July 29th 2022

PA.131 | Crises, money doctors and reforms: Is the new monetary technology a resource or a curse?

Parallel Sessions
This session aims at combining monetary history with the history of economic ideas and debates with the added dimension of what different technological solutions means for the monetary system. We aim at original research on the analysis of historical episodes of attempts at reforming, transforming or creating monetary architectures. The final goal of the session is to try to shed light on contemporary debates about new technologies of payment since the last global financial crisis. From Nicholàs de Oresme in the 14th century to contemporary monetary economists and policy makers today, monetary thinkers have played a pivotal role not only in building monetary theories but also in translating the theories into practical reforms. The term “money doctor” is often referred to as an adviser who engaged in implementing monetary reforms. We redefine the term in a broader sense as “a person who, with theoretical and practical knowledge, advices on how to build a stable monetary and financial system.” Advices may have or may not have been implemented, and if implemented, reforms may have succeeded or failed. Recent technological advances such as blockchain, cryptocurrencies, mobile phones and general digitalization have opened up for new solutions concerning monetary systems. All over the world digital money is being implemented in different forms, as cryptocurrencies, local money, mobile phone transfers and so on. According to a recent report from Bank of International Settlements (BIS) no less than nineteen central banks are currently investigating the possibility to issue so called ‘Central Bank Digital Currency’ (CBDC). Sometimes, however, it seem as the race towards implementing monetary systems based on new technologies is seeking solutions to non-existing problems – or put differently, that the technology allows new solutions but that monetary policy makers do not have a full understanding of what they are aiming to achieve by implementing these new technologies. Communities striving for independence from the State or the banking system rally towards blockchain because it supposedly mean autonomy from such authorities. Yet not much discussion is devoted to what the costs of different solutions are, what effects they will have on the fiscal system, equality and the economy as a whole. Thus, despite the rapidly increased interest in, what seem to be, ‘new forms of money’, we argue that current monetary development can not be understood without a firm understanding of monetary systems and monetary issues in the past. The organizers of the session welcome papers on the theoretical thinking of money and its application as well as the empirical studies on practical working of monetary systems. Considering recent developments toward a new course of monetary reforms, we also welcome papers on present day technological issues discussing the limits and possibilities brought by the new technology. By bringing together these perspectives we aim to unveil general patterns of the basis for well working monetary systems given different contextual and technological settings.
B - History of Economic Thought, Methodology, and Heterodox Approaches
Ogren Anders - Uppsala University
Masato SHIZUME - Waseda University
"Money doctors who established Japan’s modern monetary and financial systems."
Masato SHIZUME - Waseda University
Existing literature in English celebrates Matsukata Masayoshi, a Japanese politician who served as finance minister for many years, as the main architect of Japan’s modern monetary and financial systems in the late 19th century (e.g., Sylla 2002, He 2013, and Schiltz 2012). In this paper, I revisit early attempts by the Meiji government to build modern institutions, focusing on the accomplishments of monetary and financial experts before Matsukata, to paint a more balanced picture of the transition from an indigenous system to a modern one. In doing so, I focus on the 1871 debate among three money doctors, Ito Hirobumi, Yoshida Kiyonari, and Shibusawa Eiichi, on money conversion and the establishment of the modern banking system. Despite their different backgrounds and motivations, they managed to draw blueprints that were referred to by later experts, including Matsukata. (References) He, Wenkai. Paths toward the modern fiscal state: England, Japan, and China. Harvard University Press (2013). Schiltz, Michael. "Money on the road to empire: Japan’s adoption of gold monometallism, 1873-97." Economic History Review 65, no.3 (2012): 1147-68. Sylla, Richard. "Financial systems and economic modernaization." Journal of Economic History 62 (2002): 277-92.
