Archive for the ‘Central Banks / Monetary Policy’ Category

Euro at 20: A consortium of West African countries moving towards their own common currency..

November 16, 2018

As Euro celebrates 20 years, we have a currency design competition for another proposed monetary union.

This one is amidst West African countries named Economic Community of West African States.

Basically, in ECOWAS there are two sub-blocks:

  • The West African Economic and Monetary Union (also known by its French-language acronym UEMOA) is an organization of eight, mainly French-speaking, states within the ECOWAS which share a customs union and currency union. Established in 1994 and intended to counterbalance the dominance of English-speaking economies in the bloc (such as Nigeria and Ghana), members of UEMOA are mostly former territories of French West Africa. The currency they all use is the CFA franc, which is pegged to the euro.
  • The West African Monetary Zone (WAMZ), established in 2000, comprises six mainly English-speaking countries within ECOWAS which plan to work towards adopting their own common currency, the eco.

I did post about UEMOA and how France continues to control these countries.

It is WAMZ which is deciding to introduce a common currency. Its members are:

Formed in 2000, the West African Monetary Zone (WAMZ) is a group of six countries within ECOWAS that plan to introduce a common currency called the Eco.[23] The six member states of WAMZ are GambiaGhanaGuineaNigeria and Sierra Leone who founded the organization together in 2000 and Liberia who joined on 16 February 2010. Apart from Guinea, which is Francophone, they are all English-speaking countries. Along with Mauritania, Guinea opted out of the CFA franc currency shared by all other former French colonies in West and Central Africa.

The WAMZ attempts to establish a strong stable currency to rival the CFA franc, whose exchange rate is tied to that of the Euro and is guaranteed by the French Treasury. The eventual goal is for the CFA franc and Eco to merge, giving all of West and Central Africa a single, stable currency. The launch of the new currency is being developed by the West African Monetary Institute based in Accra, Ghana.

The currency’s proposed name is Eco which has similar joining conditions as Euro.

After much dilly dally, action has begun on Eco. Central Bank of Nigeria has floated a competition for the common currency. Apparently, all ECOWAS members have decided to go for this common currency. It even asks for a name for the currency as Eco is not the final name.

Interesting to see this space…


Federal Reserve undergoing changes in banking and monetary policy matters…

November 16, 2018

Several changes underway at Federal Reserve.


What are we learning about Artificial Intelligence in Financial Services?

November 16, 2018

Federal Reserve Governor Lael Brainard takes us through this interesting fascinating topic.

My focus today is the branch of artificial intelligence known as machine learning, which is the basis of many recent advances and commercial applications.2 Modern machine learning applies and refines, or “trains,” a series of algorithms on a large data set by optimizing iteratively as it learns in order to identify patterns and make predictions for new data.3Machine learning essentially imposes much less structure on how data is interpreted compared to conventional approaches in which programmers impose ex ante rule sets to make decisions.

The three key components of AI–algorithms, processing power, and big data–are all increasingly accessible. Due to an early commitment to open-source principles, AI algorithms from some of the largest companies are available to even nascent startups.4 As for processing power, continuing innovation by public cloud providers means that with only a laptop and a credit card, it is possible to tap into some of the world’s most powerful computing systems by paying only for usage time, without having to build out substantial hardware infrastructure. Vendors have made it easy to use these tools for even small businesses and non-technology firms, including in the financial sector. Public cloud companies provide access to pre-trained AI models via developer-friendly application programming interfaces or even “drop and drag” tools for creating sophisticated AI models.5 Most notably, the world is creating data to feed those models at an ever-increasing rate. Whereas in 2013 it was estimated that 90 percent of the world’s data had been created in the prior two years, by 2016, IBM estimated that 90 percent of global data had been created in the prior year alone.6

The pace and ubiquity of AI innovation have surprised even experts. The best AI result on a popular image recognition challenge improved from a 26 percent error rate to 3.5 percent in just four years. That is lower than the human error rate of 5 percent.7 In one study, a combination AI-human approach brought the error rate down even further–to 0.5 percent.

