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Central banks and governments: issues, traditions, lessons

Published online by Cambridge University Press:  12 September 2008

Rolf Caesar
Rolf Caesar
Affiliation:
University of Hohenheim1
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Financial History Review , Volume 2 , Issue 2 , October 1995 , pp. 119 - 143
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Copyright © European Association for Banking and Financial History 1995

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References

2 Schokker, E., The Central Bank and the State in the Light of European Integration, Suerf Series No. 34 A (Tilburg, 1980), p. 5.Google Scholar

3 Caesar, R., Der Handlungsspielraum von Notenbanken, Theoretische Analyse und Internationaler Vergleich (Baden-Baden, 1981), pp. 56–8Google Scholar, and idem, ‘A European Central Bank: the issue of independence’, in Baltensperger, E. and Sinn, H.-W. (eds), Exchange Rate Regimes and Currency Unions (Houndmills, 1992), p. 229.CrossRefGoogle Scholar

4 Swinburne, M. and Castello-Branco, M., ‘Central Bank Independence: Issues and Experience’, IMF Working Paper WP/91/58 (Washington, DC, 1991), p. 5.Google Scholar

5 See the detailed thesis of Lück, W., ‘Monetäre Unabhängigkeit. Untersuchung der Vorschläge von J. M. Keynes für unabhängige nationale Währungssysteme’ (University of Leipzig, 1939).Google Scholar

6 See Cukierman, A., Central Bank Strategy, Credibility, and Interdependence: Theory and Evidence (Cambridge, MA/London, 1992), p. 394.Google Scholar

7 See Duwendag, D. (ed.), Macht und Ohnmacht der Bundesbank (Frankfurt-a.-Main, 1973).Google Scholar

8 See Woolley, J. T., Monetary Politics: The Federal Reserve and the Politics of Monetary Policy (Cambridge, MA, 1984), ch. 1.CrossRefGoogle Scholar

9 Caesar, R., ‘Central banks in the political arena’, Intereconomics (1983), pp. 3–4.CrossRefGoogle Scholar

10 With respect to the term ‘autonomy’, a similar interpretation is given by Nardozzi, G., ‘A central bank between the government and the credit system: the Bank of Italy after World War II’, in Toniolo, G. (ed.), Central Banks’ Independence in Historical Perspective (Berlin, 1988), p. 192Google Scholar: ‘autonomy is the scope allowed to the central bank to formulate monetary policy as it thinks best (as regards both ends and means) in the light of the Government's economic policy and the socio-economic situation’.

11 Quoted by von Bonin, K., Zentralbanken zwischen funktioneller Unabhängigkeit und politischer Autonomie (Baden-Baden, 1979), p. 48.Google Scholar

12 Thus, commercial banks are still shareholders, and ‘actors of decisions’, in the cases of the Banca d'ltalia and the Federal Reserve System.

13 For example, the influence of parliamentary committees on the Bank of England has been quite high; see Willeke, C., Zentralbanken und Inflation. Ein institutionenökonomischier Ansatz (Berlin, 1993), p. 87.Google Scholar Today, parliaments have direct powers of control over the national central banks in some Scandinavian countries (Sweden, Norway, Finland) and in Spain (since 1993) as well as in some countries of the former Comecon (Russia, Ukraine, Croatia); see Hahn, O., Die Währungsbank – Behörde, Untemehmung, Autorität (Berlin, 1993), p. 58.Google Scholar

14 See Willeke, , Zentralbanken, pp. 85–6Google Scholar, and Hahn, , Währungsbank, pp. 58–9.Google Scholar

15 See Bruni, F. and Masciandaro, D., ‘Delors' ESCB and central bank independence’, De Pecunia, 2 (1990), p. 214.Google Scholar

16 Schmidt, P.-G., ‘Die Zentralbank in der Demokratie’, Jahrbuch für Neue Politische Ökonomie, 2 (1983), p. 278.Google Scholar

17 See Toma, E. F. and Toma, M., Central Bankers, Bureaucratic Incentives, and Monetary Policy (Dordrecht, 1986)CrossRefGoogle Scholar, and Schmidt, , ‘Zentralbank’, p. 295.Google Scholar

18 See Willeke, , Zentralbanken, p. 79.Google Scholar

19 For example, Hahn, , Währungsbank, p. 58Google Scholar, regards the parliament as even more inclined to central bank financing than the government.

