Toward a Historical Philosophy of Monetary Policy

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Monetary Policy, or the protocols by which central banks operate, has appeared in many democratic nations throughout history. In the West, monetary policy was conducted first in Italy (Venice and Genoa), and then in the Netherlands (Amsterdam, Middleburg, and Rotterdam) and Sweden. England, France, and Germany have their own distinguished histories of monetary policy and central banking, while in the contemporary world the United States’ Federal Reserve is of international repute, significance, and influence. The European Central Bank represents the European Union’s monetary policy authority. Its currency, the Euro, serves as its chief policy instrument and accounts for the most recent addition to monetary policy and central banking in the democratic world. This paper draws on the work of Walter Bagehot; Kate Rosenberg and R. Thruston Hopkins; Fernand Braudel, and others as suggested as extra reading for those interested in delving further on this topic.

Italian and Swedish Central Banks: The Emergence of Monetary Policy

Monetary policy appeared in the Western world as early as 1157 in Italy, where there existed a central bank in Venice that served as a transfer office for the national debt. From most historical accounts, the central bank in Venice symbolized the earliest interaction between state and bank, the language of which would become known as monetary policy (see works by Rosenberg and Hopkins, and Braudel) . The most prominent of early Italian central banks was the Bank of St. George at Genoa. The bank was created in the fifteenth century, being that Genoa needed a special body to administer the loans that were the result of massive public borrowing during the wars of the previous century. In this early instance of monetary policy, the bank acted as an intermediary between the state and its creditors. The Bank of Genoa nearly grew into a sovereign authority, with its officials being confirmed by the Pope, which signaled the limits of its democratic orientation.

Even though Italian central banks represented the earliest of monetary policy in a state system, one of the most comprehensive of the early central banks was the Swedish Riksbank. Chartered as a private bank in 1656, it collapsed eight years later from bad loans. In 1668 the bank was reorganized as the Rickets Standers Bank and was placed under the authority of parliament, not the king. In 1720, the parliament made the bank’s notes legal tender as a result of a crisis that involved the Swedish government’s failure to repay loans to the Riksbank, with the notes being made legal tender because there was not enough gold in the vault for the public’s exchanging. It was not until 1873 that the country went on the gold standard.

Comparisons of the early Riksbank have been made to the Federal Reserve in the contemporary United States in the arguing that it was not a private institution, but rather an instrument of the legislature reflecting its democratic foundations. Nonetheless, there is a line of argument in monetary policy scholarship that argues for central bank independence. The argument entails that the Federal Reserve is effective as a monetary policy authority because it is a separate entity free from the authority of Congress. This argument contrasts the idea that the Federal Reserve was created as a model of the Bank of England and its Lombard Street of finance in London. It certainly is not the most democratically centered line of argument in the field of monetary policy.

Dutch and English Monetary Policy in the Seventeenth-Century

In the early modern world of democracy, the Bank of Amsterdam was established in 1609 and its success greatly influenced English merchants’ movement for a national bank. Following Amsterdam was Middleburg (1616), Hamburg in Germany (1619) and Rotterdam (1635), as well as Nuremberg, also in Germany. In 1656, after the Swedish government set up the national Riksbank, two years later a Sweden invented the bank note. Historical accounts situate the existence of bank notes as early as 800 CE in China, but the Swedish conception of the bank note was the first of its kind in Europe. On Lombard Street, however, the Grasshopper House was the only banking representation evident. There was a royal robbery that took place under Charles I and II, and the public at-large realized that there needed to be some sort of national banking authority in England.

The idea of a State bank in England was not new. There had been four proposals for one during the years 1620-1666. The Revolution of 1689, which was the work of the Whigs, dethroned King James II and William came over from Holland to assume the throne, as King William III. William’s financial adviser helped him borrow 100,000 pounds from the City of London, or more precisely, from its goldsmith, and helped encourage people to lend him money by a method called a “tontine”, which resulted in the raising of 880,000 pounds. In 1694, 5.5 million pounds were needed for the year, and William’s financial adviser created a scheme that was first described as a lottery. Prizes of up to 40,000 pounds were awarded to fortunate subscribers of government loans, but the scheme only brought in one million pounds. At that time put forward was an idea to create a bank that would assist the government in resolving its financial problem by granting a loan that was raised on public subscription.

The House of Commons did not have a problem passing the bill for such a state bank that could administer monetary policy, but the House of Lords were afraid that a King with a bank behind him would be so financially strong that he could free himself from Parliamentary control and have absolute power. The bill for the State bank was passed by a small majority only after there was a clause added that stated the bank could only lend the government money with Parliamentary approval. As the case for the creation of national banks in Venice and Genoa in the sixteenth and seventeenth centuries, the Bank of England, referred to as the “Tonnage Bank” during its early years, was created as an answer to political ‘vulnerability’, in that the Monarchy could no longer carry on its tasks of governing without financial aid.

French and German Monetary Policy in the Nineteenth Century

The French and Germans have historically also had prominent central banks and monetary policy, but their central banks were developed later than the Bank of England. The Banque de France was chartered in 1800 by Napoleon. During the French Revolution, the National Assembly issued assignats, which were a currency whose value was based on what had been seized from the aristocracy and the Catholic Church. The Reichsbank was created in 1875 as a result of the German Empire’s unification. At the time there were seven currencies circulating from all the different kingdoms, grand duchies and principalities.

The Reichsbank was essentially an extension of the Prussian State Bank, which in turn was modeled after the Banque de France, except for one feature. The central bank did not compete with commercial banks and therefore it did not pay interest on deposits. During a financial crisis, the bank would purchase bills and pour money into the market, so therefore the German commercial banks did not have to worry about keeping enough reserves to pay off depositors. Nonetheless, the Reichsbank’s operations were confined only to the German Empire, whereas the Bank of England and Banque de France undertook international ventures. For example the French Franc served as the reserve currency for the interchange of the all the different currencies of the Swiss cantons.

