Untimely Births
The Spread of the Modern Central Bank and Global Cooperation, Ed. Barry Eichengreen and Andreas Kakridis, 2024.
There are few periodisations as universally accepted as the ‘interwar period’. This is with good reason — demarcated by transformative conflicts on either side, the era has a sharp (and clearly meaningful) beginning and end. But it is important to remember that the period was not a homogenous lump. The 20s were an era of conservative consolidation which started with Maier’s “Global Thermidor” and peaked in 1928, with the ill-fated return of France to the gold standard. But the 30s were different. The Great Depression blew conservative social and political fortifications apart, and caused the rapid crumbling of the international monetary system, and of global cooperation on every level, well before the Second World War.
This is also likely an overly simplistic framing. Nonetheless, perhaps nowhere does it ring truer than regarding the spread of central banks and the rise and fall of central bank independence in its first iteration. In the 20s, over a dozen central banks were established, especially in three regions: The Dominions of the British Empire, Latin America, and Eastern Europe. Almost all were built around the edifice of private-ownership and independence; key, in the eyes of British and American central bankers, if a stable gold-exchange standard was to be maintained and cooperation on monetary policy between nations normalised. But in this domain, 1929 really was a watershed. In the space of little over a decade, governmental control of central banks grew to become the norm. In 1944, even Montagu Norman’s Bank of England, a blueprint for independent central banks worldwide, was nationalised — it would not have operational independence again until 1998. Further still, the hopes for global cooperation between (and, crucially, on the terms of) central banks were lost with the failure of the Bank of International Settlements (BIS).
The many essays in the edited volume, The Spread of the Modern Central Bank and Global Cooperation, raise themes familiar to those who have read (or, who have read my review of) Barry Eichengreen’s Globalizing Capital. The historic specificity of monetary systems is an example of this: in a chapter on Austria, Hans Kernbauer strikes this note when he writes that “it was [the] fatal belief that the conditions of the late nineteenth century could be replicated which led to the collapse of the interwar economic and monetary system”. However, unlike Globalizing Capital, this is a book about nuances — regional differences in history and politics which complexify all-encompassing theories about the nature of interwar central banking. As such, one chapter pushes softly against the excesses of hegemonic transition theory. Another reframes our narratives about the development of the Bulgarian National Bank. Some authors support a clear demarcation of before from after 1929, while others reject it — usually based on subtle differences between national pathways.
Nonetheless, there is a shared analysis which binds the volume together: the Polanyian perspective which emphasises a conflict between democracy and markets. In their introductory remarks, Eichengreen and Andreas Kakradis suggest that interwar central banks “were designed to remove management of monetary affairs from the domestic political arena at the very time when the latter was becoming more representative”. Crucially, they add, “the very process of de-politicization was political, not only in its motives, but also in its distributional consequences”.
Depoliticisation had both a domestic and an international component for the central banks founded in the 1920s. The hyperinflations of the early twenties had convinced many of the need for an independent central bank responsible for the value of the currency, especially in Central and Eastern Europe. Often, these states had founded their central banks in the midst of severe economic crises and political dislocations, when domestic stabilisation was the priority. But, more often than not, the rationale behind depoliticising monetary policy by creating an independent central bank was less urgent, and multifaceted. It did include the need for price and exchange-rate stability, but also lender-of-last-resort capacity, and crucially, plain external influence.
The role of external influence is well debated. Prominent central bankers like Montagu Norman and the Federal Reserve Bank’s Benjamin Strong (and their “money-doctors" Otto Niemeyer and Edwin Kemmerer) preached the virtues of a network of independent, “apolitical” central banks. For many developing countries, a method to guarantee their support was to bring in an American or British central banker advise on building their new central bank — hence the missions of the money-doctors. So while external influence was a factor amongst many, it was a key determinant of what the newly-founded central banks looked like, especially in regards to the key pillar of independence. As Zendejas and Nodari argue, since most Latin American states financed their debt externally, building central banks which followed the rules of the gold standard was an important international signal in the 20s — “independence was the price to secure exchange rate stability and lower inflation rates”.