So it is no surprise that many financial services firms are devoting so much money, attention, and time to developing and using AI approaches. Broadly, there is particular interest in at least five capabilities.8 First, firms view AI approaches as potentially having superior ability for pattern recognition, such as identifying relationships among variables that are not intuitive or not revealed by more traditional modeling. Second, firms see potential cost efficiencies where AI approaches may be able to arrive at outcomes more cheaply with no reduction in performance. Third, AI approaches might have greater accuracy in processing because of their greater automation compared to approaches that have more human input and higher “operator error.” Fourth, firms may see better predictive power with AI compared to more traditional approaches–for instance, in improving investment performance or expanding credit access. Finally, AI approaches are better than conventional approaches at accommodating very large and less-structured data sets and processing those data more efficiently and effectively. Some machine learning approaches can be “let loose” on data sets to identify patterns or develop predictions without the need to specify a functional form ex ante.

What do those capabilities mean in terms of how we bank? The Financial Stability Board highlighted four areas where AI could impact banking.9 First, customer-facing uses could combine expanded consumer data sets with new algorithms to assess credit quality or price insurance policies. And chatbots could provide help and even financial advice to consumers, saving them the waiting time to speak with a live operator. Second, there is the potential for strengthening back-office operations, such as advanced models for capital optimization, model risk management, stress testing, and market impact analysis. Third, AI approaches could be applied to trading and investment strategies, from identifying new signals on price movements to using past trading behavior to anticipate a client’s next order. Finally, there are likely to be AI advancements in compliance and risk mitigation by banks. AI solutions are already being used by some firms in areas like fraud detection, capital optimization, and portfolio management.


One believes that sooner than later we will either have technologists in top management at central banks (even banks) or the top management will have to undergo rigorous tech training. This is no more science fiction but day light reality.

Why we should be interested in the history of currencies

November 15, 2018

Swiss National Bank issued a press release about Ernst Baltensperger’s history of the Swiss franc to appear in Italian. The book was written in 2012 and is available in German and French editions. Sigh! Will have to wait for English edition.

Anyways, further research took me to this wonderful speech by Ernst titled: Why we should be interested in the history of currencies.


History trivia: Why 19 November is a curious date for much awaited RBI Board meeting…

November 15, 2018

The much awaited RBI Board meeting is slated on 19 November. But if news are to be believed, lot of patchwork is already done. Trust the folks to meet as if nothing has happened.

What is interesting is 19 November also happens to be birthday of former Prime Minister Indira Gandhi. Reading RBI’s history volumes, one clearly sees how the central bank just becomes a handmaiden of government during her PMship years.  This was largely due to the nationalisation of banks in 1969 which gave government/finance ministry enormous powers over economic and banking matters. Much action during those days came from finance ministry. The joke was that all RBI top management did was to wait for phone calls from Delhi.

It is interesting that we are seeing these battlelines between the two being drawn on 19th November of all dates. We are hearing talks of Section 7 being invoked (its history) where government wants to take away powers being taken away from RBI top management.

In all likelihood, this is just sheer coincidence. But what a coincidence. If we do see government taking control on the date and day, it will be an interesting case of history coming back and biting…

IMF building case for Central Bank Digital Currencies (and mentions hundis too!)

November 15, 2018

Christine Lagarde in this speech discusses discusses pros and cons of issuing a central bank digital currency.

But before discussing CBDC, it was really surprising to see IMF chief mentioning hundis:

Let me begin with the big issue on the table today—the changing nature of money. When commerce was local, centered around the town square, money in the form of tokens—metal coins—was sufficient. And it was efficient.

The exchange of coins from one hand to another settled transactions. So long as the coins were valid—determined by glancing, scratching, or even biting into them—it did not matter which hands held them. But as commerce moved to ships, like those that passed through Singapore, and covered increasingly greater distances, carrying coins became expensive, risky, and cumbersome.

Chinese paper money—introduced in the 9th century—helped, but not enough. Innovation produced bills of exchange—pieces of paper allowing merchants with a bank account in their home city to draw money from a bank at their destination.

The Arabs called these Sakks, the origin of our word “check” today. These checks, and the banks that went along with them, spread around the world, spearheaded by the Italian bankers and merchants of the Renaissance. Other examples are the Chinese Shansi and Indian Hundi bills.

Suddenly, it mattered whom you dealt with. Was this Persian merchant the rightful owner of that bill? Was the bill trustworthy? Was that Shanxi bank going to accept it? Trust became essential—and the state became the guarantor of that trust, by offering liquidity backstops, and supervision.

Why is this brief tour of history relevant? Because the fintech revolution questions the two forms of money we just discussed—coins and commercial bank deposits. And it questions the role of the state in providing money.

Hundis has long been forgotten by researchers in India barring those history folks. Nice to see Lagarde mentioning hundis along with Sakks and Shansi..

