Monday, March 12, 2018

Classical Political Economics and the History of Central Banks


As promised not long ago, here a short paper on the history of central banks presented at ASSA meeting in Philadelphia. The paper is short, given the submission policy. It discusses the growing literature on the origins of central banks, and essentially disagrees with Charles Goodhart, who is the authority on the topic.

The conventional argument is that central banks only become effectively central banks in the late 19th century when a concern with financial stability was developed and the function of Lender of Last Resort (LOLR) was more formally established. The notion is that up to that point central banks were essentially concerned with profit making, as private institutions, and that only when a concern with financial stability as a public good was developed is that they can be seen truly as public institutions (even if they remained private).

Implicit in this view is also the notion that central banks would have a tendency to overissue paper money, in times of booms, which would help their profitability, and that constraining that ability, but at the same time allowing them to act as LOLR was central for financial stability. The first part of the argument, the notion that inflation is caused by the overissue of paper money, derives from the Bullionist controversies and the Bank Charter Act of 1844.

The point of the paper is that early public banks (essentially Italian and Dutch banks that preceded the the Swedish and English central banks) were central banks because they did have a public concern considerably before than their LOLR function was developed. They were fiscal agents of the state concerned with providing a stable unit of account and a secondary market for public debt allowing the expansion of the State.

The paper tries, in that sense, to connect the discussion of the origins of central banks with the extensive literature on the Fiscal-Military State and its relevance for the process of capitalist development.

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