29 March 2014

The Fifth Age of Central Banking in the Global Economy

The Fifth Age of Central Banking in the Global
Martin Marcussen, Copenhagen University, mm@ifs.ku.dk
Only dead institutions do not change. Central banks across the world are embedded in a variety of
national contexts and histories, and, to different degrees, they are exposed to a multitude of
challenges that require learning and adaptation in very specific situations. Globalization, regional
integration processes, financial crises, wars and terrorist attacks impact differently on different
central banks and in most cases central banks themselves feel that these challenges make flexibility
and change indispensable. Seen in that light, we would not expect that central banks across the
globe display isomorphic characteristics. Central bankers do indeed model each other’s practices,
structures and ideologies. However, they do not copy these features one to one. Rather, they
translate institutional fashions from other contexts into a format that resonate with existing domestic
structures, relations and ideas. Emulation does not necessarily imply institutional convergence.
Indeed, in preparation of major institutional reform a comparative study commissioned by the
Reserve Bank of New Zealand concluded that in the 1980s “there was little commonality among
central banks in their precise functions, objectives, or even the question of who should set the
objectives. The evidence was that few central banks at the time had well-defined, stable, objective
functions” (cited in Singleton et al., 2006: 140). And it has been argued that central bankers are an
“oddly assorted bunch. Many national idiosyncrasies persist that may no longer have a place,
though ... these may have deeper roots than many people assume” (Dean and Pringle, 1994: 338).
Despite the obvious danger of oversimplification I will neglect many of the differences that indeed
exist and continue to exist between central banks. Rather, I will raise the level of abstraction to such
an extent that central banks and the art of central banking are analyzed as categories in their own
right. I will adopt a so-called macro-historical perspective on central banks and central banking with
a view to spelling out some of the commonalities that exist in the world of central banking. The
purpose of this exercise is to try to substantiate a claim about where central banks are at the
moment and whereto they are heading. In short, I will claim that central banking is on its way into
an entirely new age, characterized by scientization, horizontal bureaucratic extension, external
communication, collective decision-making and outcome management. Max Weber’s concept of
rationalization that includes a striking intellectualization of the world; an objectification of things
and actions via formal analysis and mathematical abstraction; a technical mastery via specialized
practices and discourse; and reification (or thingification) of humans, machinery, raw materials
describe well the development.
The scope of this paper does not allow that I present bulletproof evidence for my claims. The
analysis will amount to what has elsewhere been categorized as a “plausibility probe”, i.e. an
exercise in presenting an argument that intuitively sounds plausible and puzzling and ought to be
dealt with in further and more detailed empirical research (Eckstein, 1975). In the last part of the
paper I will discuss which possible implications scientization will have for trasnational governance,
knowledge production and accountability.
Global Trends in Central Banking
Because central banks and the practice of central banking are complicated phenomena it takes
detailed case studies to really grasp the reasons behind, the content of and impact from institutional
change. The fact that the practice of central banking typically is decoupled from the formal statutes
of the central banks in question further complicates the analytical endeavor (Siklos, 2002: 116). As
mentioned, this paper takes the luxury of neglecting these well-founded methodological challenges,
and, applying the “large brush strokes method”, it directs its attention towards macro-phenomena,
i.e. institutional characteristics which in hindsight seem to have been shared by a majority of the
central banks around. In other words, I neglect the individual trees in order to be able to get a good
look at the forest. When doing that, it is common practice among central bank historians to
distinguish between four stages in the development of central banking (Fischer, 1994: 262). In a
first stage, special banks were created by governments to raise loans for the government; typically
to be able to cover war expenditures. These central banks also regulated and took responsibility for
the issuing of notes. In a second stage, central bankers were defined as the sort of entities that we
recognize today as central banks proper. Central banks started to become banks to other banks, and
thus accepting the responsibility for the stability of the financial system. The central bank was
sometimes the lender of last resort and they were responsible for the management of the external
value of the national currency. In a third stage, central banks were nationalized. They were entirely
subordinated their government and should implement the general macro-economic policy.
Monetary policy had multiple goals such as full employment, economic growth, price stability, and
a stable exchange rate. Finally, in a fourth stage, central banks were given formal autonomy to
pursue a single objective, most typically price stability. Central banks maintained their currency
function and responsibility for the overall stability of the financial system (although their
supervisory functions vary from country to country).

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