20 See Schmölders, G., Geldpolitik (Tübingen, 2nd edn, 1968), pp. 211–12.Google Scholar

21 For an overview of the debate see Swinburne, and Castello-Branco, , ‘Central Bank Independence’, p. 7Google Scholar, and Cukierman, Central Bank Strategy. Some other possible economic motives a government might have for controlling the central bank may only be mentioned here, such as an interest-rate-smoothing objective or a balance-of-payments objective (i.e., to improve the balance of payments by devaluation).

22 For example, see the title of the study of Ertel, E., ‘Der Schutz der Notenbanken vor den Kreditansprüchen des Staates’, Bankwissenschaft, 7 (1930/1931)Google Scholar, and the study of Born, E., Die finanzielle Heranziehung der Zentralnotenbank durch den Staat in Europa (Leipzig, 1907)Google Scholar, with further references.

23 It should be noted that the majority of these studies refer to the legal status of the relevant central banks. See Parkin, M., ‘In search of a monetary constitution for the European Communities’, in Fratianni, M. and Peeters, T. (eds), One Money for Europe (New York, 1978)Google Scholar; Parkin, M. and Bade, R., ‘Central banks law and monetary policies: a preliminary investigation’, in Porter, M. A. (ed.), The Australian Monetary System in the 1970s (Melbourne, 1978)Google Scholar; Fair, D., ‘The independence of central banks’, The Banker, No. 644 (1979)Google Scholar; Banaian, K., Laney, L. and Willett, T., ‘Central bank independence: an international comparison’, Federal Reserve Bank of Dallas, Economic Review (03 1983)Google Scholar; Alesina, A., ‘Macroeconomics and politics’, in Fisher, S. (ed.), NBER Macroeconomics Annual (Cambridge, MA, 1988)Google Scholar; idem, ‘Politics and business cycles in industrial democracies’, Economic Policy, 4 (1989)Google Scholar; Alesina, A. and Summers, L., Central Bank Independence and Macroeconomic Performance, Some Comparative Evidence (Harvard, 1991)Google Scholar; Grilli, V., Masciandaro, D. and Tabellini, G., ‘Political and monetary institutions and public financial policies in industrial countries’, Economic Policy, 13 (1991)Google Scholar; Swinburne and Castello-Branco, ‘Central Bank Independence’ Eijffinger, S. and Schaling, E., ‘Central bank independence in twelve industrial countries’, Banca Nazional del Lavoro, Quarterly Review, No. 184 (1993)Google Scholar; and Schiemann, J. and Alshuth, S., ‘Der Grad der Zentralbankautonnomie und sein Einfluß im gesamtwirtschaftichen Prozeß: Eine internationale vergleichende Rangkorrelationsanalyse’, Diskussionsbeitrag Nr. 28 des Institute für Wirtschaftspolitik der Universität der Bundeswehr (Hamburg, 1993).Google Scholar A critical view on the usefulness of these studies is offered by Posen, A. S., ‘Why central bank independence does not cause low inflation’, Central Banking, 4 (1993).Google Scholar However, some studies which also try to take into account the actual aspects of independence provide similar results; see Caesar, Handlungsspielraum, Cukierman, Central Bank Strategy, and the various contributions in Toniolo (ed.), Central Banks' Independence.

24 For more details see Caesar, , Handlungsspielraum, pp. 125–49.Google Scholar

25 See Goodhart, C., The Evolution of Central Banks (Cambridge, MA/London, 1985), pp. 110–12.Google Scholar

26 The Bank of England was founded in 1694 in order to create an efficient centralised credit mechanism for financing war against France. See McNeill, W. H., The Pursuit of Power (Oxford, 1983), p. 178.Google Scholar

27 In 1811 David Ricardo asked ‘whether a bank lending many millions more to the government than its capital and savings, can be called independent of that government’; quoted in Schokker, Central Bank, p. 15.

