Thursday, July 5, 2018

Matias Vernengo — Classical Political Economy and the Evolution of Central Banks

The paper analyzes briefly the changing ideas on the role of money and banks from William Petty to Thomas Tooke, including the works of Adam Smith, David Ricardo, and Karl Marx. It analyzes the role of ideas in shaping the evolution of central bank regulation. Particular importance is given to the Bank of England’s inconvertibility period, from 1797 to 1821, and the ensuing debate in shaping Robert Peel’s Bank Act of 1844, which is often seen as the birth of modern central banking. The importance of the Say’s Law, and the inexistence of an alternative theory of the determination of output, is shown to play an essential role in the policy prescriptions of the so-called Bullionist authors, who won the debates that shaped central banking practices in the nineteenth century. The paper concludes with a brief analysis of what is a central bank according to the dominant (marginalist) mainstream of the profession, and what an alternative conception based on what may be termed classical-Keynesian political economy would be....
Naked Keynesianism
Classical Political Economy and the Evolution of Central Banks
Matias Vernengo | Associate Professor of Economics, Bucknell University


Andrew Anderson said...

If you make a comment at Naked Keynesian, save it before submitting since it will disappear until and if it is "approved."

Clint Ballinger said...

I am interested on the relationship of the first/earliest sovereign bond sales and early central banks (including the proto ones way before the Bank of England and Amsterdam). Seems the two phenomena are not discussed together enough, but since sovereigns could just circulate their own tax credits, how/why did central banks keep arising?
Any leads to good discussions (besides Vernengo's excellent work) greatly appreciated

Tom Hickey said...

I can't recall references off hand, but my overall impression is that financial and commercial interests became powerful enough to control the sovereign (at the time, the monarch) since monarchs had a history of abusing the purse. Central banks were a means of imposing discipline on the system. which commercial interests regraded as essential.

Moreover, the rising wealthy whose wealth was not connected with land were concerned about the stability of the worth of their portfolios. They were able to do this because banking and finance were rising in economic importance in an era where the concern was "the wealth of nations."

One factor that was greatly influential is metalism (gold) and bi-metalism (gold and silver). This was a mercantile age and wealth of nations was measured in terms of metalism. Thus, issues arose when bankers and financially astute merchants realized that currency was exchangeable for the metals, if not at a fixed rate of convertibility, then at least in markets. The metals were the "coin of war." Monarchs just love war and so the financial people and merchants realize that they had to put some controls on the purse strings.

Something like this seems to have been behind the establishing of the Bank of England. IIRC.

The rise of banking and finance was pivotal in the development of modern economics and the transition from feudalism to capitalism, which took several centuries. Hint — which you may already be working on — what is needed is a history of this written from the perspective of a correct theory of money.

Andrew Anderson said...

One factor that was greatly influential is metalism (gold) and bi-metalism (gold and silver). Tom Hickey

I read just today that there is enough gold and platinum at the Earth's core to cover the entire surface of the Earth to 12 feet deep. But that's (probably forever) inaccessible. However ...

I read just yesterday that 85% of the Asteroid Belt comes from 5 ancient planets that broke up - which means there maybe the remains of 5 planetary cores in the Asteroid Belt in addition to the one recently discovered.

Which means the prospects of gold hoarders may be drowned in the not-too-distant future when mining of the Asteroid Belt becomes practical.

Not that ethical concerns don't doom their hope of windfall profits from a new Gold Standard anyway - except the current system isn't ethical either. And whose fault is that, Tom?

Calgacus said...

Clint Ballinger: Geoffrey Ingham's The Nature of Money & his references are a good start.

Clint Ballinger said...

Thanks Tom and Calgacus. Tom, I will re read your post more carefully. Calgacus - I have looked through the literature some, and Vernengo does a great job of getting to what really happened (not just the shallow stories economists tell that suit them). The details of the origins of the various central banks vis-a-vis sovereign bond issuance never get into the detail I think matters - exactly how and why did Sovereigns come to believe and keep believing they need some other token than their own tax credit? I am writing something now related but don't have the time to expand on this at the moment. Maybe a follow up work someday.
This topic gets to the heart of about 5 centuries of bad economic policy, right up to the present. If good history ever mattered, this is it.

Calgacus said...

Ingham (who of course is basically an MMTer) sort of focuses on that, but the creation of central banks and modern banking was not bad economic policy in his or my view. Rather, as he argues, it was one of the reasons that England won against France. Of course believing that anybody other than the sovereign nation was ever on top, as in the idea that the USA needs (or even can possibly get its own) money from banks or rich people to spend, is sheer lunacy. But before the time of central banking, sovereign debt was usually considered a personal debt of the king, not of the nation. CBs & modern banking were part of the change to the modern system.

The period of the last few decades before MMT in my opinion was the darkest age in history concerning the belief that the state, in actually far stronger than ever, is a needy beggar. But modern ignorance should not be projected onto the past. Basically everyone basically understood MMT in the first few decades after the Great Depression for instance, and many did before. The ups and downs of that story over the centuries are very long. One of the reasons for Anglo-American ascendancy over the centuries is that almost always, there was someone somewhere in the government with basic understanding of how things worked. Someone who could remember the zeroth law of rocket science - pointy end up. Not so much in other countries.

Calgacus said...
This comment has been removed by the author.
Clint Ballinger said...

Calgacus - would love to read an expanded blog post on the above :) Great stuff!

Clint Ballinger said...

...although this I think is a substantial overstatement: "Basically everyone basically understood MMT in the first few decades after the Great Depression for instance, and many did before."
They probably did understand both banking and government spending better, but besides that brief time period, I think having a clear understanding of either the banking system or the power of the treasury was rare, and the two at the same time virtually never occurred (we are in the midst of the final unification of vertical and horizontal money just now, post 2008)

Clint Ballinger said...

(I meant, the final unification of the theories of the two; we finally are seeing banking and chartalism fully unified to understand the macroeconomy properly)

Clint Ballinger said...

I mean the _simultaneous understanding_ of banking/Horizontal and Verticl/chartalism

Tom Hickey said...

Looking back, one can see evidence of an understanding of some of these issues but mostly in isolation. There are many quotations out there that show this history.

But theory wasn't;t developed until recently, e.g, Basil Moore's analysis of horizontalism.

The MMT theorists pulled it all together — credit and chartal, horizontal and vertical — for the first time in terms of accounting and operations, I believe.

It is possible that much of this was known earlier but kept proprietary. Why would bankers and finance people want to give way the game? If they did have a more comprehensive understanding, it would not have been to their advantage to reveal it but rather use the aspects of it that favored their interests.

For example, the Carroll Quigley quote I posted from time to time shows that TPTB understood the power of central banking and the significance of the BIS in the years after WWI. (The Fed was founded in 1913.)

White definitely had a plan when arguing against Keynes at the time of Bretton Woods, an argument that the US won, and the USD became the global reserve currency.

This is not just about banking but also control. It's probably neither possible or helpful to separate banking and finance from control, especially in light of the development of financial capitalism and globalization under finance, which the Quigley quote shows to have been the plan.

So it is not only the development of the understanding that is important but also the use of the understanding as it developed.

This would explain a lot about economic rent, specifically financial rent.