July 28th 2022

PA.026 | Central banking as a resource for industrial and economic growth: a historical perspective from the nineteenth century to the present

Parallel Sessions
The standard theory of central banking, which is still in force today, dates back to the early 1920s, in the aftermath of the First World War. The international financial conference held in Brussels in October 1920 explicitly formulated the mandate of central banks: maintaining price stability. That goal was thereafter included in the statutes of the numerous central banks founded worldwide in the inter-war period. The shift in mandate for the first banks of issue which were created in the seventeenth to the nineteenth centuries, from the Swedish Riksbank to the Bank of England and the Bank of France, was obvious, as the original mandate of those banks was indeed fostering economic and industrial growth, as well as full employment, through an appropriate credit policy of cheap money (which could even imply direct investments in industry by the banks of issue) and the fine-tuning of money markets allowing the optimal allocation of financial resources. We find that original mandate of central banks once again at the hearth of the Keynesian revolution from the crisis of the 1930s to the crisis of the 1970s, building up a specific financial system – an ‘overdraft economy’ (John R. Hicks, 1979) – where the central bank acted as a ‘lender of first resort’ in order to monetise mid-and even long term credits. But the monetarist turn occurring in the 1970s moved once again the cursor of central banking to the price stability mandate. So much so that Paul Volker could speak of the ‘triumph of central banking’ in the Per Jacobson’s conference in 1990. Does the mandate of price stability mark the end of history in central banking? The most recent developments in the small world of central banking (i.e. Quantitative easing and central banks’s purchase of corporate bonds and assets), since the outbreak of the 2008 financial crisis, followed by the euro crisis in 2011-2012 and more recently, last not least, by the Covid-19 global crisis seem to suggest that that history has not come to an end as yet. These developments raise in particular the question as to whether central banks, taken in the long perspective, have a sort of double, unresolved personality and a dual mandate. Is it possible to talk about the existence of a form of central banking which is specific to ‘normal’ times and of a central banking which is by contrast tailored to stormy economic conditions? Also, considered in a long term and global perspective, is central banking intended as a resource for economic growth the norm or rather the exception? The session will attempt these questions looking at different national experiences and case-studies over the past two centuries. Given the relatively large number of contributors (a fact per sé suggesting the increasing attention that this theme is receiving), we suggest to divide the panel into two sub-sessions, one where emphasis will be more on theory and its historical evolution, and another in which mostly historical case-studies will be presented and discussed. The contributors will be: Session one: Introduction: Olivier Feiertag; Speakers: Arnaud Manas (Banque de France); Gerald Epstein (University of Mass. Amherst); Kazuhiko Yago (Waseda University, Tokyo); Clément Fontan (Leuven University); Discussants: Eric Monnet (PSE) and Shizume Masato (Waseda University, Tokyo) Session two: Introduction: Valerio Cerretano (University of Glasgow); Speakers: Marianna Astore and Mario Perugini (Bocconi University, Milan, and University Politecnica delle Marche, Ancona); Patrice Baubeau (University of Nanterre); Valerio Cerretano; Juan Flores (Geneva University); Giandomenico Piluso (University of Siena); Discussant: Jim Tomlinson (University of Glasgow). The title and the abstract of the proposed papers, which are listed alphabetically, can be found in the appendix to this proposal. Organisers: Valerio Cerretano, University of Glasgow Olivier Feiertag, University of Paris 1 Contributors: Eric Monnet (PSE) Marianna Astore (Bocconi University, Milan and Università Politecnica delle Marche, Ancona) Patrice Baubeau (University of Nanterre) Gerald Epstein (University of Mass. Amherst) Clément Fontan (Leuven University) Juan Flores (Geneva University) Kazuhiko Yago (Waseda University, Tokyo) Arnaud Manas (Banque de France) Paolo Di Martino (University of Turin) Giandomenico Piluso (University of Turin) Mario Perugini (Bocconi University, Milan) Enrique Jorge Sotelo (Universitat de Barcelona) Jim Tomlinson (University of Glasgow)
E - Macroeconomics and Monetary Economics
E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit
E52 - Monetary Policy
E58 - Central Banks and Their Policies
Olivier Feiertag - Université Paris Pantheon-Sorbonne
Cerretano Valerio - University of Glasgow
Eric Monnet - Paris School of Economics (PSE)
jim tomlinson - University of Glasgow
Masato SHIZUME - Waseda University
A pragmatic approach. The Bank of Italy, the CSVI and the provision of industrial finance, 1893-1926
Marianna Astore - Paris School of Economics (PSE)
Mario Perugini - Università di Catania
Our contribution is about the intervention in industry of the Bank of Italy from 1914 to about the end of the 1920s. It will look in particular at the role of the Bank in the launch and management of the ‘Consorzio Sovvenzioni sui Valori Industriali’ (hereinafter Consorzio) in 1914 and the Special Section of the Consorzio in the early 1920s. These were companies holding stakes in numerous firms and industrial sectors, with which the Bank, often on behalf of the government, came to be a major industrial actor. Our contribution confirms the suggestion that ‘managing instability’ was the main goal of the central bank in the period 1893-1926. A ‘pragmatic approach’ in central banking, to put it with De Cecco (1990), appeared to be the norm in that period. While the provision of industrial finance proved the norm more than the exception, that approach did not match at all the best practice of central banking, i.e. the principles of independence and price stability, as it has long been postulated in the dominant macroeconomic theory until the financial crisis in 2007-8 and, more recently, the Covid-19 pandemic.
