Jan F Qvigstad: Writing central bank and monetary history - what are the
issues?
Welcome remarks by Mr Jan F Qvigstad, Deputy Governor of Norges Bank (Central Bank of
Norway), at a workshop co-organised by The Graduate Institute, Geneva and Norges Bank,
Oslo, 30 October 2008.
* * *
Dear participants,
It is a great pleasure for me to welcome all of you to the first workshop in Norges Bank's
Bicentenary Project. In particular I want to express a warm welcome to those of you who
have travelled far. Norges Bank and the Graduate Institute here in Geneva are privileged to
host a workshop with such a distinguished group of international experts in central bank and
monetary history from academic institutions and from the central bank community all over
Europe and from the US.
The financial crisis that was unleashed in the US more than a year ago went into uncharted
waters on 15 September this year. Since then G7, IMF and governments all over the world
have taken active policy measures that hopefully will steer the financial world into smoother
water, although the real economy probably will be in dire straits the next year or two. It might
seem strange, and a bit of an intellectual escapism in this situation, to gather here in Geneva
to discuss economics in a hundred year perspective. However, while it may be necessary to
take active policy measures in the short run to solve the crisis, it is equally important to learn
from historical lessons of the past so we can be better prepared for the future.
Why are we here? Why has Norges Bank taken the initiative to this workshop? To answer
this we have to turn the clock back to the time of the birth of Norges Bank right after the end
of the Napoleonic wars in Europe. Six laws about the Norwegian monetary system, passed
by the Norwegian Parliament in 1816, paved the way for the establishment of Norges Bank.
The Norwegian Constitution of 17 May 1814 specified that the Parliament should oversee the
monetary system but made no explicit reference to a central bank. The Constitution was
modified in November 1814 after Sweden showed some military muscle to enforce the
Treaty of Kiel. The revised Constitution was in place on 4 November 1814, and the main
changes reflected the fact that Norway had entered a loose union with Sweden under a
common King. A change, often overlooked, was that a new paragraph had been added
which explicitly stated that Norway should keep its own bank and monetary system. Hence
the Norwegian Parliament preserved an independent legal authority to decide on Norway's
monetary system and institutions under the union with Sweden.
Norges Bank is thus celebrating its 200-year anniversary in 2016 and has announced
ambitious targets for its Bicentenary Project. In 2016 we want to see that this project has
produced three high quality books on The History of Norges Bank 1816-2016, The Monetary
History of Norway 1816-2016 and on selected Topics in Central Banking in an international
historical perspective.
The aim of the workshop is to bring together international experts from central banks and
academia for informal discussions and an exchange on topics related to the writing of central
bank and monetary history. We expect discussions to be active and lively and we want this
workshop to kick-start research activities in these important areas. I want to thank the
Graduate Institute here in Geneva and Professor Marc Flandreau in particular for their
hospitality and for allowing us to spend almost two days discussing research in central bank
and monetary history.
Previous books about the history of Norges Bank have been written in Norwegian, and
predominantly by previous central bank governors. But "the times they are a-changin", to
phrase Bob Dylan (Dylan, 1964),1 and today we believe that best practice in writing central
bank and monetary history is achieved by contributions from professional academic experts
in relevant areas. The research should be brought up to international quality standards
through the usual peer review process. And, once it is recognized that there is only one
central bank in each country, it is also clear that a strong international perspective on central
bank history and monetary history is needed in order to trace the origin of ideas and how
monetary policy views and practices have developed over time as well as across different
countries.
The key responsibilities of central banks are to promote price stability and financial stability.
This fall, policy makers around the world have struggled to implement policy measures to
bring the international financial markets back into a more normal mode of operation. In this
pursuit we are constantly reminded of the importance of having a solid understanding of
economic history and developments as a backdrop to designing the right policy for the
current situation.
This fall, international experts like you are in greater demand than ever to help bring about
this level of understanding, and many of you appear frequently in debates on these issues in
policy workshops and conferences as well as in the media. Against this backdrop we see this
workshop as one of many arenas where policy makers and academic experts can exchange
ideas and views on what has been characterized as the most serious financial crisis since
the Great Depression in the 1930s.
The escalation of the financial crisis on 15 September was a consequence of an abrupt loss
of confidence and credibility in the financial markets. The banks' trust in other banks dropped
to a level where interbank lending almost came to a complete halt. Confidence and credibility
is the core in money and finance. What good is a 100 dollar note if there is no trust in its
worth to buy 100 dollars of goods and service.
