1584 (quoted in Lattes (1869, p. 118), my translation).
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Notes
- 1.
See, for example, Siklos (2002).
- 2.
See, for example, Bindseil (2004).
- 3.
Borio (2014, p. 191).
- 4.
Davies and Green (2010).
- 5.
Qvigstad (2016, pp. 124–155).
- 6.
Goodhart (1988). The first edition of the book was published in 1985.
- 7.
Hayek (1978).
- 8.
Smith (1990). This book consists of Vera Smith ’s doctoral dissertation (supervised by Hayek ); originally published in 1936, it only started to gain popularity after the author’s death in 1976.
- 9.
White (1989). This volume collects the essays the author had been publishing in the preceding years.
- 10.
Timberlake (1984).
- 11.
In a nutshell: “The crucial feature necessary to allow a Central Bank to carry out, in full, its various functions , e.g., of maintaining financial discipline, providing support at times of crisis, is that it should become above the competitive battle, a noncompetitive , non-profit-maximizing body. This was not generally recognized at the outset. In the first half of the nineteenth century, the key feature of a Central Bank was seen to reside in its relationship with government and its privileged position as (monopolistic ) note issuer: but in its banking function, it was often widely considered that it was, and should act as, just one competitive bank among many. This concept of a Central Bank’s role was codified in the 1844 Bank of England Act . But this was, as argued above, an incorrect, indeed faulty, concept, and, I would argue, true Central Banking did not develop until the need for the Central Banks to be noncompetitive had become realized and established. This metamorphosis occurred slowly and by trial, error, and debate in England in the last half of the nineteenth century, in some large part following the prompting of Bagehot . It was a difficult transition […]”: Goodhart (1988, pp. 45–46, my emphasis).
- 12.
For a discussion of Goodhart ’s contribution to the literature on the evolution of central banks, see Uittenbogaard (2015, pp. 11–29).
- 13.
Goodhart had been with the Bank of England from 1968 to 1985 and has remained a prominent figure in central banking circles since: Goodhart (1988, pp. vii–viii).
- 14.
See esp. the “universal” survey of central bank history provided by Capie et al. (1994), which remains a benchmark reference in the literature.
- 15.
Clapham (1944).
- 16.
Morgan (1943).
- 17.
King (1936).
- 18.
- 19.
Gregory (1929).
- 20.
Bagehot (1873).
- 21.
Goodhart (1988, p. 46).
- 22.
Fetter (1965).
- 23.
Wood (1939).
- 24.
Bagehot (1867).
- 25.
Bagehot (1872).
- 26.
Hodgson (2004).
- 27.
- 28.
To be precise, Charles Darwin did not put forward himself this idea, which was rather coined in the social sciences by Herbert Spencer : Hudson (2000, p. 535).
- 29.
The “survivor bias ” is the error of taking into account only continued processes while ignoring discontinued ones.
- 30.
“We are aware that blind forces are not at work here [in the evolution of central banking], but human beings grappling for solutions to problems they perhaps do not fully understand. Nor do we necessarily think that all hillclimbing algorithms find the global optimum: where one arrives often depends on initial conditions and on the path followed. […] Central banking involves a sort of alchemy, and what we see in our history is a search for the right formula. We do not conclude that it has been found; if anything, we are left with a sense that the search continues”: Roberds and Velde (2016, pp. 19–20).
- 31.
Giannini (2011). The Italian version of the book had been published posthumously in 2004.
- 32.
Giannini was with the Banca d’Italia from 1983 to 2003, when he passed away: Giannini (2011, pp. viii–ix).
- 33.
In a nutshell: “With the industrial revolution and virtually contemporaneous development of the representative state a structural split occurred. On the one side, as the economic circuit became increasingly complex it fuelled the social incentive to develop more flexible payment procedures. On the other side, under the new political and institutional framework monetary institutions could, for the first time, develop outside the control of the prince. Any attempt to move beyond commodity money , even in its most advanced form of coinage , must entail an intermingling of money circuit and credit circuit. […] The intermingling of money and credit circuit thus set in motion a long and somewhat tortuous process of institutional adaptation centred around the figure of the central bank”: Giannini (2011, pp. xxvi–xxvii).
