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GOHTROL OF CENTRAL BáííKS lay Karl R. Bopp Gwutoat« Cours# in Central Banking f î i a r i f c B Finance *»dnesd»y, April 28, 1943 CONTROL OF CENTRAL BANKS Introduction De facto vs. de jure analysis Gladstone vs. Bank of England, 185A> on payment of interest on the government debt. 1. Bank council - Kelley and Palmer - after meditation, supports bank position. 2. Law officers of the Crown - Cockburn and Bethell - after meditation, support Gladstone. "I may almost say they de clared me bound to pursue it.” 3. Lord Chancellor Cranworth - having read all the papers relative to the question vrrote Gladstone: "I am clearly of opinion you are right." Assumptions 1. 2. I. General familiarity with theory of central banking. Curiosity why central banks do not adopt "the proper" policy forthrightly- The major drift of control A. Central banks in the 19th century 1. The philosophy of laissez fairej liberalism a. Content of the philosophy "which . . . refused, in any profound or coherent way, to consider the state as a potential source of good." H. J. Laski - 2 - Private corporations acquired an enormous prestige - in part not merited. b. Application to central banks: independence (1) England (a) (b) Fox in 1797: "The bank directors ought to do nothing inconsistent with the inter ests of the proprietors for whom they act." (c) (2) Lord Grenville: "The utility of the bank depends upon its being kept distinct from the government." Sir James Graham, 1827, com ments that Fox remarked "with rare sagacity and early foresight." Cretet memorialized Napoleon "No bank without complete independence." Molltfen memorialized to the same effect. (3) Germany Aretz von Phillipovifch ( . United States 4) Didn*t even have a central bank after Jackson distroyed the Bank of the U. S. - c. 3 - "Demonstration".of validity of the wishes of Bank of England that float ing debt be reduced rapidly after the Napoleonic wars - addçd to deflation. Part of Napoleonic inflations caused by commercial discounts of the bank. Bank came to the rescue of commerce in iaf7 - according to its own evi dence - only after insistence by the government. Bank refused to accept any social responsibilities. 2 • Natural law a. Content of the idea Government refused to assign and bank refused to accept social responsi bilities. Cobden - 18^0 - "Managing the currency is just as possible as the management of the tides or the regulation of the stars or the wind." Gov, Rouland - 1865 - "Monetary crises occur because God has attached a fatal law to all things human - exees et imprevoyanee.* B. Central banks in the 20th century Eccles1 quotation - I. u - Cyclical changes in control A. Historical 1. Bank of France Government domination Independence Foundation Napoleon Louis, minister of financej appointed Lafete provi sional governor replacing Joubert. Revolution of 1830 House of Orleans Revolution of 18^8 Second Republic Limit on note issue Coup^ d c itat - 1851 f' Louis Napoleon 1870 - Third Republic Limit on note issue 19U-18-26 1926 - power of the bank over loans to the gov’ t. 1936 World War II 2* Bank of England Throughout its history has maintained the fiction of independence. - 5 - Government domination Independence Napoleonic wars Pitt vs. the bank - 1814 'd' '1 ' 3* Peal’s Act, 1844- "With respect to banking business of Bank, I pro pose that it should be governed on precisely the same principle as would any other bank dealing with Bank of England notes Reichsbank Law vs. fact Government domination Independence Rate increase December 1880. Dechend - pressure on France. July 1887 - Lombard on Russian securities refused World War I The Dawes plan Hitler 4. - Federal Reserve System government domination World War I http://fraser.stlouisfed.org/ The depression Federal Reserve Bank of St. Louis Independence No central bank till 1915 After 1919 The ffa,poleerf!bc-W*Q?e~ Period. N. VaiAsittart usually addressed the Governor and eputy Go^eifrior somewhat as follows: "I beg leave to icquaint yJuj' fchat it will be an Accommodation to the ?ublic Service, if your Court will consent to exchange the Exchequer Bills dated . . . for a like Amount to D dated . . . e I request therefore you will have the goodness to move your Court to consent to such Exchange accordingly." In the case of purchases (as contrasted Pith exchange) of bills, it was a "great Accommodation bo the Public Service” or even a ’very great Accommo’ lation."^ Ordinarily the Court resolved to comply iith the Chancellor’s letters. Not infrequently, how ever, they imposed conditions, especially concerning repayment. For example, the Bank became increasingly :oncerned in 1814. They had agreed to purchase 3 nillion from May 5 to June 9» They agreed to a further Purchase of two million on June 16 "on account of the urgent Necessity of Government, -under the peculiar Circumstances of the Moment, and also that so large a Portion of the said Advances is settled to be paid off out of the Instalment of the present Loan."^f Three Keeks later they agreed to purchase another two million ^But the to acquaint the First Lord of the treasury and the Chancellor of the Exchequer, that the fcourt cannot grant any further Advances; and expect Euch Arrangements may be made as shall tend to a very -lsideraftle^ Reduction of the present enormous Amount these Advances. *W Nevertheless, the request of July 28 for yet another two million was "Reluctantly complied with, under the Assurance that every Endeavour will be made to bring the Advances of the Court within reasonable Bounds as soon as possible." l>± - 6 B. Analytical 1« 2. C. II. Government domination in the war and depressions Resuscitation of independence afterwards Reconciliation with "the major drift" Organizational factors A. The role of law 1. Sets certain limits e.g. 2. a* German government could hot dispose of Schacht Can be over emphasized e.g. Germany 1875-1914 b. B. a* France 1806-1936 Institutional factors 'tj,$n/ 1* Persistence of institutional personality K r '/R U §¿5«** ¿Ml tVI I a i n factors tla A. 1 W “ 1 Human nature 1. Place o f «notions a. Likes and dislikes C. S. Hamlin vs. P. M. Warburg Warburg and Miller vs. remainder J. S. Williams vs. remainder -7b. Jealousy of power Federal Reserve policy in 1929 c. Desire to follow _ . Gov. Bailey and Benjamin Strong ) Benjamin Strong and the System ** 2. The place of reason , i - Chester Davis and Class 3 directors The two-term myth B. Institutional analogy 1. Effect of public censure a. b. \ 2« Federal Reserve in 1921 Federal Reserve in 1923 The importance of personalities V __ ^a. b. c. V. Conclusion: Benjamin Strong Hjalmar Schacht Montagu Norman the interrelations of A* The major drift B. The cyclical factors C. Organisational factors D. Human factors