ABSTRACT

The historical analysis of how central banks emerged and developed is usually presented with the main focus on the countries which were most successful in terms of financial development. Consequently, the development of the Bank of England as a central bank and monetary policy maker is seen as the main case of reference, as the previous chapter by Forrest Capie illustrates. This is of course well justified by the fact that, by the latter half of the nineteenth century, the English type of central banking became an important model which inspired many other countries’ financial and monetary reforms. Another important standard of reference has been Banque de France. In spite of some important differences, the Bank of England and Banque de France, and the way these banks operated during the classical gold standard, can be said to constitute the ideal type of the classical central bank. But what exactly distinguished the classical model of central banking from the other models which were eventually abandoned? What were the alternatives the classical model ultimately superseded, and why? Capie et al. (1994), in their review of the development of central banking, fix the beginning of central banking in various countries by two indicators: the legal monopoly of note issue, and the de facto assumption of the responsibilities of the lender of last resort. These criteria seem natural from today’s perspective but they were probably not considered by contemporaries as the main parts of the central banking ‘revolution’ of the late nineteenth century. In order to get a true perspective on what actually was special about the victorious classical model of central banking one has to contrast it with the relevant alternative designs and their performance, and study the reasons which led to the adoption of the classical model. It is the claim of this chapter that the crucial feature which distinguished classical central banking from its predecessors was actually the lending doctrine, especially with regard to collateral policy. This chapter is about the proto-central banking development of the countries of the Baltic Sea basin. I survey the development of central banking institutions in the area from their beginning roughly until the period when they became fully fledged central banks in the classical sense. The Baltic Sea area is particularly interesting, because there public banks of issue emerged quite early, and also reached a scale which was significant in their day. It is well-known that the

Swedish Stockholm Banco was the first bank in Europe to issue banknotes; and one can note that the value of the banknotes of the Russian Assignat Bank in circulation in the 1830s was clearly larger than that of the Bank of England. The design of the organisation and the principles of operation of the proto central banks of the Baltic Sea area display a certain underlying unity which enables one to speak about a particular north European model of early central banking. This model was different from the classical model of central banking in some ways which were only changed in the latter half of the nineteenth century, when the classical model was finally adopted in the Baltic Sea area as well. One may perhaps question the practical relevance for today’s central banking of the study of ‘wie es eigentlich gewesen’ around the Baltic Sea basin before the adoption of the classical gold standard, with regard to the central banking practices of that period. In addition to the general historical interest, which I believe would in itself certainly warrant the study of the patterns of proto-central banking in the area, a review of alternative models of central banking – even historical ones – may pay off by drawing attention to aspects of central banking currently disregarded (or taken for granted) by theoretical analysis. One such aspect, once very important but now nearly forgotten by theoreticians, is the question of what types of credit are suitable for central banks. However, the question of eligible collateral must be resolved in one way or another by every central bank even of today, and becomes especially topical in times of financial turmoil, when the financial system turns to the central bank for liquidity. As I demonstrate in this chapter, one of the interesting contrasts between the early north European model and the classical model of central banking is the difference in what forms of credit were considered appropriate for an issuing bank (or more generally, a money-creating bank) to extend. The classical model of central banking à la Bank of England or Banque de France was based on what can be called a restrictive form of the real bills doctrine. This emphasised the liquid (‘self-liquidating’ was the contemporary term) nature of the assets appropriate for the bank of issue. By contrast, the early north European model emphasised another asset criteron, the underlying security (or indeed solidity) of the banks’ investments, and was based more directly on the idea of using banks to increase the liquidity of otherwise illiquid assets. The proto central banks were often established to alleviate what was seen as a shortage of liquidity and means of payment in the economies. These concerns led to a lending policy where land credit had a big share. Loans to government were also important in many cases. In the remaining parts of the chapter, I consider the development of the ideas regarding the suitable lending forms for banks of issue. I contrast the earlier thinking, which was based on the concept of real credit (and led to the landbased and goods-based lending policies of the proto central banks), with the real bills doctrine and the currency principle, which in turn constituted the distinguishing features of the classical model of central banking. After a brief introduction to the monetary and economic structure of the Baltic Sea area in the period of interest, I present an overview of the development of proto central banks in the countries of the area. I also consider the reasons which eventually

led to the abandonment of the early north European model and the adoption of the classical central banking principles.