28 Contrary to normal practice, because of the subject of this article, all references to specific central banks will be in lower case, that is ‘bank’ as opposed to ‘Bank’.

29 Cairncross, A., ‘The Bank of England: relationships with the government, the civil service, and parliament’, in Toniolo, (ed.), Central Banks' Independence.Google Scholar

30 von Bonin, , Zentralbanken, p. 52.Google Scholar

31 See Bouvier, J., ‘The Banque de France and the state from 1850 to the present day’, in Toniolo, (ed.), Central Banks' Independence, p. 81Google Scholar, and Goodhart, , Evolution of Central Banks, p. 106.Google Scholar

32 Quoted in Schmölders, , Geldpolitik, p. 169.Google Scholar

33 Veit, O., Grundriβ der Währungspolitik (Frankfurt-a.-Main, 3rd. edn, 1969), p. 418.Google Scholar

34 See Seeger, M., Die Politik der Reichsbank von 1876–1914 im Lichte der Spielregeln der Goldwährung (Berlin, 1968), pp. 128–31CrossRefGoogle Scholar, who concludes that the deviations from the rules finally had a positive influence on Germany's economic development.

35 Born, K. E., ‘Geld und Währungen im 19. Jahrhundert’, in Pohl, H. (ed.), Europäische Bankengeschichte (Frankfurt-a.-Main, 1993), p. 182.Google Scholar

36 Cairncross, , ‘Bank of England’, p. 46.Google Scholar

37 For details, see Bouvier, , ‘Banque de France’, pp. 77–82.Google Scholar

38 Of course, some other factors were also important: differences in productivity between ‘member’ countries of the gold standard could be matched by sufficient flexibility of prices and wages; exchange rates largely corresponded to equilibrium rates; and there were hardly any international capital transfers. See Veit, , Grundriβ, p. 418.Google Scholar

39 See the comment by Pfleiderer, O., ‘Unabhängigkeit der Notenbank’, Die Justiz, Amtsblatt des Justizministeriums Baden-Württemberg, Ausgabe A, 6 (1957), p. 308Google Scholar, ‘that the true guidance of a central bank was not executed by a person but by an object, namely the rules of the game of the gold standard’ (own translation by R.C.).

40 This is clearly demonstrated by the outcome of the discussion held in the United States during the early 1980s on a possible reintroduction of the gold standard.

41 From a legal point of view, Great Britain did not give up gold convertibility; however, gold exports were blocked. See Veit, , Grundriβ, p. 420.Google Scholar

42 For the Reichsbank see Holtfrerich, C. L., ‘Relations between monetary authorities and governmental institutions: the case of Germany from the 19th century to the present’, in Toniolo, (ed.), Central Banks' Independence, p. 114Google Scholar, and Caesar, R., ‘Währungsreformen in Deutschland von 1870 bis 1945’, Bankhistorisches Archiv, 21 (1992), pp. 18–19Google Scholar; for the Bank of England, see von Bonin, , Zentralbanken, pp. 40–1Google Scholar, and Pohl, H., ‘Allgemeine Entwicklungslinien’, in Pohl, (ed.), Europäische Bankengeschichte, p. 223.Google Scholar

43 Pohl, , ‘Entwicklungslinien’, p. 232.Google Scholar

44 This is documented in detail for the Reichsbank in Caesar, R., ‘Die Finanzierung des Ersten Weltkrieges und die Rolle der Sparkassen’, Zeitschrift für bayerische Sparkassengeschichte, 5 (1991), pp. 69–75.Google Scholar

45 For example, see Cairncross, , ‘Bank of England’, pp. 43–4Google Scholar, for the case of the Bank of England, which in 1914 got the government's support in a quarrel with the clearers over stopping of gold payments.