In the British Empire, depoliticisation had an additional international aspect: imperial control and the “good of sterling”. As John Singleton shows, this was true in the Dominions (Australia, Canada, and New Zealand), in which central banks, cooperating with the Bank of England, could support British financial leadership, even while political divergence was increasingly difficult to resist. In India, however — the only colony in the interwar period to found a central bank — this dynamic was even more pronounced. As G. Balachandran writes, the Reserve Bank of India, founded in 1935, “had become, three years after its founding, a government department and an agent and subsidiary of the Bank of England”. Nominal independence could invite a reality of dependence.
With the Great Depression, this adolescent network of independent central banks crumbled. But was this an inevitable result of the crash? Patricia Clavin and Piet Clement help explain the link between the depression and the fall of the BIS and central bank cooperation. Founded in 1930, the BIS was a product of a breakdown in relations between central banks and the League of Nations. It was the brainchild of Montagu Norman and Hjalmar Schacht, both of whom sought an institution wherein central bankers could cooperate discreetly and regularly.1 But the BIS never fulfilled this ambition. Instead, it would fade into four decades of irrelevance, only narrowly escaping abolition after the war.
Why? As Clement notes, “from more than one perspective, the birth of the BIS happened at the wrong time”. Created on the cusp of the depression, it was unprepared for a rapidly deteriorating international environment. Still further, the Great Depression rapidly re-politicised monetary policy. Crisis fighting, Clement argues, “became unavoidably political, as it had a bearing on the stability and even survival of banks and governments”. Central banks were pulled from the BIS and into conflict with their own governments and banking sectors.
The interesting point, however, is what the BIS might have been. According to Clement, there is a case that “under more propitious circumstances the BIS might have developed into something resembling the International Monetary Fund (IMF) or the World Bank… an IBRD avant la lettre”. This was the idea, he argues, of Schacht, who proposed that the BIS should be authorised to “grant credits to promote trade and economic development, not just to central banks, but also to governments, public authorities, and any other borrower benefitting from a government guarantee”. An empowered BIS along these lines, one imagines, might have had a more significant role in the aftermath of the Great Depression. It might have demonstrated that Norman’s network of independent central banks, and monetary policy itself, could assist crisis-fighting; in much the same way as central banks revealed their role after the financial crisis of 2008.
But the BIS would not be so empowered. Not only was its birth untimely, but Schacht’s suggestions met with great opposition, especially from France and Italy. As Clement says, “Norman and his colleagues had done their utmost to keep politics out, priding themselves in having created the BIS as a technical, non-political organisation”. Depoliticisation was not flexible enough for such an international bank in the twilight of the gold-exchange standard era. The limited interventions of the BIS in Spain (1930) and Austria (1931) failed. After that, the BIS retreated into little more than an information-sharing hub. The next era of global cooperation, Bretton Woods, would not be built by banks.2
Thinking about the first age of central bank independence, I am inevitably led to thinking about how it compares to the second — our own. What makes the independent central banks of today more capable of effective cooperation — even if that effectiveness raises fundamental political questions — than their interwar counterparts? Why did the Global Financial Crisis not similarly see a failure of independent monetary institutions, a backlash, and winding back of depoliticisation?
In back of mind, of course, is Éric Monnet, whose Balance of Power I reviewed a few weeks ago. There is a case to be made that our era is not fundamentally different to the interwar period in this regard. If one, following Monnet, takes a pessimistic view of contemporary central bank independence, it might only be that the reckoning of this latest episode of depoliticisation was postponed. However, there is an alternative possibility: that the independence of central banks today might be more resilient. In a sense, Schacht’s vision of the BIS as an institution committed to depoliticisation and independence while capable of organising international cooperation in unorthodox ways, is similar to how central banks operate today. Whether Schacht’s BIS, if it had been pursued to fruition, would have altered the course of monetary and financial history is a fanciful counterfactual. But it is also, perhaps, closely connected to a history we are living through now.
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The Governor of the Bank of England and the President of the Reichsbank, respectively.
My next review, on Eric Helleiner’s States and the Reemergence of Global Finance, will cover the rise and fall of the Bretton Woods system.