EC Can A Modern Central Bank Still Be A “Banker’s Bank”?

Answer: No. And not for reasons of policy or politics, but of national character — that is, what remains of such.

For, once upon a time in the early history of modern banking, a common belief among all rational analysts of the system was an aversion to what was then referred to in those rose-tinted 19th-century decades as “speculative political economy.” At the time, central banks carefully managed their status as the symbol and paragon of national pride, responsible as that institution was for the maintenance of three basic principles of fiscal agency. First, that a central bank, above all, must honor its reputation as a ‘pillar of public credit’; secondly, that the central bank both worked with while remained wary of the State; third, that the central bank had to retain a superior position to private banks, and did so by disciplining itself to preside over high reserve ratios and the strict administration of credit.

Compare that assessment with that of James Grant, of Grant’s Interest Rate Observer, who stated in an excellent interview with a Swiss newspaper in August 2016: “Over the past 100 years, collective responsibility in banking has replaced individual responsibility. The government, with the introduction of deposit insurance, new regulations, and interventions, has superseded the old doctrine of the responsibility of the owners of a property. That is why we need to go away from government intervention and go more towards market-oriented solutions such as the old doctrine of the responsibility of bank owners.”

Grant’s citing of the “old doctrine of the responsibility of bank owners” is key here. While the sage analyst was speaking of private banks in general, his point applies to the contemporary culture of central banks as well. Ideally, the purpose and role of the central bank is to be to other banks what banks, ideally, are to the individual. While no chapter in the history of those banks is by any means scandal, scoundrel, or mismanagement-free, the “bankers’ bank” was, in theory and to a great degree in practice, defined by one signature distinction above all: that individual and national character played a key role in the guiding principles of their management.