46 See Cairncross, , ‘Bank of England’, pp. 43–4.Google Scholar

47 See Sayers, R. S., The Bank of England 1891–1944, vol. 1 (Cambridge, 1976), p. 105Google Scholar, and Cairncross, , ‘Bank of England’, p. 45.Google Scholar

48 Sylla, R., ‘The autonomy of monetary authorities: the case of the U.S. Federal Reserve System’, in Toniolo, (ed.), Central Banks' Independence, p. 21.Google Scholar

49 Friedman, M. and Schwartz, A., A Monetary History of the United States 1867–1969 (Princeton, NJ, 1963), p. 216.Google Scholar

50 The Act authorized the President, ‘for the national security and defense, for the successful prosecution of the war … to make such a redistribution of function among executive agencies as he may deem necessary, including any functions, duties and powers hitherto by law conferred upon any executive department, comission bureau, agency, office or officer…’ Clifford, A. J., The Independence of the Federal Reserve System (Philadelphia, 1965), p. 100.CrossRefGoogle Scholar

51 von Bonin, , Zentralbanken, p. 54.Google Scholar

52 Holtfrerich, , ‘Relations’, pp. 115–16.Google Scholar In the same sense the subsequent President of the Reichsbank, Schacht, remarked that resistance by the Reichsbank to the government's credit demands would at best have been of moral but of no practical value. Schacht, H., The Stabilization of the Mark (London, 1927), p. 116.Google Scholar

53 See Pohl, , ‘Entwicklungslinien’, p. 233Google Scholar, and James, H., ‘General trends: a search for stability in uncertain conditions’, in Pohl, (ed.), Europäische Bankengeschichte, p. 348.Google Scholar

54 Bankgesetz vom 30 August 1924.

55 See Müller, H., Die Zentralbank – eine Nebenregierung. Reichsbankpräsident Hjalmar Schacht als Politiker der Weimarer Republik (Opladen, 1973), pp. 38–102.CrossRefGoogle Scholar

56 See Friedman, and Schwartz, , Monetary History, p. 240Google Scholar (who use this term specifically with respect to the Federal Reserve System).

57 See von Benin, , Zentralbanken, pp. 54–5.Google Scholar

58 For instance, by dismissal of the bank's governor in 1926; see Bouvier, J., Un siècle de banque franςaise (Paris, 1973), p. 181.Google Scholar

59 See, for example, Delaisi, F., La Banque de France et les deux cents families (Paris, 1936).Google Scholar

60 As a result, the Banque de France was characterised by Achille Dauphin-Meunier as a ‘power within the state, and sometimes against the state. It decides a policy and demands that government follow. And governments give in; for the bank has the real power, the power of money’; quoted in von Bonin, , Zentralbanken, p. 56 (translation by R.C.).Google Scholar

61 Bouvier, , ‘Banque de France’, p. 77.Google Scholar

62 See von Bonin, , Zentralbanken, p. 42.Google Scholar

63 See Collins, M., ‘Introduction’, Central Banking in History, vol. 1 (Cambridge, 1993), p. xii.Google Scholar

64 Norman himself characterised the bank's and his own position in 1926 with the often quoted remark: ‘I look upon the bank as having the unique right to offer advice and to press such advice even to the point of “nagging”; but always, of course, subject to the supreme authority of the government’; quoted in Sayers, R. S., Modem Banking, (Oxford, 4th edn, 1958), p. 66.Google Scholar

65 See Geisler, R. P., Notenbankverfassung und Notenbankentwicklung in USA und Westdeutschland (Berlin, 1953). p. 188Google Scholar, and Sylla, , ‘Autonomy’, p. 30.Google Scholar Sometimes it is argued that the Fed may have been under the influence of private banks to a certain degree (at least until 1933); for example, the Fed's policy during the Great Depression is seen as proof of this thesis. See Sylla, , ‘Autonomy’, p. 30.Google Scholar

66 Quoted in Kisch, C. B. and Elkin, W. A., Central Banks. A Study of the Constitutions of Banks of Issue, with an Analysis of Representative Charters (London, 1928), p. 17.Google Scholar

67 Sylla, , ‘Autonomy’, p. 28.Google Scholar

68 For details, see Friedman, and Schwartz, , Monetary History, pp. 225, 411–12.Google Scholar

69 For details, see Caesar, , ‘Finanzierung’, pp. 24–5.Google Scholar

70 See Geisler, , Notenbankverfasssung, p. 188.Google Scholar

71 ‘The abandonment of the gold standard in the 1930s signalled the end of the era in which monetary affairs were left principally to the basic rules of the classical financial and economic system, which were characterized by confidence in and reliance on the functioning of certain market mechanisms. While under that system central banks were expected to conform to the “rules of the game”, central banks exist today for the very reason that there are no such rules any more.’ Schokker, , Central Bank, p. 16.Google Scholar

