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2 Some Preconditions for Having “Central Banks”

2 Some Preconditions for Having “Central Banks”

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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



8



The Origins and Nature of Scandinavian Central Banking



and Norway. The type of economy referred to in footnote 3 was probably

not confined to Finland only.

Secondly, paper money (bank notes) has to be widely circulating as the

predominating means of settling cash payments.

Minting has, in virtually all Western countries, been a royal or a government prerogative since mints were first invented. The seigniorage has

often been an important source of income for cash strained monarchs and

governments. Coins remained the primary money supply long after bank

notes had been invented, albeit with very large swings in both, depending

on circumstances. As long as coins (of silver or gold) remained the basis

of the money supply, the concept of “central banking ” was both impossible and irrelevant. Monarchs or governments minted coins, i.e. “real”

money. Banks issued only paper money. The relative “weight” of paper

money versus species is not a matter of statistics only. Rather, it is a matter of public sentiments and regulation. When paper competed with “real

money”, paper money was usually subject to strict regulation regarding

silver or gold coverage. Issuers of paper money issued only second-class

money.

This was clearly demonstrated in the last quarter of the 19th century.

Few, if any, politicians bothered to discuss the gold standard or the creation of the Latin Currency Union with the four or six “central banks”.

They did not matter. It was purely a matter of government policy.

Third, the term “central bank” can only have a meaning, if a “central

bank” is the centre of something. A centre is no centre if there is nothing

around it. For a “central bank” to exist it has to be the centre of a banking

scene of some substance.

In Sweden, a few bank-like discount houses (diskonterne) grew up

during the 1770s and 1780s, but they disappeared in the slipstream of

the Napoleonic wars. A number of provincial private partnership banks

(enskilda banker) grew up from the 1830s and onwards, but the banking

scene could not be considered “substantial” until joint stock banks began

to be formed in the 1860s. In Denmark, the banking network was very

limited until the 1870s, and in Norway until the 1880s.4

4



For a description of the growth and changing pattern of the Nordic capital markets see Steffen

Elkiær Andersen (2010) The Evolution of Nordic Finance (Palgrave Macmillan).



1



Some General Remarks on “Central Banking”



9



Table 1.2 Number of banks and savings banks in Scandinavia 1840–1915



1840

1850

1860

1880

1900

1915



Denmark



Norway



Banks



Savings banks



Banks



Savings banks



Sweden

Banks



Savings banks



1

2

16

41

87

142



1

35

57

443

512

513



1

1

3

21

82

127



26

90

174

311

413

527



7

8

12

44

67

66



60

86

151

341

388

444



Sources: See sources for Table 1.1



In all three Scandinavian countries hundreds of savings banks sprang

up during the early decades of the 19th century. They were tiny and quite

primitive in their operations, even if the total volume of their deposits

exceeded the bank deposits during most of the 19th century (see Table 1.2).

The conclusion is that the prerequisites for the existence of central

banks in the Scandinavian countries seem to have been in place since the

last decades of the 19th century. The economy was largely monetized,

and a substantial banking scene had been established.

The fact (hereby at least semi-established) that the preconditions for

the existence of central banks in Scandinavia were fulfilled as from around

the 1880s does not, however, necessarily imply that any bank at that time

existed, which would qualify as a “central bank” in any useful meaning

of that term. The question of a useful meaning of the concept of “central

banking” is the subject of Chap. 2.

Indeed, to talk of “central banks” in Scandinavia (and probably most

other countries) before the end of the 19th century would be somewhat

anachronistic. In the UK, the Bank Charter Act of 1844 signified a great

step towards “central banking” by separating the Bank of England’s commercial business from its function as an issuer of bank notes.5 It was then

recognized that printing bank notes was something beyond purely commercial interests. However, not even Walter Bagehot in his celebrated

5

Cf. Davidson & Green (Princeton University Press, 2010), Banking on the Future. The Fall and

Rise of Central Banking: “…Others argue that the modern-day notion of central banking should be

dated from the 1844 Act…or even from 1870 when the Bank first accepted the function of lender

of last resort. The other main European central banks took on this responsibility in the last decades

of the 19th century.” P. 11.



