The Age of Central Banks
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The Age of Central Banks

Curzio Giannini

Curzio Giannini’s history of the evolution of central banks illustrates how the most relevant institutional developments have taken place at times of widespread confidence crises and in response to deflationary pressures. The eminent and highly-renowned author provides an analytical perspective to study the evolution of central banking as an endogenous response to crisis and to the ever increasing needs of economic growth. The key argument of the analysis is that crucial innovations in the payment technology (from the invention of coinage to the development of electronic money) could not have taken place without an institution – i.e. the central bank - that could preserve confidence in the instruments used as money. According to Curzio Giannini’s ‘neo-institutionalist’ methodological approach, social institutions are, in fact, essential in the coordination of individual decisions as they minimize transaction costs, overcome information asymmetries and deal with incomplete contracts.
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Chapter 3: The Convertible Banknote and the ‘English Model’

Curzio Giannini


3.1 INTRODUCTION The development of the banknote laid the foundation for the history of central banking. It was not an easy start and definitely not one whose outcome could be taken for granted. The century roughly spanning 1650 to 1750 is, from the monetary standpoint, a trial period during which the most varied solutions were tested to promote trust in a new payment technology that, despite its extraordinary flexibility, proved extremely fragile. In principle, as Vera Smith remarks in her classical text on the origins of central banking, there are three possible set-ups for issuing notes: (1) by a centralized public body; (2) by a private institution subject to specific surveillance; and (3) by a multiplicity of competing private banks, subject, in the most liberal arrangement, only to commercial law and, in the least liberal, to a series of ad hoc controls limiting their issuing capability.1 A certain liberalist vulgate that developed in the 1880s preferred the first solution right from the beginning, for the simple reason that it was the only one guaranteeing state control of a form of hidden taxation, the inflation rate, implemented by issuing more banknotes than the economy required.2 At first glance, this seems plausible. The main forerunners of today’s central banks, namely the Bank of Stockholm, the Bank of England and the First Bank of the United States, were all established with the specific intent of facilitating state funding at a time of large regime gaps, that is, slow fiscal structure and uncertain results....

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