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The Evolution of Central Banking: Theory and History PALGRAVE STUDIES IN ECONOMIC HISTORY THE EVOLUTION OF CENTRAL BANKING: THEORY AND HISTORY Stefano Ugolini Palgrave Studies in Economic History Series editor Kent Deng London School of Economics London, UK Palgrave Studies in Economic History is designed to illuminate and enrich our understanding of economies and economic phenomena of the past. The series covers a vast range of topics including financial history, labour history, development economics, commercialisation, urbanisation,­ industrialisation, modernisation, globalisation, and changes in world economic orders. More information about this series at http://www.palgrave.com/series/14632 Stefano Ugolini The Evolution of Central Banking: Theory and History Stefano Ugolini Sciences Po Toulouse and LEREPS University of Toulouse Toulouse, France Palgrave Studies in Economic History ISBN 978-1-137-48524-3 ISBN 978-1-137-48525-0 (eBook) https://doi.org/10.1057/978-1-137-48525-0 Library of Congress Control Number: 2017957573 © The Editor(s) (if applicable) and The Author(s) 2017 The author(s) has/have asserted their right(s) to be identified as the author(s) of this work in accordance with the Copyright, Designs and Patents Act 1988. This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and trans- mission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, express or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. Cover illustration: Canaletto, The Rialto Square (1758-1763). Berlin, Gemäldegalerie. Artexplorer / Alamy Stock Photo Printed on acid-free paper This Palgrave Macmillan imprint is published by Springer Nature The registered company is Macmillan Publishers Ltd. The registered company address is: The Campus, 4 Crinan Street, London, N1 9XW, United Kingdom To Marta, Sveva, Giacomo, and… Acknowledgements This research project started in spring 2010, at the time I was Norges Bank Post-doctoral Fellow at the Graduate Institute of International and Development Studies. In the framework of Norges Bank’s Bicentenary Project, I was kindly asked to prepare a presentation on the state-of-the-­ art research on the evolution of central banks. As I started to delve deep into the vast historical literature, a sense of profound dissatisfaction started to develop within me. Dissatisfaction was not at all tied to the quality of available research, which was generally very high from a histo- riographical viewpoint. It was rather tied to the conceptual framework explicitly or implicitly adopted by most of these studies. The more con- tributions I read, the more I was confronted with the very same story of the invention of a “gold standard” of central banking and of its more or less successful imitation elsewhere. Could that really be the whole story? I had some doubts. In order to understand things better, I started to read more about the early modern period. The result was the first sketch of the argument of the present book, which was subsequently published in the working paper series of the Norwegian central bank (“What Do We Really Know About the Long-Term Evolution of Central Banking? Evidence from the Past, Insights for the Present”, Norges Bank Working Paper 2011/15). That was the beginning of this journey. In a sense, the present book can hence be said to be a “spin-off” of Norges Bank’s Bicentenary Project. My long list of acknowledgements vii viii Acknowledgements must therefore start with Jan Fredrik Qvigstad and Øyvind Eitrheim, who provided the initial input for my focalization on this subject. Without them, the whole project would have likely never started. I want to warmly thank them for their encouragement and support. The finan- cial support provided by Norges Bank to the initial stages of this research is also gratefully acknowledged. It goes without saying that the views expressed here do not necessarily reflect those of the Norwegian central bank. Marc Flandreau also is to be thanked for having involved me in the Project, as well as for his early exhortation to work on the Bank of England. At the time I was a PhD student, my research was only focused on Continental Europe, and I hesitated to move on to England as I felt that the subject had already been over-researched. It turned out that Marc was totally