72 For details see Caesar, R. and Hansmeyer, K.-H., ‘Reichsbank und öffentliche Kreditinstitute’, Deutsche Venwaltungsgeschichte, 4 (Stuttgart, 1986).Google Scholar

73 For example, this was the case in Canada, Australia, and New Zealand; see Schokker, , Central Bank, p. 23.Google Scholar

74 Geisler, , Notenbankverfassung, p. 205.Google Scholar

75 For details see Horstmann, T., ‘Die Enstehung der Bank deutscher Länder als geldpolitische Lenkungsinstanz in der Bundesrepublik Deutschland’, in Riese, H. and Spahn, H.-P. (eds), Geldpolitik and ökonomische Entwicklung – Ein Symposion (Regenburg, 1990), pp. 213–16Google Scholar, and Wandel, E., Die Entstehung der Bank deutscher Länder und die deutsche Währungsreform 1948 (Frankfurt-a.-Main, 1980), p. 81.Google Scholar

76 As to the functional aspect, explicitly the bank should ‘not be subject to the instructions of any political body or public non-judicial agency’ (though subject to Allied control until 1951); on the financial level, the bank had to be the fiscal agent of the government, but short-term advances to the public sector were strictly limited; and on the personal level, the bank's leading organ (the Zentralbankrat) alone decided on the bank's president and vice-president, without government intervention. See Holtfrerich, , ‘Relations’, pp. 140–2.Google Scholar

77 In the substantial points the regulations on the Bank deutscher Länder were a compromise between the ideas of the Americans and the British; see Marsh, D., Die Bundesbank, Geschäfte mit der Macht (Munich, 1992) p. 190.Google Scholar

78 Gesetz über die Deutsche Bundesbank v. 26 Juli 1957, §3.

79 See Caesar, , Handlungsspielraum, pp. 188–190Google Scholar; Holtfrerich, , ‘Relations’, pp. 141–2Google Scholar; Marsh, , Bundesbank, pp. 225, 239–44.Google Scholar

80 Opie, R. G., ‘Western Germany’, in Sayers, R. S. (ed.), Banking in Western Europe (Oxford, 1962), p. 91Google Scholar; the same formulation is used by Sayers, , Modem Banking (Oxford, 6th edn, 1964), p. 78.Google Scholar

81 For details see Caesar, , Handlungsspielraum, pp. 232–4.Google Scholar

82 According to Friedman and Schwartz, the Fed regarded the support of government financing as a ‘traditional’ task and took some time to give up this attitude. See Sylla, , ‘Autonomy’, p. 32.Google Scholar

83 For details see Caesar, , Handlungsspielraum, pp. 286–7Google Scholar, as Well as the studies of Barger, H., The Management of Money. A Survey of American Experience (Chicago, 1964) and Clifford, Independence.Google Scholar

84 See Caesar, , Handlungsspielraum, pp. 289–90.Google Scholar

85 Rose, S., ‘The Agony of the Fed’, Fortune, 90 (1974), p. 188.Google Scholar

86 For example, in 1955 Governor Baumgartner stated: ‘In the same way the clergyman of history was against sin, so is the Banque de France against inflation. It reacts tirelessly … On the whole the Banque de France is what it has always been … It has to defend itself against the dangers that come from the evolution of the balance of payments, or from private credit, or from the treasury’. Quoted, in Bouvier, , ‘Banque de France’, p. 89.Google Scholar

87 See Caesar, , Handlungsspielraum, pp. 333–47Google Scholar, and Bouvier, , ‘Banque de France’, pp. 91–2.Google Scholar

88 Comitato Interministeriale per il Credito ed il Risparmio (Interministerial Committee for Credit and Saving).

89 For details, see Caesar, , Handlungsspielraum, pp. 419–41.Google Scholar

90 Nardozzi, , ‘Bank of Italy’, pp. 192–3.Google Scholar

91 Caesar, , Handlungsspielraum, pp. 440–1.Google Scholar

92 See Bank of England Act, para. 4 (I): ‘The Treasury may from time to time give such directions to the Bank as, after consultation with the Governor of the Bank, they think necessary in the public interest’.