From arm-lentgh to full embrace: the “middle-term loan”, the public financial sector and industrial financing in France, 1931-1947
Patrice Baubeau - Universite Paris Nanterre
The post-WW1 inflation and monetary disorders, combined to the 1930s economic crisis, put an enormous pressure on GSEs – the Banque de France included – to develop innovative credit schemes. In that respect, what came to be known as “medium-term loans” played a key-role in addressing capital needs for industrial reconstruction and development in post-WW2 France. But the road to this successful innovation is much more convoluted and complicated than usually assumed, and the central bank was centerpiece in both resisting and allowing this innovation to flourish.
The Bank of England, credit policy and industrial reorganisation after 1945
Cerretano Valerio - University of Glasgow
The intervention of the Bank of England in industry and its role in the reconstruction of entire industrial sectors, such as the heavy and cotton industries, before 1945 have been the focus of much scholarly attention over the past three decades. Much less has been said about the Bank’s intervention after 1945. In relation to the pre-war period, scholars have established that the Bank by taking a series of initiatives which sought to channel capital available in the City towards industrial sectors much in need of long-term finance attempted to fill what came to be perceived after the First World War as a gap in industrial finance. This literature has emphasised the Bank’s strong independence in taking these initiatives and has sought to subsume these episodes of industrial intervention within the broader debate about Britain’s alleged industrial decline. As a result of this, attention has been paid primarily to the outcomes of that intervention, while little scholarly energy has been directed towards a better understanding first of the main reasons leading the Bank towards that intervention and second of the relationship of the Bank with the Treasury and the country’s government. This paper proposes a shift in focus. First and foremost, it will look at the initiatives undertaken after 1945, and in particular at the role of the Bank in the establishing of the Industrial Reorganisation Corporation and in the rescue of Rolls Royce in the 1970s. Secondly, it will seek to assess the extent to which that intervention - to borrow the jargon of economists who are probably unfamiliar with the history of central banking - was ‘unconventional’ in relation to the history of the Bank and central banking in general.
Beating around the green bush. Central banking in the face of the environmental catastrophe
Clement Fontan - Université Catolique de Lovaine
Since 2015, central bankers from advanced Western economies are increasingly voicing their concerns about the impact of climate change on economic systems. Because climate change is seriously threatening their policy objectives, e.g. financial and price stability, central bankers are encouraging market operators to disclose their exposure to carbon activities and turn towards so-called “green finance”. Yet, central banks from advanced Western economies have not yet implemented significant measures aiming at aligning their own monetary and prudential policies with environmental priorities. Worst, their corporate securities purchase programmes are skewed in favor of multinational firms with large carbon footprints. In this communication, I argue that the gap between central bankers “green” discourse and the lack of environmental concerns in their policies is linked to the high degree of central bankers’ independence.
Do central banks have to earn money? The Red Queen Hypothesis
Arnaud Manas - Banque de France
Central banks thrive in complex ecosystems and while their evolutions appear to follow some punctuated equilibriums, they are constant competition and must achieve the “’holy trinity’ of profits, legitimacy and trustworthiness” (Baubeau, 2005). They are defined by their business model and have to adapt it to their changing environment and interactions...The aim of this paper is to study the evolution of Banque de France’s business models under the Red Queen Hypothesis and how it evolved from the 3-4-3 one to the present model. The questions of profit, ownership (Manas, 2019) and public good (Johnson, 1968) will be at the core of this paper.
Latin American Experiments in Central Banking at the Onset of the Great Depression
Juan Flores Zendejas - Université de Geneva
Gianandrea Nodari - University of Geneva
This paper analyzes the role of central banks during the initial years of the Great Depression. To date, the literature has focused on the loss of autonomy by central banks and on the implementation of innovative, countercyclical monetary policies which, while fostering economic recovery, led to higher rates of inflation and exchange rate volatility. In what follows, we show that policies of this kind had been foreseen by foreign advisors before and during the crisis, but that policymakers had been reluctant to implement them due to the fear of a loss of credibility for the gold standard regime. Nevertheless, we show that in most cases, expansionary monetary policies were short-lived, and that for the most part central banks were able to ward off the problem of fiscal dominance. By the 1930s central banks had become effective actors, channeling credit to the real economy and also supporting the emergence of state institutions that would promote the development of local industry.
