ABSTRACT
Introduction My reaction when asked to offer a chapter on the history of central banking was, could there be anything left to say? But there might be, for while the ground is well-trodden and the pattern of development in central banking well-known, people can be relied upon to forget old truths and in any case interpretations differ. First, a caution is needed. Economists almost invariably ask for a model. There is no model in this chapter. There isn’t even a strong hypothesis. Rather some thoughts are offered as a contribution to a conversation on the design of central banks and why they are the way they are. Second, the chapter may appear overly Anglocentric. I don’t make much apology for that. Apart from the fact that it is what I know most about, there is some justification in that the Bank of England was the first central bank and it was frequently used as a model for others. It was hugely influential. Its story is central to the development of central banking. Finally, there is a vast literature on the subject, much of which I have read and perhaps absorbed but make no attempt to list here. The pattern in the development of central banking that is commonly accepted is: there was a classical period when central banks were often privately owned and independent – the late nineteenth and early twentieth centuries; that was followed in the mid twentieth century by a period when discretion on monetary policy ruled but the banks were largely dependent; and then there was a return to a concern with price stability and independence in the latter part of the twentieth century. To some extent it is implicit in this that there was an ebb and flow as the banks either adjusted to whatever environmental changes were taking place – evolution – or accepted the direction of the state – design. Charles Goodhart’s book with ‘evolution’ in the title has undoubtedly been influential in encouraging the evolutionary view and the idea of evolution still grips. Goodhart set out to show how central banks ‘have evolved naturally over time . . . rather than conforming to an initially planned structure’.1 But it is clear that not all was evolutionary. But if not, then what? Were they consciously designed? One possible title for this chapter was, ‘Evolution, design (intelligent or otherwise), or what?’ But such a title could have continued: ‘or transplant and then back to the drawing board and perhaps some of all these and not necessarily in any particular order’,
though that would have been a bit long. The chapter suggests that the beginnings of central banking, in the classical period, were evolutionary, and the period that followed was essentially one when design prevailed. It then hints at what evolution and design might suggest for the story of independence and performance that followed.