“Monetary disorder and monetary innovations: Johan Palmstrüch, Stockholm Banco and the emergence of Bank notes in 17th century Sweden”
Ogren Anders - Uppsala University
The short history of the Stockholm Banco 1656 – 1667 includes the episode of bank note issuance 1661 – 1666. This note issuance ended in the banks failure as the bank used it to quickly increase its credit provision. Behind this expansion of the banks activities that ultimately led to its failure was the director, and founder of the bank, Johan Palmstrüch, whom as a result of the mismanagement of the banks’ affairs was sentenced to lifetime imprisonment. This is the formal account of the banks’ and Palmstrüch’s destinies, being reproduced also in our days not least on the official history of the Swedish central bank, the Riksbank available on their homepage. It does not take much effort when studying this episode to observe that this account of Palmstüch’s activities and not least the failure of the bank and the bank notes was a result of monetary and fiscal malpractices, not by Palmstrüch but by ambitious and influential politicians lacking necessary financial and monetary knowledge – especially by Gustav Bonde whom at the time acted as what in today’s rhetoric would be minister of finance. Bonde was also appointed controller of the bank and its affairs by the king. After the fall of Stockholm Banco a new bank was founded in its ashes 1668, the Bank of the Diets (Rikets Ständers Bank) which today is known as the Riksbank, the central bank of Sweden. The founding of this bank was based on a detailed proposal from Gustav Bonde himself and it was in detail a replica of the Stockholm Banco, with the notable exception that the new bank was banned from issuing notes. A ban that did not last for long. So what were the evidences of Stockholm Banco’s mismanagement especially in relation to the note issuance: in short not much. Credits had increased rapidly, which may not be surprising given that the bank started as the only formal agent on the credit market – probably to a large extent replacing private credits. It is also true that a large part of this credit expansion was done by issuing bank notes after 1661, an estimate referred to frequently in the literature that the bank had 3 million Daler Copper outstanding in loans and that 2.7 million of those were provided by note issuance. Another proof is the problem representants of the bank had to pay out copper coins to people redeeming their notes, the reserves of the banks was down to 4000 Daler Copper at its lowest account. Other proof is different kinds of anecdotical evidence such as rumours that the bank avoided to pay out Copper coins for its notes or that the bank notes were traded with a discount of 6 – 10 percent. The destabilising effect of the notes is also based on some (few) accounts from people stating that prices had been driven up by the bank notes – being taken as proof that the bank’s note issuance drove inflation in accordance with a simple quantity theoretical framework. What however is not taken into account when blaming Palmstrüch for the failure of the bank notes and the bank is the economic, i.e. monetary and fiscal, context that Palmstrüch was working within. Starting with the monetary system at the time. This was first of all quite complex with different kinds of monies, denomination systems, and metallic standards. The most obvious variable was the fixed exchange rate between copper and silver that was guaranteed by the state. Copper coins were simply denominated in silver, meaning that a fixed amount of copper represented a certain amount in silver. This fixed relation had been altered with alarming frequency by the authorities through the years, constantly debasing the amount of copper for silver. In short this means that prices were quoted in silver, but that the amount of copper that was paid changed at the rulers will. This system was even more bizarre as the amount of copper minted was due to world prices, if world prices were high copper was exported and not minted, if low the contrary (Ögren Runefelt). This means that high international copper prices not only drove copper coins out of circulation by being exported, it also led to a lower supply of them, amplifying the effect of the international copper prices. In 1661 it was again time for a debasement of the silver coins or rather to lower the amount of copper in the copper coins denominated in silver. This debasement provided incentives for the depositors in the Stockholm Banco to withdraw their copper coins, as these old copper coins contained more copper than the new ones with the same denominations. It was at this point in time that Palmstrüch decided to replace paying out copper coins with notes (Kreditivnotor), these differed from previously circulated bills of exchange as they had printed denominations and where not subject to be transferred between holders in writing. These institutional features that lowered transaction costs was also boosted by the heaviness of the actual copper coins, one Daler weighed almost two kilos and the 10 Daler coin is known as the worlds heaviest coin with its weight of 19.7 kilos. There are certainly other reasons for the success of the bank notes, such as the fact that the Bank officially was the bank of the king and the crown, providing it with the status of state bank decreasing the risk of accepting these notes. Problems with the bank notes started to be observed already in the autumn 1663. This is the time when the bank allegedly had problems to satisfy the redeemers of these notes. During this period the bank resorted to import copper and mint it to be able to meet the demands of the note holders at par. This policy was probably meant to keep up the public trust in the notes. The problem being that with the design of the Swedish monetary system and as international copper prices being higher than the face value of the coins the demand for copper coins continued, and they continued to be exported abroad. The bank seemed to be able to run out this storm when the king, probably advised by aforementioned Bonde, suddenly decided that all notes should be taken out of circulation. Not long thereafter the authorities also launched