10



The Origins and Nature of Scandinavian Central Banking



Lombard Street made any direct mention of the concept of “central banking”. In fact, Bagehot stated that “In ordinary times the Bank is only one

of many lenders.”6 Neither did E.T.  Powell in his The Evolution of the

Money Market 1385–1915,7 nor Cottrell and Anderson in Money and

Banking in England. The Development of the Banking System 1694–1914.8

Nonetheless, in 1886 D. Davidson, a Swedish professor, published a

book titled Europas Centralbanker, which was updated by I. Hultman in

1909. This work describes only essential facts (year of foundation, capital, management, etc.), but makes no attempt to specify the difference

between “central banks” and other banks, nor to discuss the concept of

“central banking” in broader terms.

The Great War changed the picture completely, not only in the belligerent countries, but also in neutral Scandinavia. The classical gold standard broke down, as did both the Latin and the Scandinavian Currency

Unions. When the gold standard was revived in 1924–25, it was based

on gold bullion, not gold coins. Paper money had taken over, and “central banks” became almost real central banks. However, in several cases,

including Sweden and Norway, the “central banks” were reluctant to give

up their commercial profit driven activities.

Therefore, this work will focus much on the way the outbreak of the

Great War prompted the transformation of the “central banks” into central banks.



6



W. Bagehot (1873) Lombard Street, p. 206 (the 1878 edition).

Frank Cass, 1966.

8

David & Charles, Sources for Social and Economic History, 1974.

7



2

Defining “Central Banks”: Four Criteria



2.1



From Chartered Banks to Central Banks



Virtually all of today’s central banks in the Western world have been

founded by special royal charters or direct legislation. That does not by

itself make them “central banks”. Those charters were issued long before

the concept of “central banking” was born. Originally, they were just

commercial banks endowed with special privileges laid down in their

charters or the legislation. Their charters had been given because of special circumstances at the time they were granted, but they were still just

commercial banks with ordinary shareholders expecting a profit. In some

cases charters were granted in return for favours given to the king/government (war financing). That was not the case in Scandinavia. In all cases,

however, their charters gave the respective banks a more or less special

status, from which they gradually developed into central banks. They

steadily fulfilled the four criteria discussed below. Eventually, some of

them became so immersed in government business and politics that they

became more of a department of the country’s ministry of finance than



© The Editor(s) (if applicable) and The Author(s) 2016

S.E. Andersen, The Origins and Nature of Scandinavian Central

Banking, Palgrave Macmillan Studies in Banking and Financial

Institutions, DOI 10.1007/978-3-319-39750-4_2



11



12



The Origins and Nature of Scandinavian Central Banking



a central bank. In 1946–49, some of them were nationalized (e.g., the

Bank of England, the Banque de France, and Norges Bank).

The problem is where to draw the line between commercial banks and

central banks, and between central banks and integral parts of the financial government machinery. This is what the four criteria presented below

intend to clarify.1



2.2



The Four Criteria Defining Central Banks



2.2.1 Criterion I: Being the Sole Note-Issuing Bank

in the Country

During the last quarter of the 19th century, many European countries

had privately owned banks, either in the shape of personal partnerships

or joint stock companies, which issued bank notes. That, of course, did

not make them “central banks”.

However, for various reasons most European countries started in

the 1880s and 1890s to introduce incentives for the purely commercial banks to give up their note-issuing rights or forced them to do so

through legislation. It is not entirely clear what exactly motivated the

respective governments to take these steps. It seems plausible that a general wish to strengthen central government control was a strong motive,

not least in newly formed countries like Germany and Italy. In this sense,

giving a single state chartered bank a monopoly on note-issuing was a

political rather than an economic consideration. Similarly, concentrating note-issuance in a single, usually state chartered, bank would be seen

as symbolic of the nationalistic feelings, which had become increasingly

widespread, perhaps even fashionable, during the 19th century.

In any case, all of today’s central banks have had a monopoly on issuing bank notes since around 1900 (in some cases much earlier), and it

1



Other authors have raised the same question, e.g., Davies and Green (2010): “But what exactly do

we mean by a central bank? The answer is not straightforward.” In Banking on the Future. The Fall

and Rise of central Banking. e Princeton University Press) p. 11. These authors raise the question,

but they do not really answer it.



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