When confidence and credibility have been destroyed it may take a long time before they are
restored. An example from Norwegian monetary history illustrates this. The example is from
the time of the birth of Norges Bank. The successful establishment of Norges Bank in 1816
played a key role in stabilizing the external value of the Norwegian currency after the chaos
following the Napoleonic wars in Europe. The previous joint currency with Denmark had
collapsed and two attempts to restore the currency based on broad guarantees had failed,
first from the Danish government in 1813 and second from the hastily called Constitutional
Assembly in 1814.
The successful restoration of credibility in the Norwegian currency was finally brought about
by the establishment of Norges Bank, but it took a long time. Norges Bank was in full
operation already in 1818, but since the Parliament postponed the decision to reintroduce
silver convertibility, the value of the notes continued to fall until the Parliament changed its
strategy in 1822. In this year a course to reintroduce silver convertibility was set.
Convertibility was introduced, first at poor (low) rates far from silver parity, but as confidence
improved the convertibility rate was gradually moved closer to parity. This process took
painstakingly long and it was not until 1842 that full convertibility at par values against silver
was reintroduced after 85 years with a paper money standard. From the time when the
strategy was laid in 1822 it took more than 20 years to build enough credibility to sustain full
convertibility even after Norges Bank had been successfully established.
During the first century of its operations Norges Bank exercised a high degree of
independence from the central government and built a reputation of credibility and
confidence in defending first silver convertibility and thereafter gold convertibility. During the
heydays of the classic gold standard in the four decades preceding WWI, recent research on
monetary policy (Øksendal, 2008)2 finds that credibility and confidence allowed Norges Bank
more room for discretion than has previously been acknowledged. This room for discretion
was used to take domestic considerations into account. This extra room for manoeuvring,
however, was only available to the bank as long as its commitment to defend the gold
standard was not called into question. Was this a preview of today's modern inflation
targeting regime? As long as inflation expectations are well anchored, more weight can be
given to developments in the real economy.
The independence of Norges Bank was de facto substantially reduced after WWII. The
legitimacy of the bank and confidence in the bank had been seriously undermined during the
interwar period and during WWII. The government tried on several occasions in the first
decade after WWII to turn Norges Bank into a subordinated agency. If the history of Norges
Bank was written in a vacuum with no international references, one might have thought that
this was unique for Norway. Not so, similar developments were observed in many countries
who previously subscribed to the gold standard. Political control over central banks was
tightened in many countries with one notable exception, the Bundesbank in West Germany
which was established as the most independent central bank in the post-WWII period
(Sejersted, 1994).3 Norges Bank was in fact not as dependent as believed. The truth may lie
somewhere in between. Recent research on the role of Norges Bank during the first decade
after WWII (Ecklund, 2008)4 suggests that Norges Bank maintained a relatively high degree
of operational independence in this period.
Norges Bank's independence was gradually restored. In 1986 Norges Bank was granted
instrument autonomy and started to set short-term interest rates to sustain the prevailing
fixed exchange rate regime. The current inflation targeting regime was introduced in March
2001 and Norges Bank now sets short-term interest rates aimed at keeping inflation around
2.5% over time. Greater independence demands adequate accountability. Along with greater
degree of autonomy and independence Norges Bank has become more open and
transparent in its monetary policy communication. Increased openness by Norges Bank is
not only a way of achieving accountability to its constituents, but is also instrumental to
enhance policy effectiveness. This stands in stark contrast with the mystique and
opaqueness which characterized earlier central bank communication.
For a long time central banks have focused predominantly on their interest rate policy.
Considerably less attention has been devoted to their liquidity policy which used to be carried
out somewhere in the basement of the monetary policy temple, far away from the spotlight of
the announcement of interest rate decisions. This year, liquidity policy has moved into the
spotlight and has taken over the lead role at the forefront of the monetary policy scene. The
current situation also highlights the close interaction between price stability and financial
stability and that the focus of policy makers today is on crisis management. The challenge in
the coming months and year is to pursue a dual approach consisting of short-term action and
long-term solutions. We must constantly be on the alert to put out fires when and where they
emerge, while studying the causes of the current crisis and finding the right long-term
remedies in the form of new rules and systems so that we do not repeat the same mistakes.
As the French saying goes, there is no point in putting a band-aid on a wooden leg.