a process towards Palmstrüch for mismanagement of the bank completely destroying what trust their may have been left. Accusations was that the bank notes had led to a destabilised economy and Palmstrüch was accused of embezzlement. The decision to take all notes out of circulation meant foreclosing all the loans of the bank. This in itself brought more havoc over the financial and monetary system. In 1668 the process ended with Palmstrüch found guilty although no proof of embezzlement had been found and no client of the bank had lost any money. What Palmstrüch had to deal with was to act as a money doctor repairing a system that constantly was destroyed by the authorities. The decision to circulate bank notes has in the literature given rise to much debate whether England or Sweden was the first European country to have banknotes in circulation. In relation to this also where the influence of these bank notes came from. The first question of being the first European country is quite uninteresting, what is interesting however is the idea of the bank notes. There is however a very simple and convincing influence, that of bills of exchange. Bills of exchange was the financial instrument at the time and the bulk of the bank’s activities included bills of exchange from the start. To print a kind of bill of exchange issued by the bank (and thus relying on the banks credibility) that can be circulated and then redeemed by the bank by any holder instead of endorsing others’ bills of exchange is not a too farfetched idea.
"Is Oda Nobunaga the final champion of the medieval or a pioneer of the early modern era? A money doctor in the 16th century Japan."
Hisashi Takagi - Osaka University of Economics
This paper explores bronze coin policies employed by the Oda Nobunaga administration in the late 16th century. Published research has described Oda Nobunaga as the pioneer of the early modern regime—that is, the Tokugawa Shogunate—and emphasised disruptive aspects for the medieval regime. However, this paper focuses on the aspect that his monetary policy, especially on bronze coins, is merely a continuation of the status quo—in other words, confirmation of the social practices in the 16th century.
"The role of the international banks under the monetary reforms in Siam, 1888-1913."
Takeshi Nishimura - Kansai University
''Was the native interest rate good for financial stability? Money creation, clearing system, and a growth of a modern banking sector in Shanghai in the early 20th century.''
Hiroaki Morota Hiroaki Morota - Yamagata University
This paper intends to examine what factors determined the native interest rate-a 1-day call loan- in Shanghai in the interwar period. Conventional wisdoms argue that in modern China, the amount of silver determines price as a base money and therefore international silver market fairly affected contemporary Chinese price. On the contrary, interest rate-an another important indicator that the amount of silver affected-has been hardly discussed. When it comes to lending interest rate, although some research points out long-term downward trends and regional disparity in the interwar period citing fragmented materials of prestigious banks, almost nothing more is known. It seems that almost everything as to interest rate is explained by the total amount of silver and regional disparity as well as the price. However, this paper argues that a certain type of silver has had a particularly strong impact on the interest rate. In this era, there were two types of silver currencies: silver ingot and silver coin. Silver ingot was casted by local private mints and mainly used in transactions with foreign countries or other treaty ports. The denomination of silver ingot was called teal which was also the denomination of the native interest rate. The native interest rate is a 1-day call loan which was decided in the call market held by native banks with unlimited liability in Shanghai. Many contemporary resources said that the native interest rates had been a one of the most important indices showing the supply and demand balance of money even after the rise of large-capitalized Chinese banks with limited liability along with the below mentions dollar-teal rate in Shanghai in the early 20th century.    Silver coin was casted by government influential mints and was mainly used in treaty ports or inland for purchasing exports goods. Its denomination was dollar. Native banks held dollar-teal exchange market every day, and many contemporary businessmen and bankers carefully watched dollar-teal rate as an indicator of business sentiment. That is, the native interest rate was the teal denominated rental fee of transfer on books, on the contrary, dollar-teal rate is the relative price of actual silver coin and silver ingot. As mentioned above, conventional wisdoms argue that the amount of silver determines price and the interest rate as a base money in modern China. However, using ARMA model, this paper shows the fluctuation of native interest rate had correlation with the amount of silver ingot, but did not have correlation with the amount of silver coin held by financial institutions at least in the interwar period. This result shows that the native interest rate was regulated the amount of silver ingot rather than the total amount of silver. That is, besides the international silver market, the casting ability of local private mints and the competitive relationship between silver coin as to secure the raw material-silver- affected the native interest rate. Generally, it can be said that the native interest rate was almost totally regulated in private sector. This does not mean the native interest rate was easy to get out of control. Native bankers’ association regulated members and negotiated with other institutions including government influential mints casting silver coin. In addition, native bankers’ association controlled the native interest rate and ordered members not to build black market when financial agitation happened. It seems that the native bankers’ association relatively well controlled members, because the loss of being exiled from native bankers’ association―expulsion from clearing system managed by native bankers’ association― was devastating.
