- From Lahore to Lancashire: Untold stories from imperial Britain John Keay, Literary Review
- The younger sons in Jane Austen’s England had to work Richard Francis, Spectator
- How soon we forget Scott Sumner, EconLog
- Gin, sex, malaria, and American anthropology Charles King, Chronicle Review
- Yield-curve inversion and the agony of central banking David Glasner, Uneasy Money
- Ossian’s Ride: wild Irish science fiction I’d never heard of Henry Farrell, Crooked Timber
- The pioneers of cultural relativism did a lot of good, too Patrick Iber, New Republic
- Umberto Eco: Champion of popular culture Paul Cobley, Footnotes to Plato
In a piece on a rather different topic, George Selgin, director for the Center for Monetary and Financial Alternatives and editor-in-chief of the monetary blog Alt-M, gave a somewhat offhand comment about the origins of central banks:
For revenue-hungry governments to get central banks to fund their debts is itself nothing new, of course. The first central banks were set up with little else in mind. (emphasis added)
Writing about little else than (central) banks in history, you can imagine my surprise:
Reasoned response: Selgin ought to know better than buying into this simplified argument.
Less reasoned response, paraphrasing one of recent year’s most epic tweets: you come into MY house?!
Alright, let’s make a quick run-through, then. Clearly, some simplification and lack of attention to nuances is permissible under the punchy poetic licenses of the economic blogosphere – especially so when the core of an argument lies elsewhere. But the conviction that early central banks
(a) were created as revenue-raising devices for their governments, or
(b) all central banks provided their governments with direct fiscal benefits,
is a gross simplification of a much broader and much more diverse history of early public banks. Additionally, the misconception entails what Italian banking scholar Curzio Giannini derisively referred to as overly-narrow “fiscal theor[ies] of central banks”. Since too many people believe some version of the argument, let’s showcase the plethora of early central banks and illustrate their diverse experiences.
Initially, the banks-as-fund-raisers argument may seem reasonable; a few proto-central banks definitely were set up with this purpose in mind, with the Bank of England’s series of monopoly charters beginning in 1694 as the prime example. David Kynaston, the great historian of the Bank, eloquently characterized the relation between the government and the Bank as a ‘ritualistic dance’ in light of the periodic renewals of its monopoly charter; the Bank provided the government with funds and in return received some new privilege in addition to lucrative interest payments.
Among the dozen or so other candidates reasonably fitting the description “first central banks”, we see a wide variety of purposes, not all of which were principally – or even at all – concerned with funding their governments.
Banco di San Giorgio (Genoa, 1407), was essentially a precursor of money market funds with investors holding the City state’s debt and receiving taxing rights. Here, as in many of the northern Italian city-state banks of the 14th and 15th century, the banks-as-fund-raisers argument seems applicable (we might mention others here too, like the Catalonian Taula de Canvi, 1401, that is often considered the first public bank). Whether or not these first generation banks may be counted as “central banks” is much less doubtful, but a topic for another day.
Amsterdam Wisselbank (1609), a much-studied institution and a trailblazer in the history of central banking, was primarily set up to facilitate payments, specifically to simplify the chaotic muddle of coins and payment methods that abounded in the Low Countries during the 1500s and 1600s. The Bank’s lending was circumscribed, and the lending that did take place often went to the Dutch East India Company – of course, we might argue that the Dutch East India Company, with its directors appointed by the Dutch provinces, actually constituted an arm of the government and so counting this lending as government financing. Besides, the City only began using the Wisselbank for financing purposes firstly through a loan in the 1650s and then more frequently towards the end of the 17th century. Regardless, those are (decades removed) outcomes – not initial purposes.
Hamburger Bank (1619) was similarly set up with monetary stabilization in mind and adopted many of the features of the Wisselbank. Contrary to the Wisselbank, it had a credit department that right away engaged in lending to private parties on collateral. However, it seems that most of its funds were lent to the Kämmerei (municipality treasury). In economists William Roberds and Francois Velde’s account, the
problems with circulating coinage in early seventeenth-century Hamburg were, if anything, worse than in Amsterdam.
A partial vindication, at best, for the banks-as-fund-raisers argument since the Hamburger Bank was clearly set up with monetary stabilization in mind rather than government financing. In practice, however, it did finance the city.
The Riksbank: (Stockholm, 1668). Picking up from its failed predecessor ‘Stockholms Banco’, what later became known as Sveriges Riksbank (frequently credited with being the first – surviving – central bank) was tasked with facilitating trade and upholding the value of the domestic currency. In practice, this meant influencing the foreign exchanges as they stood in Hamburg or Amsterdam. Initially, the bank was explicitly prohibited from extending funds to the crown (in early 2019 there has emerged a dispute over this point among some Swedish financial historians). What is clear is that for the first fifty years or so of the bank’s existence, the rule seems to have mostly held up; not until the Great Northern Wars in the early 1700s did the Riksbank to any meaningful extent advance funds to the government.
Bank of Scotland (1695) and the Royal Bank of Scotland (1727), were both – a bit like the Riksbank – chartered to advance and improve the functioning of the domestic economy, and they were prohibited from lending to the crown. Despite the well-known political conflicts leading to the chartering of the Royal Bank, the Scottish case of rivaling banks were clearly created to advance the North Sea trade, not to finance the government or manage its debt. The third chartered Scottish bank, the British Linen Company (1745) was formed in order “to carry on the linen manufactory”. As is often the case in banking history, the Scottish case might thus be the clearest counterpoint to an argument. Further, the Scottish banking historian Sydney Checkland pointed out that the Bank of Scotland was “solely dependent on private capital, and […] wholly unconnected with the state.”. Again, the No True Central Bank objection might be raised, but it would send us tumbling into a dark definitional hole that has to wait for another time.
Banco del Giro/Wiener Stadtbank (Vienna, 1703 and 1705) were both established as a result of “the poor state of Austrian public finance” Like in Venice and Genoa, the banks were meant to enhance the liquidity of the government’s debt, actively contributing to reducing the State’s and the City’s interest rates respectively – and then gradually pay back their debt. While both banks did accept private deposits, and like its Hamburg and Dutch predecessors facilitated payments through their ledgers, these operations were clearly not their prime purposes. Money-raising argument vindicated.
This brief overview of some early central banks illustrate the point: banking history contains much wider experiences than a simplified money-raising argument implies. Indeed, even the First Bank of the United States – clearly an aspiring candidate to the title of ‘first’ central banks’ – seems to primarily have had trade-enhancing and economic development purposes in mind. This I say much hesitantly, since early American banking is definitely not my forte and I fully expect Selgin (and others) to correct me here.
Regardless, to claim that early (central) banks were set up with government finance in mind, is clearly an overstatement.
The title is a play on my favorite of George Selgin’s many brilliant articles, ‘Those dishonest goldsmiths’.
For the record, George Selgin is well-versed in this literature, and I’m merely using his quote as a stand-in for a common conviction among the not-so-well informed academic crowd.
- Functional Illiteracy Stephen Cox, Liberty Unbound
- Hydraulic Monetarism Nick Rowe, Worthwhile Canadian Initiative
- The “New” Monopsony Argument and the Suppression of Wages Mario Rizzo, Think Markets
- The Computer-Glitch Argument for Central Bank eCash George Selgin, Alt-M