Central bank intervention on the exchange rate market during the gold standard: Italy 1893-1913
Paolo Di Martino - Università di Torino
Recent literature has emphasised the relevance of central banks’ direct intervention on exchange rate markets as a key explanation of exchange rate stabilisation visible between 1900 and 1913. In contrast with the standard view of the gold standard of a system based on an invariant (yet contingent) rule of behaviour, this literature has unveiled the existence (as well as the effectiveness) of a set of very diverse policies aimed at operating in the gold standard regime by not respecting, rather than respecting, the so-called “rules of the game”. In this scenario little, if anything, is known about Italy, whose experience in the classic gold standard has been traditionally addressed from a macro, rather than micro-institutional, point of view. The aim of this paper is to contribute to fill this gap, using a mix of quantitative techniques (based also on original data) as well as qualitative sources from the archive of the main Italian bank of issue (the Banca d’Italia, from now on BdI).
Can a central banker serve two masters? The Bank of Italy between investment maximisation and macroeconomic stability, 1960-1990
Giandomenico Piluso - Università di Torino
From the early 1960s to the early 1990s the Bank of Italy had to face a major dilemma. As Franco Modigliani pointed out, the more or less implicit model steering the Italian central bank after 1945 had centred around the goals of investment maximisation, economic growth and productivity improvement. That model, however, proved not always and necessarily consistent with macroeconomic stability (price and exchange rates) and long-term allocative efficiency. In the 1960s, the Bank of Italy had increasingly opted for lax monetary policies to counter rising liquidity constraints of manufacturing firms (and mounting public debt in the following decade) assuring at the same time price and exchange rate stability. Things changed dramatically as stagflation hit the Italian and European economy in the early 1970s and as the Bank could no longer ensure price stability. The declining competitiveness of the Italian economy starting in the early 1970s imposed a different strategy, giving way to a monetary policy which was more restrictive than that pursued by governor Guido Carli in the previous decade. It is worth emphasising that initially, however, that policy, more than aiming at stabilising prices and exchange rates, was meant to change the behaviour of firms and banks as the new governor Paolo Baffi stated in 1976.
Fragility in central banking design: the Catalan banking crisis of 1931
Enrique Jorge-Sotelo - Universitat de Barcelona
Following leading countries during the post-WWI period, Spain created a semi-public bank in 1929, Banco Exterior de España (BEX). BEX was born to provide banks with a source of liquidity in foreign exchange, which the central bank, Banco de España had traditionally refused to provide. Precisely because of this, BEX was not granted access to the discount window of the Banco de España, so banks relying on BEX for liquidity grew very exposed. By drawing on newly collected archival material, I show that the incomplete design of BEX created the risks that materialized in the Catalan banking crisis of 1931.
To what extent is the Central Bank responsible for the growth of a country? A view from the Japanese experience
Kazuhiko Yago - Waseda University
It has been recognized, after long years of historical experiences, that central banks should be in charge of monetary stability in various ways: keeping convertibility with gold, managing the exchange rate, and securing money supply. However, recent works about central banks, with Quantitative Easing and Zero Interest Rate Policy, suggest a revision of the abovementioned historical experiences. Those practices nowadays derive from a new responsibility placed upon central banks, i.e. economic growth under deflation. This communication aims to deal with a fundamental question, focusing on the Japanese experience: To what extent is the central bank responsible for the growth of a country? The Bank of Japan, after long debates, set the “2% inflation target” in January 2013. Legally independent but politically influenced by the government, the Bank of Japan, since then made an effort to achieve the target in vain. The years spent brought about “Much ruin in Japan’s journey to 2%”, as Brendan Brown described it. Although discussed from economics and current political viewpoints, the above Japanese experience has its long prehistory, dating back to the post-WWII inflation management and foreign reserve policy under high-growth era of the 1960s. This study, relying on newly discovered Bank of Japan archives, tries to make clear historical context in which this “responsibility” was produced. Special attention is paid to the international background of central banking after the 1970s, when high-speed growth with inflation came to an end. (Selected bibliography) Brendan Brown, The Case Against 2 per cent Inflation: from Negative Interest Rates to a 21st Century Gold Standard, Palgrave Macmillan, 2018. Jennifer Holt Dwyer, “Explaining the Politicization of Monetary Policy in Japan”, Social Science Japan Journal, 2012, Vol. 15(2) Masanao Itoh, Ryoji Koike and Masato Shizume, “Bank of Japan’s Monetary Policy in the 1980s: A View Perceived from Archives and Other Materials”, Monetary and Economic Studies, Bank of Japan, 2015. Masaaki Shirakawa, “(Is Inflation (or Deflation) “Always and Everywhere” a Monetary Phenomenon?” (BIS Paper No. 77e) 2014. Kazuhiko Yago, “Convergence and Divergence over the Growth Paradigm: The OECD Working Party 2 and the Japanese “Doubling National Income Plan” (1961–70)”, Revue Economique, vol.71, 2020.