Commentators on international finance have for a long time been fascinated by the characters of leading central bankers and their personal relationships. Aditi Sahasrabuddhe of Brown University argues in Bankers’ Trust that analysts of international finance have underestimated the significance of these relationships in decision-making and the resulting outcomes. She also discusses the legitimacy of decisions made by central banks on international financial issues, notably the provision of swap lines by the Federal Reserve. Her extensive research has been enlightened by a wide range of interviews with participants international finance and the book includes several case studies.

The word ‘trust’ does a lot of work in this book, and it is worth considering what it means in the context of social relations in international finance. For example, central bank swaps, which Sahasrabuddhe discusses extensively, involve a certain amount of financial risk, but that risk has little to do with the personalities and relationships of the officials involved. Negotiating swaps entails certain personality or relationship risks, e.g. that the motivation for a proposal is not as stated; that the person making the proposal lacks the authority (or the desire) to implement it; or that the person making the proposal doesn’t really understand the main issues. These risks are certainly mitigated if the parties to a proposal know each other well and respect each other’s integrity and professional abilities; they are much the same as the risks faced by diplomats of all kinds.

Personalities can have a very important influence on policies. Federal Reserve Chairman Paul Volcker remodelled United States monetary policy in 1979 so as to overcome inflation, and then in 1982 used the prestige he had earned to reverse some of the 1979 remodelling in the light of the financial problems of Mexico. His successor Ben Bernanke had the foresight, courage and authority to expand the Fed swap network rapidly in the financial crisis of 2007 – 2008, as Sahasrabuddhe describes. Another example, also much discussed by Sahasrabuddhe, is that of Montagu Norman, the Governor of the Bank of England from 1920 – 1944, who did his utmost to dominate international monetary affairs in the in the 1920s.

She is, however, quite wrong when she says on p168 that Norman’s approach to Britain’s return to the gold standard went against the preferences of the government and the Treasury. It did not. True, both he and leading Treasury officials gave the government bad advice, but the government decided. Likewise, she is wrong in saying that Charlie Coombs of the Federal Reserve Bank of New York circumvented the preferences of the Fed in the arrangement of the earliest swap lines in the early 1960s: Coombs persuaded the Fed, he didn’t circumvent it.

In her various case studies, Sahasrabuddhe in my judgment consistently overstates her argument: she attributes too much influence to personal relationships and too little to the march of events. One example is Poland in the 1920s: she claims that Norman’s disdain for Émile Moreau, the Governor of the Bank of France, obstructed Poland’s international borrowing. Norman certainly disdained Moreau. However, it was his disdain for Poland (‘bad people; no stable prospects. avoid.’), rather than for Moreau, that made him try to obstruct lending to Poland; and in any case, Poland got its money despite Norman.

Like Milton Friedman and Anna Schwartz, Sahasrabuddhe attributes great policy significance to the death in 1928, at the age of only 55, of Benjamin Strong, the Governor of the Federal Reserve Bank of New York, and his replacement by the much less influential George Harrison, who served from 1928 to 1941. She claims that had Strong survived, central bank co-operation in the 1930s would have been much closer. However, all over the world, the reputations of the gold standard and of its defenders in central banks went into decline with the onset of the Great Depression. Treasuries eased central banks aside and took control of exchange rate policies. In the United States, the Federal Reserve Board gained power at the expense of the New York bank, and inhibited Harrison in his relations with foreign central bankers. It is doubtful whether Strong, had he lived, or anyone else could have done anything about it.

Much of Sahasrabuddhe’s analysis rests on the idea, proposed by Charles Kindleberger in his history of the Great Depression, that global economic stability depends on the presence of a benevolent hegemon which can act as a lender or trader of last resort, so as to contain the spread of an incipient crisis or economic depression. Central bank co-operation can therefore be regarded as desirable.

Or can it? What if central bank co-operation is based on a bad idea? Is competition among central banks sometimes a better idea than co-operation? In the early 1960s, the construction of the Federal Reserve swap network, which Sahasrabuddhe discusses at length, was intended to preserve the Bretton Woods exchange rate structure, which was under pressure because American monetary policy was not compatible with the fixed dollar price of gold. The exchange rate structure might have been preserved if American monetary policy had been adjusted, or the official price of gold increased, but neither of those things happened. In the end, Bretton Woods collapsed. It is not surprising that some of the European central banks, not only the Bank of England but also the Bank of France, foresaw that, and were sceptical of the swap network. Jumping forty-plus years ahead, it is highly doubtful whether the remarkable consensus among central banks in favour of large-scale quantitative easing after the financial crisis, and even more after the outbreak of Covid, was a wise one.

Sahasrabuddhe worries that crisis resolution usually depends on improvisation, and that there is no pre-existing procedure for crisis resolution which can be designed and legitimised by political agreement before the crisis occurs. Improvisation by unelected officials, as in 2008, lacks democratic legitimacy. In fact, however, there is a pre-existing procedure, embodied in the International Monetary Fund. The problem in 2008 was that the IMF lacked the lending facilities necessary for rapid large-scale action of the kind that was needed, and it didn’t have time to invent a new one.  In that year, the IMF lent, net, the equivalent of $18 billion, whereas the Fed lent, net, $530 billion by means of swaps. The disparity illustrates the relative effectiveness of the IMF and the Fed as crisis managers. It does not reflect at all on the personalities or abilities of the executive managers or the staff of the IMF, but on the IMF’s decision-making procedure, which requires the approval of its board of directors, representing its member countries. It is inevitably cumbersome, cautious and slow, and thus ill-adapted to reacting to a fast-moving situation. The solution is clearly not to set up a new international institution, which would surely have similar characteristics (though some new such institutions have nevertheless been set up). 

There are, however, plenty of precedents in the accumulated history of financial crises, and an inventory of crisis management devices which are either extant (like some swap lines) or capable of being reconstructed quickly. The capacity to react quickly and inventively is essential in crisis management, because panic spreads quickly, and no crisis is exactly like its predecessors. As Sahasrabuddhe acknowledges, effectiveness and wide consultation are usually in conflict – though it should be noted that the Fed consulted the State Department before setting up swap lines with foreign central banks in 2008. The choice is between improvisation and inaction. And if you think that personal relationships play a very large part in improvised crisis management, then you are likely to worry a lot about the implications of the conflict. There are plenty of reasons to be worried about central banks taking liberties with their independence, but I think that Saharasbuddhe worries a bit too much about this one.

Bankers’ Trust is above all a thought-provoking review of important issues, well worth reading even if you don’t share its conclusions. For me, it demonstrates that sometimes there are financial crises which are too big to be addressed by the loan and other credit facilities to which governments have pre-committed. If the possibility of filling the resulting gaps is to be retained, then relations among central banks cannot be confined by a pre-established set of rules and procedures. Events affect institutions, as well as vice versa. Personalities and personal relationships matter, but not as much as facts.