"When science is for sale – Edwin W. Kemmerer – a 1920’s Bond Man or the International Man of Mystery? Inquisitions into the Mystery of Value."
Joanna Kinga Sławatyniec - Rotterdam School of Management, Erasmus University
"A Gold Battle? Revisiting the History of De Gaulle vs. Dollar Hegemony During the Bretton Woods Era."
Maylis Avaro - University of Pennsylvania
The US dollar was the central currency of the Bretton Woods international monetary system. During the sixties, French authorities took a strong stance against the continuation of the dollar’s key currency role. I study this episode of non-cooperative behavior thanks to new archival evidence and investigate De Gaulle and his advisors' motives for rejecting the dollar hegemony.
''Stagflation and the crisis of the 1970s.''
Jonas Ljungberg - Department of Economic History, Lund University
Central Bank Cooperation 1930-1932. A Reappraisal
Juan Flores Zendejas - Université de Geneva
Gianandrea Nodari - University of Geneva
The literature on interwar monetary history has argued that the lack of central bank cooperation contributed to the pervasive economic outcome of the 1930s. The reasons for this failure are still object of debate amongst economic historians. In this paper, we revisit the attitude of individual central banks – the Bank of England, the Bank of France and the Federal Reserve – to the attempts led by the Bank for International Settlements (BIS) to institutionalize central bank cooperation. We first redefine central bank cooperation as understood by contemporaries, and focus on the range of instruments designed by the BIS with this aim in mind. These instruments included the monthly exchange of information and an extensive array of technical financial arrangements, which the BIS defined as the "rules of the game" of central bank cooperation. Finally, we analyze the volumes and conditions of BIS loans. These loans were conceived to stabilize the currency of member countries, to reinforce foreign reserves during banking crises, to facilitate credit to the private sector via central banks and to provide medium-term credit to the agricultural sector. We observe that BIS loans served to crowd-in other bilateral loans, thereby increasing the capacity of central banks to confront the effects of the 1931 financial crisis. However, we find that central banks' attitudes were driven by domestic interests rather than by a disposition to engage into an institutionalized process of reciprocal assistance in times of crisis.
"The doctor is shortsighted: the French Senate and the narrow view on banking regulation during the Interwar,"
Patrice Baubeau - Universite Paris Nanterre
"The inequality-debt-crisis nexus during three macroeconomic policy regimes"
Lars Ahnland - Stockholm University
“O.M.W. Sprague (the Man Who “Wrote the Book” on Financial Crises) meets the Great Depression,”
Hugh Rockoff - Rutgers University
When the Great Depression struck the United States, O.M.W. Sprague was America’s foremost expert on financial crises. His History of Crises under the National Banking System is a frequently cited classic. Had he diagnosed a banking panic and called for an aggressive response by the Federal Reserve, it might have made a difference; but he did neither. Sprague’s misdiagnosis had, I argue, two causes. First, the crisis lacked the symptoms of a panic, such as high interest rates in the New York money market, which Sprague had identified from his studies of previous crises. Second, Sprague’s macro-economic ideas led him to conclude that increasing the stock of money would be of little help once a depression was underway. Sprague’s main concern was that abandoning the gold standard would intensify the crisis, a concern that led him to resign his position as advisor to the U.S. Treasury to protest Roosevelt’s gold policy.