Now to CBDC:


Reflections on Bank of Engalnd’s 300 year history…

November 14, 2018

Another superb guest post on Bank of England’s Underground blog. This one is by David Kynaston who wrote Till Time’s Last Sand: A History of the Bank of England 1694-2013.

He points to key lessons from the 300 year history of the bank:


Paradise lost? A brief history of DSGE macroeconomics

November 14, 2018

Gulan Adam of Bank of Finland provides a brief overview in this paper:

Since the Global Financial Crisis, academic economists and policymakers have had to deal with uncomfortable questions about the quality of their models and the state of macroeconomics as a profession. This note offers a summary of this discussion, focusing on the Dynamic Stochastic General Equilibrium (DSGE) framework and its underpinnings. This class of models reflects both theoretical advances and perennial modeling challenges.

While DSGE modeling developed in times of scarce micro data and limited computational resources, it has much room for improvement given progress along these dimensions and advances in other branches of economics. Key tasks on the to-do-list for model improvement include the modeling on the financial sector, departures from the representative agent and rationality, as well as clarification of the empirical relevance of the Lucas critique. The framework is likely to remain a major research and policy tool, although its limitations call for greater robustness, validation and open recognition of uncertainty in drawing real-life quantitative conclusions.

We need more and more of such papers to help demystify the acronym DSGE…

Why Central bank autonomy is in the government’s “enlightened self-interest”…

November 14, 2018

Avinash Tripathi has a nice piece on the recent turmoil in relations between Indian central bank and government.

There is a bit of everything in the article: political economy, game theory, history, microeconomics and even Sherlock Holmes!

RBI deputy governor Viral Acharya in government crosshairs and what to expect if Section 7 of RBI Act is invoked…

November 14, 2018

Asit Ranjan Mishra of Mint on the ongoing drama between RBI and Finance Ministry.

The government may train its guns on Reserve Bank of India deputy governor Viral Acharya if the confrontation with the central bank escalates at the RBI board meeting on 19 November, a person familiar with the deliberations within central bank’s board said.

In case discussions between the government and RBI break down, the government may choose to invoke Section 7 of the Reserve Bank of India Act, 1934, and at least four of the 11 independent directors of the central bank could move a no-confidence motion against Acharya for publicly airing his views protesting government interference, the person said, asking not to be identified because of the sensitivity of the matter.

If Section 7 of RBI Act is invoked, the five representatives of the central bank, including governor Urjit Patel, and the two finance ministry secretaries have to withdraw from further deliberations of the board. The independent directors will then pass resolutions on contentious issues such as liquidity measures for non-banking financial companies (NBFCs) and micro, small and medium enterprises (MSMEs) and RBI’s 12 February circular.

“The danger in this board meeting is that it will boil down to voting. If both sides do not budge from their positions after their presentations, they will have to walk out of the room. The government is clear that there needs to be resolution of all the contentious issues at this meeting,” the person said.

Once the government invokes Section 7, the powers of the RBI board will be supreme.

“Subject to any such directions, the general superintendence and direction of the affairs and business of the bank shall be entrusted to a central board of directors which may exercise all powers and do all acts and things which may be exercised or done by the bank,” the relevant part of Section 7 (2) of the RBI Act says.

Hope RBI minutes the meetings and tells us atleast something…

How did organisations adapt to change in the 18th and 19th century: Case of Bank of England

November 13, 2018

Bank of England recently held an economic history workshop at the St Clere Estate, home of former governor Montagu Norman.

The Bank of England blog – named as Bankunderground – has been reaching out to econ history scholars to wrote guest posts on the blog. This is fabulous as blog is a great medium to disseminate research ideas. There was an earlier guest post by Prof Barry Eichengreen on lessons from Montagu Norman.

There is another superb post from Anne Murphy, Dean of Humanities and a professor at the University of Hertfordshire. She writes on how Bank of England archives can help us learn about organisational changes at Bank of England itself:

Industrialisation was not the only driver of change during the eighteenth century. Recent historiography has revealed more about the financial and organisational revolutions that helped to shape the British state and the country’s economic development. The Bank of England was at the forefront of these revolutions and a pioneer of new modes of business organisation. A business that started out in a small rented space with only seventeen clerks in 1694 was, by 1815, employing nearly 1,000 workers and occupying most of the Threadneedle Street block. Yet it has been sadly neglected as a case study. What might we find in the Bank’s archives to understand how business adapted to rapid and radical change during the eighteenth and nineteenth centuries?

