Published by EH.NET (July 2001)


Carl-Ludwig Holtfrerich, Jaime Reis and Gianni Toniolo, editors, The Emergence of Modern Central Banking from 1918 to the Present. Aldershot, UK: Ashgate Publishing, 1999. xi + 385 pp. $99.95 (hardcover), ISBN: 1-85928-241-5.

Reviewed for EH.NET by Mark Toma, Department of Economics, University of Kentucky.

What is a central bank? The question is raised throughout this volume of papers originally presented at a 1996 conference held in Evora, Portugal celebrating the 150th anniversary of the Bank of Portugal. The volume consists of an introductory overview chapter by the editors, nine core chapters discussing the founding and evolution of seventeen central banks, two chapters discussing the role of the International Monetary Fund and the Bank for International Settlements and a concluding chapter by Barry Eichengreen. The core chapters start with a case study of the central banking giant, the Bank of England, and end with the Latin American central banks of Argentina, Brazil, and Mexico. The introductory chapter lists five themes that tie together the case histories. These include the role of central banks in the transition from gold to fiat money, the regulatory role of central banks, the growing importance of open market operations in government debt and the growing concern by central banks for macroeconomic policy objectives.

I found a final theme — worldwide switches between independent and dependent central bank structures — to be the most intriguing. At the risk of over-generalizing, three stages emerge from the various case histories. First, before 1914, central banks tended to be private and independent of their respective governments. Next, during the inter-war period, newly created central banks were made dependent and existing central banks found their independence reduced or eliminated. Finally, the last three decades have witnessed a swing back toward independent, though still government-owned, central banks. A careful reading of the histories suggests a possible reason for the reappearance of independence — globalization, which imposes relatively tight market constraints on the actions of central bankers. Nation-states may as well choose independence for their central banks, since monetary policy must dance to the tune of the market. Before 1914, the tight constraints arose from the rules of the global gold standard game. More recently, they have arisen from global competition among central banks. Looking back, the stage-two era of dependent-managed central banks may turn out to be a relic, suited uniquely to a time when individual central banks possessed a substantial degree of market power.

Another issue raised by the independence/dependence distinction is a possible tie-in between the Great Depression and dependent-managed central banks. Some of the facts presented in the histories seem at odds with the conventional wisdom that dependent central bank structures were created as a remedy to the monetary problems associated with the Great Depression. For instance the chapter on the French and Spanish central banks indicates that the transition to managed structures was well under way before, or early in, the Great Depression. Could it be that the switch from an international self-regulated monetary system to a managed system was a contributing factor to the Depression rather than the other way around? The type of international comparison undertaken in this volume is ideally suited for further exploring this possibility.

Perhaps the most valuable contributions of the assorted histories are not the broad generalizations but the little gems to be absorbed and stored in one’s memory bank. For instance, the chapter comparing German and Japanese central banking finds that the post World War II monetary constitutions of the two nation-states differed markedly even though they were drafted by largely the same people — leaders of the US occupation forces. Also, Pierre Siklos finds that the post World War II economic performance of the US and Canada were similar even though the two had markedly different histories in terms of central bank statutes and the characteristics of the CEO’s in command at the central banks.

Overall, I would recommend this volume to the aficionado of central banking. Those with more general interests would be rewarded with the gems but might find the details of the case studies a bit much. Those with an interest in the history of a particular central bank might be better served by a more narrowly focused study.

Mark Toma is an Associate Professor of Economics at the University of Kentucky. His recent research is on Federal Reserve open market operations during the Great Depression and on the relationship between the income tax amendment of 1913 and the founding of the Fed.