right: English monetary history was by no means over-­ researched. Thanks Marc for this, as well as for the many discussions we have had over time on many different subjects related to this book. A special thought goes to Marcello De Cecco, who unfortunately left us in March 2016. Marcello was to me the “Maestro” (an Italian title that has been quite inappropriately used elsewhere before the recent crisis). Many years ago, Marcello raised doubts on the granitic “orthodoxy” of central banking history, but his still outstanding contribution on the sub- ject has been willingly ignored by the “orthodox” literature. Fortunately, as the Italian say goes, “il tempo è galantuomo”: as the case of Money and Empire proves, good books are destined to last anyway. The colleague who helped me the most in figuring out the argument developed in this book is Clemens Jobst. My exchanges with Clemens, which have always been extremely fruitful since the time we both were PhD students in Paris, strongly contributed to give birth to some of the ideas defended here. Besides this, Clemens also generously volunteered comments on the whole manuscript. That was more than a lot: thanks Clemens for all your help. This research has greatly benefitted from discussions and comments by a number of colleagues over the years. A non-comprehensive list would feature Olivier Accominotti, Stefano Battilossi, Vincent Bignon, Forrest Capie, Mark Carlson, Rui Pedro Esteves, Marvin Goodfriend, Charles Goodhart, Timothy Guinnane, Harold James, John James, Alfonso Acknowledgements ix Herranz-Loncán, Robert Hetzel, Naomi Lamoreaux, Donato Masciandaro, Robert McCauley, Pilar Nogués-Marco, William Roberds, François Velde, Lars Fredrik Øksendal, as well as participants to presenta- tions in Barcelona, Dublin, Milan, New Haven, Oslo, Oxford, and Toulouse. I would also like to thank Richard Baldwin for the interest he displayed in my original working paper, which led to the publication of a VoxEu column in December 2011. I am grateful to all colleagues at Sciences Po Toulouse and at the LEREPS research unit, and especially to Olivier Brossard and Jérôme Vicente, for their support and encourage- ment during these years. This book has also greatly benefitted from help by staff at Palgrave Macmillan, and especially by Taiba Batool, Thomas Coughlan, and Rachel Sangster. Of course, none of the above-mentioned persons should be held responsible for my own views, mistakes, and misinterpretations. On a more personal note, one affectionate thought goes to my family in Italy: my father and especially my mother, who has always urged me to “write a nice book” since I was at primary school (sorry for the lag); my sister; and my parents-in-law. In France, my children all paid a dispropor- tional tribute to this book, which totally absorbed me for way too much time; they now well deserve to get me back, principal and interests. As for my wife, the only thing I can say is that nothing at all would have been possible without her. Thanks, a lot, for everything. Toulouse Stefano Ugolini July 13th, 2017 Contents 1 Introduction 1 1.1 The Evolution of Central Banks 3 1.1.1 The Starting Point 3 1.1.2 A Manifest Destiny? 5 1.1.3 Post Hoc, Propter Hoc? 7 1.1.4 What Is a Central Bank? 9 1.2 The Evolution of Central Banking 11 1.2.1 What Are Central Banking Functions? 11 1.2.2 The Roadmap 13 Bibliography 17 2 The Payment System 21 2.1 The Payment System: Theory 23 2.1.1 The Industrial Organization of Payments 23 2.1.2 The Payment System as a Natural Monopoly 27 2.1.3 A Tentative Solution: Clearinghouses 30 2.2 The Payment System: History 35 2.2.1 The Reluctant Monopolist: The Venetian State and the Rialto Clearing 35 2.2.2 Fixing the Payment Infrastructure in Early Modern Europe: “Bank-Based” Solutions 45 xi xii Contents 2.2.3 Fixing the Payment Infrastructure in Early Modern Europe: “Market-Based” Solutions 57 2.2.4 The Creation of National Payment Systems: Europe 63 2.2.5 The Creation of National Payment Systems: The New World 72 2.2.6 From National to International Payment Systems 84 2.2.7 The Evolution of Payment Systems: Conclusions 89 Bibliography 90 3 Lending of Last Resort and Supervision 101 3.1 Lending of Last Resort and Supervision: Theory 102 3.1.1 The Problem: The Inherent Instability
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