24 November 2023

The Rise of Central Banks

State Power in Financial Capitalism

Leon Wansleben
2023, Harvard University Press, 336 pages,
ISBN 9780674270510

Reviewer: Ian Bright

Central banks have always been powerful institutions. Over the past 50 years, it can be argued that they have become more powerful. Many have gained operational independence from government. The question of how central banks became more powerful and the implications for society are addressed in this book. These topics have been addressed many times previously by political scientists and economists. The author admits this. However, Leon Wansleben approaches this topic from the perspective of a sociologist. This may bring a different perspective. Wansleben argues that “A distinct strength of my discipline, I thought, was to look at central banks as organizations, how people interact within them and with outside groups, and how those who work there think and come to decisions.” (Preface p ix)

The book makes its arguments based on archival research, interviews with current and former central bankers, and by summarising existing research. The concentration is on four central banks – the Bank of England, the Bundesbank, the Federal Reserve and the Swiss National Bank. The time period covered is from the 1970s until the period of quantitative easing following the global financial crisis. There is some discussion of the Covid period but archival sources are not available for that period yet.

Starting in the 1970s is sensible. It was a time when global capital became more mobile, inflation needed to be lowered, and economic policy was re-organised along neo-liberal lines. In this case, neo-liberal is loosely defined (p.4) as an approach where globalisation of finance is allowed and even encouraged and responsibility for obtaining key economic objectives such as output stabilisation shifts from fiscal to monetary policy. Central banks became more powerful in this environment but the development of that power differed between countries due to the structure of their financial markets. These structures essentially cover the payment and regulatory systems in each country – the plumbing of the financial system. (see page 44 where the key tenet of the book is outlined). However, an implication of these structures has been that central banks concentrated on what they thought they could control. The way central bankers think may be influenced by these structures and they may not really be able to control them. This has led to some unfortunate outcomes.

To understand this, consider what is implied by control. Control implies some form of causal relationship between the actions of central banks and outcomes, giving rise to “output legitimacy” (p.45). However, approaches to monetary policy have changed over time from, for example, monetary targeting, to inflation targeting, to inflation expectations management, to forward guidance and to quantitative easing. These approaches may contain different causal mechanisms. If so, these changes in approach bring into question the output legitimacy of the central banks, especially if these changes can be thought of as experiments. There are detailed outlines of discussions in the four central banks covered for many of these changes.

The difficult problems that needed to be addressed by central banks and the structures of the markets they operated in drew them into closer relationships with financial market operators. As a result, central banks supported increased financialisation of economies, encouraged excessive debt, and supported bloated asset prices (p.57). Regulation was underplayed if not abandoned (see chapter five). Each of these failings continues to some extent and, according to the author, central banks find themselves in the position of having to defend an unstable regime (p.243).

As to the aim of the book to add a new perspective on the rise of central banks, I am not sure. The detail is impressive. The book will serve as a useful reference for understanding how some technical aspects of payment systems developed in different countries. By concentrating on the technical aspects of central banking, it adds to the literature on this topic. That said, the conclusions reached are not surprising. For example, the special status of central banks has been noted by many and especially by Paul Tucker in his 2018 book “Unelected Power”. The complexity of financial systems and the failure of central banks in regulation is covered extensively by Anat Admati and Martin Hellwig in their 2012 book “The Bankers New Clothes”. That book is being updated and will be re-released in 2024. The challenge of increased financialisation and shadow banking is covered extensively in Adair Turner’s 2015 book “Between Debt and the Devil”. Differing opinions about how monetary policy operates – which affects output legitimacy – continues to this day. See for example, Scott Sumner’s 2023 book “Alternative Approaches to Monetary Policy”. Criticisms of the structure, sustainability and stability of global financial markets abound, for example in studies by Ann Pettifor and Oliver Bullough’s 2018 book “Moneyland”.

In listing these books, I risk being churlish. As written earlier, Wansleben notes the extensive literature on central banks. His approach complements and extends this work.

One possible criticism is the concentration on Western central banks. I understand why this has happened. Wansleben writes (p.62) that the focus on these four banks is partly because they have been most formative in changes in monetary approaches since the 1970s. Nevertheless, there may be new ways of considering the rise and power of central banks by considering the experiences of non-Western and less wealthy countries. Wansleben recognises this. When writing about how inflation targeting became adopted by so many central banks “in such diverse settings as Argentina, Brazil, Moldova, Uganda and Switzerland. It is hard to see what unites these democratic and nondemocratic countries with fundamentally different regimes”. (p. 141). On this issue of countries examining the performance and operational procedures of their central banks, it is interesting to see that the Australian government set up a review of the Reserve Bank of Australia in 2022. The report associated with that review was released in March 2023.

On a methodological note, I am left wondering how much the approach of the sociologist differs from that of the institutional school of economics. This is not meant to demean either approach.

The legitimacy of central banks has been regularly and justifiably questioned for many years, especially since the global financial crisis. It is important that their special position of power be regularly questioned. Leon Wansleben does this admirably.