93 See the unequivocal statement of the bank's governor at that time, L. O'Brien: ‘the Bank of England does not see itself as an institution which has the right to pursue policies in this country independent of Government … We have no independent policy function’. Session 1969–70, House of Commons Paper 258, cipher 1030: House of Commons, Select Committee on Nationalized Industries, First Report: Bank of England, Report, Minutes of Evidence and Appendices.

94 The famous saying ‘The Bank is my Creature’ goes back to the former Chancellor of the Exchequer, Cripps. See Hirsch, F., The Pound Sterling: A Polemic (London, 1965), p. 142.Google Scholar

95 For example, in the United States there have been repeated attacks on the Fed's independent status and attempts to bind the bank more closely to the President. The horizontal system of checks and balances may have well contributed to the fact that these attacks on the Fed were generally fended off.

96 This vertical distribution of political power has directly influenced the central bank's structure to a certain extent. For example, this is the case in Germany, where the lower levels of government (the ‘Länder’) directly participate in the selection of the bank's leading officers.

97 In New Zealand a new statute for the central bank came into force in 1989 which commits the bank to aim at absolute price stability (subject to some reservations); if this is not achieved within a certain period the central bank governor can be dismissed. Otherwise the bank is independent of the government but responsible to the parliament, a solution which is sometimes recommended as a model for the United Kingdom. See Norman, P., ‘The Brash lesson on central bank independence’, in Deutsche Bundesbank, Auszüge aus Presseartikeln, No. 44 ( 25 06 1993).Google Scholar

98 See Castello-Branco, M., Central Bank Independence: The Chilean Case, IMF Central Banking Department (Washington, DC, 1990).Google Scholar

99 See Benkhoff, W., ‘Wieviel Autonomie für eine Notenbank?’, Handelsblatt (6 01 1994).Google Scholar

100 See Bremer, H.-H., ‘Bank von Frankreich wird flügge’, Stuttgarter Zeitung (22 12 1993).Google Scholar

101 See Cavalli-Björkman, Y., ‘Die Schwedische Reichsbank auf dem Weg zu größerer Unabhängigkeit, Finnland und Norwegen bleiben zurück’, in Deutsche Bank Research, G3-Themen, Nr. 41 (Frankfurt-am-Main., 1 10 1993).Google Scholar

102 For a general overview see Ausschuß der Zentralbankpräsidenten der Mitgliedstaaten der Europäischen Wirtschaftsgemeinschaft, Jahresbericht 1992, Anhang II (Brussels, 1993).

103 Piller, T. ‘Banca d'ltalia – ein Hort der Kontinuität im unruhigen Italien’, Frankfurter Allgemeine Zeitung (11 12 1993).Google Scholar

104 See Riddell, P., ‘Freedom at the going rate’, The Times (3 01 1994)Google Scholar; and the interesting study on the chances of more independence for the Bank of England, prepared by an international panel of experts – Roll, E. et al. (Centre for Economic Policy Research), Independent and Accountable. A New Mandate for the Bank of England (London, 1993).Google Scholar This concluded that the Bank of England should be obliged to pursue the objective of price stability explicitly stated by parliament, but that the bank should be independent with respect both to setting intermediate monetary targets and the operational conduct of policy; on the other hand, the bank should be accountable to parliament by regularly reporting on its targets and policy-decisions instruments (for details, see Roll, et al. , pp. 65–71).Google Scholar

105 Zwätz, D., ‘Konfusion über den eigenen Standpunkt’, Handelsblatt (25 10 1993).Google Scholar

106 For details see Caesar, , Handlungsspietraum, pp. 297–301.Google Scholar

107 See Broaddus, J. A. Jr, ‘Central banking: then and now’, Federal Reserve Bank of Richmond, Economic Quarterly, 79.2 (1993), p. 11.Google Scholar