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1 The Emerging Public Interest in “Central Banking”

1 The Emerging Public Interest in “Central Banking”

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4



The Origins and Nature of Scandinavian Central Banking



Until sometime around the 1960s, there does not seem to have been

much general public interest in “central banking”. What “central banks”

did or did not do was almost exclusively discussed in a rather closed world

of bankers, academics and government officials. Some public debate grew

up in the late 1950s in connection with what has been called a “revival

of monetary policy”. After several years of virtually unchanged rates of

interest, some central banks reactivated the discount rate instrument.

Still, the interest from the general public seems to have been limited.

When focus on “central banking” and monetary policies increased

around 1960, it probably had much to do with two quite separate

developments:

First, since the mid-1950s rates of inflation accelerated in most of the western world leading to increased and unpopular rises in mid- and long- term

rates of interest. The Bank of England and the Federal Reserve Bank of the

United States (FED) responded by raising their respective discount rates,

the main policy instrument at that time. This was highly unpopular in the

UK and other countries, where housing has mostly been financed with

loans carrying variable rates of interest, and where changes in short- term

rates therefore have a direct and immediate impact on people’s expenses. In

Scandinavia (particularly Denmark), the interest increases were also

noticed, but they had little impact, because fixed property has always (until

fairly recently) been financed at fixed rates of interest with bond loans of up

to 30 years maturity (before the early 1970s, even up to 60 years) supplied

by mortgage institutions or––to a lesser degree––by savings banks.

However, even if the central banks responded to accelerating rates of inflation, nobody at the time suggested that the central banks could be held

responsible for whatever rate of inflation happened to materialize, let alone

expected the central banks to “target” any particular rate of inflation.



Second, the publication in 1963 by Milton Friedman and Anna

Schwartz of the seminal A Monetary History of the United States 1867–1960

no doubt triggered an intense interest in the causes and effects of monetary changes and therefore in “central banking”. The term “monetarism”

had been born. Monetarism implied a new interest in monetary policy

not only among specialists, but also among readers of other papers than

the Financial Times and The Wall Street Journal.



1



Some General Remarks on “Central Banking”



5



Friedman and Schwartz placed a great deal of blame for the severity

and duration of the American depression of 1930–33 on the FED. In the

same vein, Alan Greenspan, chairman of the FED 1986–2006, was first

praised for pulling the world out of the 1988–92 recession and thereby

creating the glorious 1990s, but was later seen by some economists as

at least somewhat guilty of the bubble of 2005–07 and the subsequent

recession. By his own admission he “did not get it” until late 2005.1 As

if by seeing the mounting problems earlier he could have prevented the

madness of crowds and the resulting property bubble. Similarly, Ben

Bernanke, Greenspan’s successor as FED chairman, has been seen as a

pupil of Friedman and Schwartz with his monetarist efforts at dragging

the USA out of that recession (by “quantitative easing”), in contrast to

the FED’s inaction of 1930–31.

Since 2014 similar tactics have been implemented by the European

Central Bank (ECB), which is expected to send Europe on a real growth

rate of 3 % p.a. with inflation hitting precisely 2 % p.a., and with unemployment not exceeding 5 %. Signals of this nature are constantly being

sent out, and the public is swallowing them eagerly. Since governments

cannot deliver the results everybody wants, the central banks must step

in to do it.

Since the late 20th century there seems to have been almost no limits

to the miracles that central banks were supposed to be able to perform,

or to the troubles for which they could be held responsible. They are

expected to deliver precise results on all macroeconomic targets, including specific inflation, growth, and employment rates. Few observers question even the theoretical ability of central banks to deliver the expected

results.

Ensuring stability in capital markets, including the prevention of bank

failures and stable “asset prices”, all now seem to be regarded as not only

natural tasks for central banks, but also achievable goals for these venerable institutions. To many observers, central banks seem to be almost

almighty.



1



“I really didn’t get it until very late in 2005 and 2006.” Statement made by Alan Greenspan in the

CBS television program 60 minutes, Sept. 7, 2007.



