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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