A History of Central Banking in Great Britain and the United States

Published by EH.NET (December 2005)

John H. Wood, A History of Central Banking in Great Britain and the United States. New York: Cambridge University Press, 2005. xv + 424 pp. $90 (cloth), ISBN: 0-521-85013-4.

Reviewed for EH.NET by Angela Redish, Department of Economics, University of British Columbia.

In 1694 a group of merchants agreed to lend the English government ?1.2 million in exchange for a charter to create a note-issuing bank, the Bank of England. Two hundred and twenty years later, in response to private sector rather than public sector concerns (notably the panic of 1907), the United States created the Federal Reserve Bank. Focusing on the UK and the United States, this book studies the transition from a seventeenth-century world free of central bankers, through the financial excitements of the eighteenth, nineteenth, and twentieth centuries to the sedate world of central banking in the late twentieth and early twenty-first centuries. The focus is on the interplay between bankers and politicians and on the evolution of an in-between species, the ‘central bankers.’

As the author, John Wood (Department of Economics, Wake Forest University), notes it is a propitious time to write such a book. Central banks are operating in a period of calm, and are widely seen as so successful that they are boring. In both the U.S. and the UK, the twentieth century posed extreme challenges for central banking: financing two world wars, facing the shocks of the Great Depression, and then learning how to operate in a fiat money world after the end of the Bretton Woods period. Since the early 1990s, there has been widespread agreement on the appropriate targets of monetary policy — price stability and financial stability — and, perhaps with the exception of how to respond to “irrational exuberance” in asset markets, central banking has become a technocratic business of forecasting future demand so as to set interest rates at an appropriate level to engender price stability.

How independent should a central bank be in a democratic country? The book takes us through the ups and downs of independence. Today many central banks, including the Bank of England and the Fed, have operational independence but are subject at some horizon to state control, but the degree of independence has fluctuated. At its origins the Bank of England was private, and the fiscal needs of the government gave the Bank considerable power, but by 1833, after years of stable public finances, the government could “afford the luxury of an independent central bank” (p.72). (Interestingly, Wood’s evidence of independence is the introduction of a requirement for the publication of the Bank’s accounts which would make explicit any changing indebtedness of the government.). In the 1920s, the Bank of England was dominant in the decision that Britain would resume convertibility of the pound at the old par, despite the deflation that this would require, but after World War II, it was the politicians and Treasury officials that determined interest rates as well as exchange rate policy. In the second half of the twentieth century the Bank considered itself as merely the “central banking arm of a centralized macroeconomic executive” (p. 386), but then, after decades of erratic monetary policy, the Bank was given its independence in 1998.

The independence of the Federal Reserve System is even more tortuous to describe because of its diffuse structure, itself a reflection of the desire to create a bankers’ bank and a government bank. The Fed is composed of twelve regional banks plus the Board of Governors located in Washington, and tensions between bankers and the government were frequently played out between the Board and the regional (especially New York) Feds. Again the degree of independence fluctuated: the disagreements between the Board and the New York Fed in the late 1920s are well known; in 1935, the system was reorganized giving more power to the Board, and after World War II the Fed was essentially subservient to Treasury desires for low interest rates. The Fed’s reassertion of its independence in early 1951 — a showdown between President Truman and Chairman Eccles — is a story that should be required reading for all students of monetary policy (pp. 226-38). Yet triumph was temporary, and in the 1960s and 70s monetary policy became an issue in election campaigns. Most recently, at Senate confirmation hearings in November, President Bush’s nominee for Chairman of the Board of Governors, Ben Bernanke, stated that: “I will be strictly independent of all political influences and will be guided solely by the Federal Reserve’s mandate from Congress and by the public interest.”

The history of central banking is told against a backdrop of the development of monetary theory and the evolving understanding of how monetary systems and banks operate. The discussion of the real bills doctrine, of ‘operation twist,’ of the use of moral suasion and credit controls, of monetarism, and of price and wage controls takes the reader through the, usually painful, learning that central bankers have undergone. The author uses extensive quotations from memoirs and minutes so that the reader can see the decision-making process in the raw.

Now to cavils: There is an inherent organizational tension in telling two stories chronologically in parallel. The author chooses to begin with three chapters on the history of the Bank of England to 1914, then three chapters on the origins of the Federal Reserve and its history to the 1960s, then a chapter taking the Bank of England from 1914 to 1980, followed by three chapters that combine analysis of contemporary monetary theory and the history of monetary policy in both countries over the last 25 years. I’m not sure there is a better way, but I found some of the transitions awkward. I suspect earlier readers also did, as there are a large number of signposts for the reader, which help, but still further prevent a seamless flow.

Finally a minor gripe: There are very useful summaries of events and dramatis personae at the beginning of each chapter, but some curious choices are made. Beginning in 1951 the President of the Council of Economic Advisors is listed, but nowhere are the New York Fed Presidents listed; Governors of the Bank of England are not listed until 1914; G. William Miller, Fed Chairman in 1978-79 is not on any list. The lists would have been more useful as a reference if they had been presented as comprehensive appendices to the whole book.

No individual event retraced here is new, but by bringing the pieces together and focusing on the evolution of central bankers this book enables the reader to see the forest rather than the trees, and appreciate one of the successes of economics. This book will be a useful resource for both economic historians and monetary economists looking for a broad overview of the evolution of Anglo-American central banking and monetary theory.

Angela Redish’s publications include Bimetallism: An Economic and Social History (2000) and (with Michael Bordo) “Is Deflation Depressing? Evidence from the Classical Gold Standard” in Burdekin and Siklos, editors, Deflation: Current and Historical Perspectives (2004).