Contemporary Monetary Policy: The Federal Reserve and European Central Bank

One of the cotemporary world’s most powerful financial institutions is the Federal Reserve in the United States. Prior to the creation of the Federal Reserve, there were banking panics in the United States during 1873, 1893 and 1907, and people had lost faith in the banking system there, being there was not enough money to repay them. There were several currencies circulating in the country at the time, including greenbacks from the Civil War, bank notes that were issued by nationally chartered banks, and gold coins. There had also been silver dollars, but Thomas Jefferson put a stop to their circulation in 1806, for the reason that Alexander Hamilton, the authorizer of those coins, created the dollars with such a high silver content that Americans began to hoard them or sell them to individuals abroad.

There were at least sixteen different monetary reform bills or plans that were created during or after the early bank panics in the United States. One of most important was the Aldrich bill, which called for the creation of a National Reserve Association, “a central bankers’ co-op that could issue currency against its members’ borrowers’ paper.” (Mayer 2001: 67) It called for bank ownership of the association whereby forty-two of its directors would be chosen by member banks while four would be chosen by the government. Nevertheless, Democrats were in favor of a Federal Reserve that would be controlled by the government, and they backed the Carter Glass bill. At the Democratic National Convention of 1912, the party claimed that, ‘Banks exist for the accommodation of the public…all legislation on the subject of banking and currency should have for its purpose the securing of these accommodations on terms of absolute security to the public and of complete protection from the misuse of the power that wealth gives those who posses it’. Therefore, the Party publicly opposed the Aldrich Bill for creating a central bank to administer monetary policy. It claimed that a Federal Reserve System would never become a central bank, with Carter Glass remarking that they had intended to preclude any such idea of central banking.

In existence would not be one central bank in America, but rather twelve regional banks, with each of these regional banks fulfilling the responsibilities of ‘big-city correspondent banks’. (Mayer 2001) The Federal Reserve Act of 1913 created a new banking system that dispersed power through monetary policy instead of centralizing it. It was the responsibility of President Woodrow Wilson to decide who would run the system. He had thought that members of the Interstate Commerce Commission could possibly be appointed by the railroads. Nonetheless, the Federal Reserve Council was created. It was a monetary policy council in which twelve bankers, one chosen from the board of directors of each regional branch, served a one year term.

The newest institutional addition to monetary policy has been the European Central Bank (ECB). It has been over a decade since the contemporary world witnessed the introduction of its currency, the Euro. It represents the first non-sovereign currency since the Roman Catholic Church printed money in the Middle Ages. The Euro is the currency of most member nation-states of the EU (but most notably, not the United Kingdom), and these ECB notes have become the world’s second reserve currency in monetary policy dialogues, with the dollar being the first and the pound also important. These are the currencies that nearly every nation’s central bank keeps in its vault while it administers its own monetary policy. The ECB is an extension, in design, of the German Bundesbank, and does not resemble the Federal Reserve in much of its monetary policy for a number of reasons. There has been increased pressure placed on both the ECB and Federal Reserve by democracies and civil societies to become more transparent in recent years, and the most significant adjustments in monetary policy have emerged in U.S. Congressional legislation with the appearance of the Dodd-Frank Wall Street Reform and Consumer Protection Act.


Further Reading:

Axilrod, Stephen H. (2009) Inside the Fed: Monetary Policy and its Management, Martin through Greenspan to Bernanke. MIT Press.

Bagehot, Walter [1873] (1931). Lombard Street: A Description of the Money Market. E.P. Dutton and Co.

Blinder, Alan. (1998) Central Banking in Theory and Practice.  MIT Press.

Blinder, Alan. (2004) The Quiet Revolution: Central Banking Goes Modern. Yale University Press,

Bofinger, Peter. (2001) Monetary Policy. Oxford University Press.

Broz, J. Lawrence. (1997) The International Origins of the Federal Reserve. Cornell University Press.

Braudel, Fernand. Civilization and Capitalism (Three Volumes). Berkeley: University of California Press, 1992.

Ferguson, Niall. (2009) The Ascent of Money: A Financial History of the World. Penguin Press.

Greider, Timothy S. (1987) Secrets of the Temple: How the Federal Reserve Runs the Country.  Simon and Schuster.

Mayer, Martin. (2001) The Fed. The Free Press.

Mehrling, Perry. (2010) The New Lombard Street: How the Fed Became the Dealer of Last Resort.  Princeton University Press.

Meltzer, Allan H. (2003) A History of the Federal Reserve, Volume 1: 1913-1951. University of Chicago Press.

Rosenberg, Kate and R. Thurston Hopkins. (1933) The Romance of the Bank of England. Trinity Press, Thornton Butterworth Ltd.

Timberlake, Richard H. (1993) Monetary Policy in the United States: An Intellectual and Institutional History. University of Chicago Press.

Wells, Donald R. (2004) The Federal Reserve System: A History.  McFarland & Co.


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Full Citation Information:
Garlitz, D. (2021). Toward a Historical Philosophy of Monetary Policy. PESA Agora.

Dustin Garlitz

Dustin Garlitz holds Master’s degrees in Philosophy and Social & Political thought and is a PhD Candidate in Philosophy at the University of South Florida, USA.  His doctoral dissertation is on Adorno's philosophy of music. He was article editor of  Critical Contemporary Culture, a section editor of the Encyclopedia of Educational Philosophy and Theory (Springer, 2017), and editorial board member of the London-based philosophy journal Evental Aesthetics. He is the author of over 100 publications.
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