------------ EH.NET BOOK REVIEW --------------
Published by EH.NET (December 2005)
John H. Wood, _A History of Central Banking in Great Britain and the
United States_. New York: Cambridge University Press, 2005. xv + 424
pp. $90 (cloth), ISBN: 0-521-85013-4.
Reviewed for EH.NET by Angela Redish, Department of Economics,
University of British Columbia.
In 1694 a group of merchants agreed to lend the English government
�1.2 million in exchange for a charter to create a note-issuing bank,
the Bank of England. Two hundred and twenty years later, in response
to private sector rather than public sector concerns (notably the
panic of 1907), the United States created the Federal Reserve Bank.
Focusing on the UK and the United States, this book studies the
transition from a seventeenth-century world free of central bankers,
through the financial excitements of the eighteenth, nineteenth, and
twentieth centuries to the sedate world of central banking in the
late twentieth and early twenty-first centuries. The focus is on the
interplay between bankers and politicians and on the evolution of an
in-between species, the 'central bankers.'
As the author, John Wood (Department of Economics, Wake Forest
University), notes it is a propitious time to write such a book.
Central banks are operating in a period of calm, and are widely seen
as so successful that they are boring. In both the U.S. and the UK,
the twentieth century posed extreme challenges for central banking:
financing two world wars, facing the shocks of the Great Depression,
and then learning how to operate in a fiat money world after the end
of the Bretton Woods period. Since the early 1990s, there has been
widespread agreement on the appropriate targets of monetary policy --
price stability and financial stability -- and, perhaps with the
exception of how to respond to "irrational exuberance" in asset
markets, central banking has become a technocratic business of
forecasting future demand so as to set interest rates at an
appropriate level to engender price stability.
How independent should a central bank be in a democratic country? The
book takes us through the ups and downs of independence. Today many
central banks, including the Bank of England and the Fed, have
operational independence but are subject at some horizon to state
control, but the degree of independence has fluctuated. At its
origins the Bank of England was private, and the fiscal needs of the
government gave the Bank considerable power, but by 1833, after years
of stable public finances, the government could "afford the luxury of
an independent central bank" (p.72). (Interestingly, Wood's evidence
of independence is the introduction of a requirement for the
publication of the Bank's accounts which would make explicit any
changing indebtedness of the government.). In the 1920s, the Bank of
England was dominant in the decision that Britain would resume
convertibility of the pound at the old par, despite the deflation
that this would require, but after World War II, it was the
politicians and Treasury officials that determined interest rates as
well as exchange rate policy. In the second half of the twentieth
century the Bank considered itself as merely the "central banking arm
of a centralized macroeconomic executive" (p. 386), but then, after
decades of erratic monetary policy, the Bank was given its
independence in 1998.
The independence of the Federal Reserve System is even more tortuous
to describe because of its diffuse structure, itself a reflection of
the desire to create a bankers' bank _and_ a government bank. The Fed
is composed of twelve regional banks plus the Board of Governors
located in Washington, and tensions between bankers and the
government were frequently played out between the Board and the
regional (especially New York) Feds. Again the degree of independence
fluctuated: the disagreements between the Board and the New York Fed
in the late 1920s are well known; in 1935, the system was reorganized
giving more power to the Board, and after World War II the Fed was
essentially subservient to Treasury desires for low interest rates.
The Fed's reassertion of its independence in early 1951 -- a showdown
between President Truman and Chairman Eccles -- is a story that
should be required reading for all students of monetary policy (pp.
226-38). Yet triumph was temporary, and in the 1960s and 70s monetary
policy became an issue in election campaigns. Most recently, at
Senate confirmation hearings in November, President Bush's nominee
for Chairman of the Board of Governors, Ben Bernanke, stated that: "I
will be strictly independent of all political influences and will be
guided solely by the Federal Reserve's mandate from Congress and by
the public interest."
The history of central banking is told against a backdrop of the
development of monetary theory and the evolving understanding of how
monetary systems and banks operate. The discussion of the real bills
doctrine, of 'operation twist,' of the use of moral suasion and
credit controls, of monetarism, and of price and wage controls takes
the reader through the, usually painful, learning that central
bankers have undergone. The author uses extensive quotations from
memoirs and minutes so that the reader can see the decision-making
process in the raw.
Now to cavils: There is an inherent organizational tension in telling
two stories chronologically in parallel. The author chooses to begin
with three chapters on the history of the Bank of England to 1914,
then three chapters on the origins of the Federal Reserve and its
history to the 1960s, then a chapter taking the Bank of England from
1914 to 1980, followed by three chapters that combine analysis of
contemporary monetary theory and the history of monetary policy in
both countries over the last 25 years. I'm not sure there is a better
way, but I found some of the transitions awkward. I suspect earlier
readers also did, as there are a large number of signposts for the
reader, which help, but still further prevent a seamless flow.
Finally a minor gripe: There are very useful summaries of events and
_dramatis personae_ at the beginning of each chapter, but some
curious choices are made. Beginning in 1951 the President of the
Council of Economic Advisors is listed, but nowhere are the New York
Fed Presidents listed; Governors of the Bank of England are not
listed until 1914; G. William Miller, Fed Chairman in 1978-79 is not
on any list. The lists would have been more useful as a reference if
they had been presented as comprehensive appendices to the whole book.
No individual event retraced here is new, but by bringing the pieces
together and focusing on the evolution of central bankers this book
enables the reader to see the forest rather than the trees, and
appreciate one of the successes of economics. This book will be a
useful resource for both economic historians and monetary economists
looking for a broad overview of the evolution of Anglo-American
central banking and monetary theory.
Angela Redish's publications include _Bimetallism: An Economic and
Social History_ (2000) and (with Michael Bordo) "Is Deflation
Depressing? Evidence from the Classical Gold Standard" in Burdekin
and Siklos, editors, _Deflation: Current and Historical Perspectives_
(2004).
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Published by EH.Net (December 2005). All EH.Net reviews are archived
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