6



The Origins and Nature of Scandinavian Central Banking



It seems tempting to paraphrase Oscar Wilde: “Really, if central banks

do not set us a good example, what on earth is the use of them?”2

Yet, at the 1920 meeting of finance ministers et al. in Brussels the final

communiqué recommended that countries which did not have a central

bank establish an independent one as soon as possible in order to help

maintaining orderly monetary conditions.

Of course, this communiqué did not specify the definition, nature,

or character of a “central bank”, other than it should be “independent”.



1.2



Some Preconditions for Having

“Central Banks”



For the idea of “central banks” to have any meaning, a few conditions

have to be fulfilled:

First, a monetary economy has to exist. In Scandinavia, this was not generally the case until rather late in the 19th century. The process of monetization of the Scandinavian economies is difficult––if not impossible––to

follow statistically, but some indications are available.3 In Sweden and

Norway money circulation was probably very limited outside the coastal

towns until the second half of the 19th century. In Denmark the process of

monetization probably developed a bit faster and earlier than in Sweden

and Norway because of a denser population and the proximity to Hamburg.

However, until 1847 neither Denmark nor Norway could boast of more

than one bank. The development in deposits with banks and savings banks

can to some extent cast light on the degree of monetization of a country,

and this development is demonstrated in Table 1.1.



In all three Scandinavian countries, hundreds of savings banks sprang

up during the early decades of the 19th century, but they were tiny and

2



Oscar Wilde (1895) The Importance of Being Earnest : ”Really, If the lower orders do not set us a

good example, what on earth is the use of them ?” (Act I).

3

E.g., in Finland a tax reform in 1840 stipulated that each tax ruble was to be settled with three

cups of seed, three pounds of butter, three pounds of lard, and a money amount between 5 and 24

kopeks depending on county, cf. N. Meinander (1962): Penningpolitik under etthundrafemtio år

(Finlands Bank), p. 16.



1



Some General Remarks on “Central Banking”



7



Table 1.1 Deposits in Scandinavian banks and savings banks 1860–1915

Mill

Kroners

Denmark

1860

1880

1900

1915

Norway

1860

1880

1900

1915

Sweden

1860

1880

1900

1915



Deposits with

Banks



Savings

Banks



Total



GDP



Deposits in per cent of

GDP (%)



13

78

310

1.077



56

254

582

995



69

332

892

2.072



464

840

1.323

2.887



15

40

67

72



16

81

311

1.007



44

139

306

724



60

220

617

1.734



(480)

720

1.115

2.594



(13)

31

55

67



18

247

772

1.999



27

146

494

1.113



45

393

1.266

3.112



704

1.233

2.162

4.710



6

32

59

66



Sources:

Denmark: Danmarks Statistik (1969) Kreditmarkedsstatistik (Statistiske

Undersøgelser nr. 24) and Sv. Aa. Hansen (1983) Økonmomisk Vækst i

Danmark, vol. II (Københavns Universitet)

Norway: Statistisk Sentralbyrå (1994) Historisk Statistikk, and (1965)

Nasjonalregnskabsstatistikk 1865–1960, and H.I. Matre (1992) Norske

forretrningsbanker 1848–1990, (NORA rapport nr 41). The 1860 estmate relates

to 1865. There is no estimate for 1860

Sweden: S. Brisman et al. (1918–30) Sveriges Riksbank 1668–1918, vol. V (Sveriges

Riksbank) and Statistisk Sentralbyråen Historisk Statistik and Statistisk Årbok

Note: The amounts are all denominated in Kroners of equal value against each

other and are therefore directly comparable



primitive. Like elsewhere, the savings banks preceded the commercial

banks.

The development of financial deposits is used here as an indicator of

the degree of monetization of the economy. The figures show that monetization advanced rapidly during the second half of the 19th century, and

that there were some, but no sharp differences between the Scandinavian

countries in this period. These macro figures cannot, of course, disclose

the difference in the degree of monetization between the major cities, the

harbour cities, and the inland provinces. In the inland provinces, barter

economy was common until late in the 19th century, at least in Sweden



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