------ EH.NET BOOK REVIEW ------
Title: The Age of Central Banks

Published by EH.Net (February 2012)

Curzio Giannini, The Age of Central Banks. Cheltenham, UK: Edward
Elgar, 2011. xxxi + 298 pp.  $135 (hardcover), ISBN:
978-0-85793-213-6.

Reviewed for EH.Net by John H. Wood, Department of Economics, Wake
Forest University.

Modern central banks are known for more than the determination of the
money stock.  They are also bank regulators and handlers of financial
crises.  This has always been so, Curzio Giannini, former Deputy
Director of the International Relations Department of the Bank of
Italy, tells us.  He urges economists to think of money not simply as
a policy variable in the neoclassical model but as “an institution
that is held up by trust: trust in its future purchasing power and
trust in the continued convention that payment is complete when money
changes hands” (p. xxv).  At the center of the institution of money is
the institution of the central bank.

The principal controversies surrounding monetary institutions – such
as the British Bank Act of 1844, the Bank of England as lender of last
resort, the Federal Reserve as a solution to the inelasticity of the
currency, and Bretton Woods and international trade – have addressed
the viability of the payments system rather than simply the price
level.  Price stability was taken care of by the monetary standard
during most of history.  The growth of a complex payments system, and
the need for trust, or confidence, in that system gave rise to central
banks.

Given the acknowledged importance of the central bank, Giannini
writes, “it may seem surprising that until quite recently it attracted
very little theoretical interest” (p. xx).  Two reasons for this may
be the failure of the neoclassical theoretical paradigm to reach to
institutions and the tendency to take central banks as given, such as
the “fiscal theory’s” treatment of them as simply financial arms of
the state.  Nor in his view did Goodhart’s explanation of central
banks as the institutionalization of restrictive competitive practices
required by the nature of banking contribute to our understanding of
their evolutionary process.  Giannini takes Hicks’ observation in A
Theory of Economic History as his guide: “if monetary theoreticians
want to move forwards they must first look backwards, building a
vision of how money has evolved, of how we have reached our present
point” (p. 5).

“In order to study money [and therefore central banks] we must start
from decentralized exchange structures in which concepts such as risk,
imperfect information and transaction cost have a meaningful role to
play” (p. 4).  Giannini’s chronological account takes off from the
“intermingling of money and credit,” brought about by banks against
the background of capitalism and the rise of the democratic state,
which “set in motion a long and somewhat tortuous process of
institutional adaptation centred around the figure of the central
bank.  To date, the process has consisted in three separate phases.”
The first, ending in 1844, saw convertible bank notes; the second saw
the recognition of the problem of how to govern bank money, and also
central banks as lenders of last resort and bank regulators; the third
saw
inconvertible “managed” money, that is, modern monetary policy which
meant the nationalization of the central banks (p. xxvii).  “All the
major monetary innovations have taken place during a sharp growth in
trade, particularly international trade” (p. 19).

“For every payment technology there must … be a body of rules,
conventions and institutional mechanisms designed to sustain the
confidence of the people using it” (p. 9).  The institutionalist
approach to its analysis puts trust at its center.  This is where
central banks come in.  The book gives examples from “Fluctuations of
Trust: Pre-industrial Credit Payment Technologies” in Chapter 2
through “International Money: Building Trust in an
Underinstitutionalized Environment,” characterized by the breakdown of
Bretton Woods, in Chapter 6.

Giannini paints a bleak picture of the future of central banking, that
is, of their capacity to provide confidence in the payments system.
He quotes Bank of England Governor (1920-44) Montagu Norman to the
effect that “No central bank can be greater than its own State – the
creature greater than the creator.”  The internationalism of bank
money is unlikely “because the banking system is … protected by a
safety net that is the responsibility of the nation-state and,
ultimately, of local taxpayers” (p. 218).   On the other hand, central
banks pursuing national goals at the expense of others are unlikely to
produce a healthy international environment.  A solution in the form
of cooperation between sovereign states is problematic.  Perhaps, “in
the long term … this problem will produce a strong incentive to share
monetary sovereignty on a regional basis and in some cases to look for
a new territorialization of money on a broader geographical scale,
through the creation of innovative forms of political action” (p.
218).

“In the years to come [as often in the past], the most interesting
developments will probably be precisely in the sphere of supervision
and regulation” (p. 255).  However, moral hazard problems, always
present, as in the lender of last resort, are growing.  “Globalization
has sharply increased financial concentration, [creating] national
champions far out of proportion with the rest of the economy and even
the central bank.  This was predicted by Fred Hirsch [“The Bagehot
Problem,” Manchester School, 1957] in the little-known article that
marked the start of modern studies of central banking.    [G]iven
informational asymmetries the attempt to subject banking to strict
market discipline would result in concentration, as large banks sought
the protective umbrella of government” (p. 257).

The increased activity of central banks since the middle of the last
decade is consistent with Giannini’s logic of the evolution of central
banks.  The problem of inflation seems to have been solved but the
greater function of central banks, that of supplying trust in the
payments system, has a murky future.  Those who hope to predict or
understand the next step would do well to begin with the book under
review.

John H. Wood, Wake Forest University, is author of A History of
Central Banking in Great Britain and the United States (Cambridge
University Press, 2005).

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Geographic Location: General, International, or Comparative
Subject: Financial Markets, Financial Institutions, and Monetary History
Time: 19th Century, 20th Century: Pre WWII, 20th Century: WWII and post-WWII