- 34.
The word “institutional” is used in economics with plenty of different meanings. Here I follow Merton and Bodie (1995) and use it merely as opposed to the word “functional”—with no other implication.
- 35.
Capie et al. (1994, p. 5).
- 36.
See, for example, Joplin (1837, pp. 22 and 38).
- 37.
- 38.
This is encapsulated by Grossman ’s (2010, pp. 42–44) claim that before the 1870s central banks did not exist as “there was no accepted concept of a central bank,” and that only thanks to Bagehot “the modern concept of central bank began to gain widespread acceptance.” This idea is extensively enunciated by Capie (2002). Also see Siklos (2002, p. 10) and Davies and Green (2010, p. 11).
- 39.
Bignon et al. (2012).
- 40.
See Sect. 1.1.3.
- 41.
- 42.
See, for example, the eighteenth-century debate between supporters of banks of issue and supporters of giro banks : Gillard (2004).
- 43.
This concerns the origin of the word “bank” in English. According to the standard interpretation, “bank” would derive from the Italian equivalent for “bench”, meaning the counter over which medieval moneychangers used to deal their transactions: this would appear consistent with the idea that central banks were created to fix problems with the payment system . Such an interpretation, however, has been questioned by some, according to whom “bank” would rather derive from the Germanic equivalent for “cliff”, meaning the amount (the joint stock) of public debt handled by the institution—which would correspond to the Italian word “monte” rather than “banco”: this would appear consistent with the idea that central banks were created to monetize government deficits : Conant (1909, pp. 8–9).
- 44.
For a discussion on the application of the functional approach to the analysis of financial systems, see Merton and Bodie (1995). The functionalist approach to social systems has been particularly promoted by sociologist Robert K. Merton ; it has been extended to financial systems by economist Robert C. Merton , son of the former.
- 45.
Central Bank Governance Group (2009).
- 46.
See Oliver Sprague ’s chapter on central banks in the third (accrued) edition of Charles Dunbar ’s Theory and History of Banking: Dunbar (1917, pp. iii and 85–86).
- 47.
A partial survey of the literature can be found in Singleton (2011, pp. 4–5).
- 48.
For a critical discussion on the epistemological relevance of “Occam’s razor ”, see, for example, Walsh (1979).
- 49.
For instance, Singleton (2011, pp. 5–11) finally proposes a list of nine functions (plus a tenth category of “other functions”). Some of these, however, are tailored to some peculiar twentieth-century condition that did not exist in other settings: this is the case of function number 9 (“participating in cooperative international agreements”), which was not an issue before 1914: Flandreau (1997). Some others can reasonably be merged: this is the case of function numbers 2 (“implementing monetary policy ”) and 6 (“managing foreign reserves and exchange rate targets”), which can be seen as two aspects of the same function. As Singleton (2011, pp. 10–11) himself does recognize, redundancy gives scope for inconclusive discussions about which functions are core and which ones are peripheral.
- 50.
See, for example, Issing (2003).
- 51.
Here I refer particularly (although not exclusively) to the list of central banking functions that the Federal Reserve understood (as of 1983) to have been entrusted by lawmakers since its foundation: “The Congress has over the last 70 years authorized the Federal Reserve (a) to be a major participant in the nation’s payments mechanism , (b) to lend at the discount window as the ultimate source of liquidity for the economy, and (c) to regulate and supervise key sectors of the financial markets, both domestic and international. These functions are in addition to, and largely predate, the more purely “monetary” functions of engaging in open market and foreign exchange operations, and setting reserve requirements ; historically, in fact, the “monetary” functions were largely grafted on the “supervisory” functions, not the reverse”: Volcker (1984, p. 548).
- 52.
- 53.
Botha (1975).
- 54.
Capie et al. (1994, p. 21).
- 55.
See esp. Singleton (2011).
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Ugolini, S. (2017). Introduction. In: The Evolution of Central Banking: Theory and History. Palgrave Studies in Economic History. Palgrave Macmillan, London. https://doi.org/10.1057/978-1-137-48525-0_1
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