“Robert Triffin – a life,”
Ivo Maes - National Bank of Belgium
Ilaria Pasotti - Archivio Storico di Intesa Sanpaolo
Robert Triffin: A Life by Ivo Maes (with Ilaria Pasotti) is the first comprehensive biography of the Belgian American economist. After studies at Louvain and Harvard in the 1930s, he became an economist at the Federal Reserve Board and the IMF. Triffin became famous as the Cassandra who predicted the end of the Bretton Woods system and he never tired of highlighting the political, economic, and moral tensions inherent in keeping the dollar, a national currency, as a global reserve currency. Already in 1950, he was an architect of the European Payments Union and he played further a key role in Europe’s EMU process, becoming one of the intellectual fathers of Europe's single currency, the euro.
"Rist, Quesnay, and Mitzakis: Different French ways to stabilize the peseta (1929-1930)"
Nicolas Barbaroux - University of Saint Etienne
Dominique Torre - Université Côté d'Azur
Enrique Jorge-Sotelo - Universitat de Barcelona
"Public Confidence and Counterfeiting: Some Lessons from the Monetary Reform of Alexey Mikhailovich (1654-1663)"
Danila Raskov - Helsinki University
The paper deals with the public confidence towards money and monetary reforms. From that angle, the short-run success and the final and total collapse of Alexey Mikhailovich’s monetary reform (1654–1663) are reconsidered. The purpose of the reform at a certain stage became the replacement of all silver money with copper tokes of similar weight and with the same denomination. Particular attention will be given to the mistakes of authorities, the agio of copper and silver money, the real value of money, the counterfeiting and the perception of new «red» copper money among the population to the extent we know from the witnesses of that era (Kotoshikhin, Pososhkov, etc). In contrast to typical assessments, I show that the reform was credible for the first four years, as copper money was seen as additional tokens, increasing liquidity and contributing to the money shortage problem. The fragility of this trust became apparent after a series of inconsistent steps on the part of the authorities: taxes continued to be collected in silver, the use of copper money in Siberia and in the contracts with foreigners was prohibited. The ease of counterfeiting copper tokens and the profit, reaching up to 60-80 times, led to a colossal distribution of counterfeit coins. The following quantitative parameters can be attributed as indirect indicators of the degree of confidence in new money: the difference between the nominal and real value of coins; exchange rate (agio) dynamics between old money and new tokens; the supply of new coins and related price dynamics (inflation); and, finally, the amount of counterfeit that spins the dynamics of competition for seigneuriage.
A re-assessment of Swedish central banking during 1930s banking crisis
Liang Zhao - Department of Economic History, Lund University
Abstract: During the 1930s financial crisis, Central bank of Sweden (Riksbank) actively intervened the liquidity of banks and the market through a range of monetary operations. The monetary policies combined with the devaluation of currency, was regarded as a crucial factor that led to the quick and strong recovery of Sweden. By making use of the balance sheets of the whole banking system, this paper explores the detailed content of monetary policies before, during and after the 1930s crisis of Sweden, and provides new evidence on the monetary stance and policy goals. The main findings are: 1) Since early 1931 Riksbank changed its role in lend of last resort from a channel to a real supplier of liquidity. However, after leaving gold standard, Riksbank started to be cautious in expanding money supply unless in urgent need of bailout.2) The rising in the deposit reserve ratio of banks offset the expansionary monetary policies and thus the actual money circulated in the market was even in contraction in most of the time under the study. 3)The reserve and currency value, instead of domestic monetary demand, were the main goals of monetary policies after leaving gold standard.
Heterodox, orthodox or just pragmatic? How the Central Bank of Colombia escaped from the Great Depression, 1923-1933
Gianandrea Nodari - University of Geneva
How did Colombia escape from the Great Depression? What was the role of its central bank in this process? Vast strands of literature have shown how the Great Depression became a turning point in the development of modern central banking In Latin America. In spite of the great attention economic historians had dedicated to this topic, until now the debate on central bank transformation is still framed in a binary heterodox vs orthodox anchor. Drawing on extensive primary research conducted at official and private historical archives the aim of this paper is to show how neither orthodoxy nor heterodoxy but just a good dose of pragmatism characterized Colombian Central Bank (BREP) action during the Great Depression. The originality of our paper lies in the fact that we depart from what a textbook on central banking during the great depression suggests (in theory) to document in practice what a “flesh-and-blood” CB such as BREP did. In doing so, we examine the starting point of a long-lasting transformation in the banking system: the rise of publicly-owned and/or run banks founded amidst the crisis to support particular economic sectors, alleviate debtors or rescue banks.