Published by EH.Net (November 2019)

Stefano Ugolini, The Evolution of Central Banking: Theory and History. London: Palgrave Macmillan, 2017. xiii + 330 pp. €135 (hardcover), ISBN: 978-1-137-48524-3.

Reviewed for EH.Net by Pierre Siklos, Department of Economics, Wilfrid Laurier University.

The so-called Global Financial Crisis raised the profile of central banks around the world. While books about central banks were, of course, published prior to the events of 2008-2009, none captured the attention of the wider public until the monetary authorities intervened on a massive scale and continue to do so well over a decade since the near collapse of the global financial system. A new set of books emerged, with titles like The Only Game in Town, or After the Music Stopped, which used a chronological approach to describe what central banks did as well as contemplating the implications of the shift from conventional to unconventional monetary policies. The approach of these books is largely descriptive and the analysis is largely rooted in depicting the evolution of central banking activities in select countries over time.

Stefano Ugolini, an Assistant Professor at the University of Toulouse, argues that this strategy, termed the institutionalist approach by the author, is not satisfactory. Instead, he proposes a functional approach to the analysis of the evolution of central banking. Four functions of central banking are explored. They are: the payments system, the lender of last resort and supervision, the issuance of money, and monetary policy. The author claims that one need not rank order these functions, though the number of pages devoted to the payments system and the lender of last resort functions suggest that these may perhaps be relatively more important to the author than the remaining two functions.

The discussion blends a history of events that reflect the growing importance of central banks in the global economy together with the history of thought about the balance between public and private roles in carrying out central banking functions. As a result, private banks and their connection with monetary authorities play an important role in the depiction of the evolution of central banking. For example, we see how the emergence of clearinghouses led to the creation of “conventional” central banks via the centralization of this function at the public level. Hence, this function is treated as a “natural monopoly.” The same is true of the evolution of many of the other functions examined. Nevertheless, the author is careful to highlight how in some countries, such as the United States, the tension between a role for government versus a preference for a strong role by the private sector in carrying out certain financial functions can explain certain cross-country differences in how central banks evolved when viewed through the lens of the functional approach. It may also be noted in passing that the experiences of Venice and Naples figure prominently in the discussion.

Ugolini has written a compact history of the critical functions of central banks emphasizing how the forces of centralization spurred or prevented financial innovations. The approach taken is a fresh one and will be useful, especially to scholars who are interested in specific areas where central banks have played an important role in economic development over time. That said, does the book provide new insights into central banks and their functions? This is debatable. For example, while financial stability is often mentioned it is not treated as a separate function. This is a shame in light of the ongoing debate about whether central banks are possibly over-burdened with responsibilities. It is also relevant for the question of the degree of centralization of the various functions considered at the level of a single institution. Stated differently, greater emphasis by the author on governance matters might have helped.

Ugolini concludes as follows: “central banking is deeply rooted in the economic and political context in which it happens to operate, and that the evolution of the former closely depends on the evolution of the latter” (p. 271). Readers of “institutionalist” style books of central banking would have reached the same conclusions. Hopefully, this is welcome as it means that the functional and institutional approaches yield similar results but this also means that no fundamentally new insights about the evolution of central banking are generated.

Three other elements about the functional approach adopted by Ugolini are also worth mentioning. First, the discussion is overwhelmingly centered on the European, British, and American experiences. The book is silent about how central banking functions evolved in Canada, Asia, or Australasia. Second, the chapter on the issuance of money does not discuss how history, or the history of thought, might inform the current debate about the digitization of money. Finally, the discussion of the monetary policy function glosses over the evolution of policy regimes, such as exchange rate or inflation targeting, preferring instead to focus on its role as a means of regulating and taxing the public to ensure something called monetary stability. Unfortunately, the latter expression is never sufficiently clearly explained. Nevertheless, Ugolini is correct to underscore the importance of examining how monetary and fiscal policy interact. After all, this is an issue that is very much at the center of the debate about the future of central banking.

Pierre Siklos is Professor of Economics at Wilfrid Laurier University and the Balsillie School of International Affairs. His latest books on central banking are Central Banks into the Breach: From Triumph to Crisis and the Road Ahead and The Economics of Central Banking, co-edited with David Mayes and Jan-Egbert Sturm, both published by Oxford University Press

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