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The Age of Central Banks

Author(s):Giannini, Curzio
Reviewer(s):Wood, John H.

Published by EH.Net (February 2012)

Curzio Giannini, The Age of Central Banks. Cheltenham, UK: Edward Elgar, 2011. xxxi + 298 pp.? $135 (hardcover), ISBN: 978-0-85793-213-6.

Reviewed for EH.Net by John H. Wood, Department of Economics, Wake Forest University.

Modern central banks are known for more than the determination of the money stock.? They are also bank regulators and handlers of financial crises.? This has always been so, Curzio Giannini, former Deputy Director of the International Relations Department of the Bank of Italy, tells us.? He urges economists to think of money not simply as a policy variable in the neoclassical model but as ?an institution that is held up by trust: trust in its future purchasing power and trust in the continued convention that payment is complete when money changes hands? (p. xxv).? At the center of the institution of money is the institution of the central bank.

The principal controversies surrounding monetary institutions ? such as the British Bank Act of 1844, the Bank of England as lender of last resort, the Federal Reserve as a solution to the inelasticity of the currency, and Bretton Woods and international trade ? have addressed the viability of the payments system rather than simply the price level.? Price stability was taken care of by the monetary standard during most of history.? The growth of a complex payments system, and the need for trust, or confidence, in that system gave rise to central banks.

Given the acknowledged importance of the central bank, Giannini writes, ?it may seem surprising that until quite recently it attracted very little theoretical interest? (p. xx).? Two reasons for this may be the failure of the neoclassical theoretical paradigm to reach to institutions and the tendency to take central banks as given, such as the ?fiscal theory?s? treatment of them as simply financial arms of the state.? Nor in his view did Goodhart?s explanation of central banks as the institutionalization of restrictive competitive practices required by the nature of banking contribute to our understanding of their evolutionary process.? Giannini takes Hicks? observation in A Theory of Economic History as his guide: ?if monetary theoreticians want to move forwards they must first look backwards, building a vision of how money has evolved, of how we have reached our present point? (p. 5).

?In order to study money [and therefore central banks] we must start from decentralized exchange structures in which concepts such as risk, imperfect information and transaction cost have a meaningful role to play? (p. 4).? Giannini?s chronological account takes off from the ?intermingling of money and credit,? brought about by banks against the background of capitalism and the rise of the democratic state, which ?set in motion a long and somewhat tortuous process of institutional adaptation centred around the figure of the central bank.? To date, the process has consisted in three separate phases.?? The first, ending in 1844, saw convertible bank notes; the second saw the recognition of the problem of how to govern bank money, and also central banks as lenders of last resort and bank regulators; the third saw
inconvertible ?managed? money, that is, modern monetary policy which meant the nationalization of the central banks (p. xxvii).? ?All the major monetary innovations have taken place during a sharp growth in trade, particularly international trade? (p. 19).
?For every payment technology there must ? be a body of rules, conventions and institutional mechanisms designed to sustain the confidence of the people using it? (p. 9).? The institutionalist approach to its analysis puts trust at its center.? This is where central banks come in.? The book gives examples from ?Fluctuations of Trust: Pre-industrial Credit Payment Technologies? in Chapter 2 through ?International Money: Building Trust in an Underinstitutionalized Environment,? characterized by the breakdown of Bretton Woods, in Chapter 6.?

Giannini paints a bleak picture of the future of central banking, that is, of their capacity to provide confidence in the payments system.? He quotes Bank of England Governor (1920-44) Montagu Norman to the effect that ?No central bank can be greater than its own State ? the creature greater than the creator.?? The internationalism of bank money is unlikely ?because the banking system is ? protected by a safety net that is the responsibility of the nation-state and, ultimately, of local taxpayers? (p. 218).?? On the other hand, central banks pursuing national goals at the expense of others are unlikely to produce a healthy international environment.? A solution in the form of cooperation between sovereign states is problematic.? Perhaps, ?in the long term ? this problem will produce a strong incentive to share monetary sovereignty on a regional basis and in some cases to look for a new territorialization of money on a broader geographical scale, through the creation of innovative forms of political action? (p. 218).

?In the years to come [as often in the past], the most interesting developments will probably be precisely in the sphere of supervision and regulation? (p. 255).? However, moral hazard problems, always present, as in the lender of last resort, are growing.? ?Globalization has sharply increased financial concentration, [creating] national champions far out of proportion with the rest of the economy and even the central bank.? This was predicted by Fred Hirsch [?The Bagehot Problem,? Manchester School, 1957] in the little-known article that marked the start of modern studies of central banking.??? [G]iven informational asymmetries the attempt to subject banking to strict market discipline would result in concentration, as large banks sought the protective umbrella of government? (p. 257).
The increased activity of central banks since the middle of the last decade is consistent with Giannini?s logic of the evolution of central banks.? The problem of inflation seems to have been solved but the greater function of central banks, that of supplying trust in the payments system, has a murky future.? Those who hope to predict or understand the next step would do well to begin with the book under review.

John H. Wood, Wake Forest University, is author of A History of Central Banking in Great Britain and the United States (Cambridge University Press, 2005).

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Subject(s):Financial Markets, Financial Institutions, and Monetary History
Geographic Area(s):General, International, or Comparative
Time Period(s):19th Century
20th Century: Pre WWII
20th Century: WWII and post-WWII