Our first insight actually comes from the extent of that archive. One response to changing organisational priorities was to accumulate information. The need to maintain comprehensive and accurate records meant that the Bank kept nearly everything. So vast was the undertaking that by the 1770s it had to invest in a four-storey fire-proof library. And many of the records preserved there have survived. Look further into the archive and it is possible to gain insights into how a new business model evolves, how a workforce adapts and how an institution conveys trust in a rapidly changing environment.

How the central bank dealt with several challenges such as record keeping, fire, human capital, building bills market and so on…

This one on bank creating trust:

…..the Bank’s directors were keen to signal their connection to the state. Britannia was particularly prominent throughout, stamped on the Bank’s notes, ledgers and letterheads and as a statue over the entrance to the Pay Hall. With her shield and spear signalling defence of the nation and close associations with trade, industry and profit Britannia offered a clear statement of the Bank’s aims and the conflation of those aims with the goals of the state. But this message was an uncomfortable fit with the Bank’s willingness to house a market that was often criticized for its supposed attempts to undermine the nation’s stability and for taking advantage of the exigencies of war.

Britania stamp. Source: Bank of England Archive.

The contradiction was dealt with by the creation of both physical and business separation between the work of managing the public credit and the business of trading the government’s debt. It was not wholly successful, as the transfer clerks’ business sidelines demonstrate. We might ask, therefore, to what extent the Bank could be trusted to serve its two masters: the state, which expected the cost-effective and reliable management of its debt, and the public who lent to the state and expected the Bank to safeguard their investment.

This question is of great importance to historians who seek to understand why the public was willing to lend, throughout the long eighteenth century, to a state so often at war. It has been answered by many scholars with reference to the institutional changes brought about by the Glorious Revolution of 1688.

The role of the Bank in this process was key and the location of the market within its walls did not serve to undermine, but rather to enhance what has been referred to as a ‘credible commitment’ to honour the state’s financial promises. It made the market easy to locate and accessible. It allowed the visitor to the Bank to observe all the processes of providing public credit. Indeed, the Bank was undeniably a space in which public credit was put on display and the financial integrity of the state was demonstrated. From its grand architecture to the open-plan arrangement of the offices to the Rotunda where the brokers and jobbers gathered, visitors were invited to witness public credit at work.

Arguably then, despite all the potential disadvantages of locating the market within the Bank, some wider and more important purposes were realized: those of exposing the functioning of the market in the state’s debt to scrutiny and demonstrating the credibility of public credit. ‘Credible commitment’, therefore, did not just reside in state institutions that might have seemed rather nebulous in the eyes of most public creditors. By the mid-eighteenth century ‘credible commitment’ could be found and observed at the Bank of England. There, credibility lay in the provision of liquidity and a one-stop-shop in which all business relating to the public debt could indeed be done quickly and easily.

Really good stuff..

In the battle between RBI and government, it is high time we look at RBI as an organisation and not just its policies. That will tell us many things we are missing in the debate. After all, RBI is one of the few central banks which has been speaking about lack of independence for a long time. No other central bank complains that much. So is there an organisational design in RBI which has gaps which allows governments to always question the central bank? If yes, how should it be fixed?

Bitcoin turns 10: An idea that shook the world monetary order

November 13, 2018

My new piece in moneycontrol: Bitcoin turns 10: An idea that shook the world monetary order.


Israel says no to issuing e-shekel

November 12, 2018

I had blogged earlier about Israel thinking about issuing e-shekel.

The central bank recently released a report which said no to the idea. It said one should wait and watch this space:

  • Central banks around the world are examining the possibility of issuing digital currency and/or using distributed technologies in the payment systems, but no advanced economy has yet issued digital currency for broad use. The Bank of Israel has also established a team to study the issue.
  • The team does not recommend that the Bank of Israel issue digital currency in the near future.  It is necessary to continue examining the field and to follow developments around the world before there are proper grounds for a decision to recommend issuing digital currency.
  • The team will continue working to study and monitor the issue, and will report to the Bank of Israel’s management semi-annually about its activity and about significant developments in the field.


Pink Floyd on government-central banks frictions

November 9, 2018

It is not just India, but we are seeing rising cases of frictions between governments and central banks.

Have reworded the iconic Pink Floyd song “We don’t need no education”.  This is perhaps what central banks could/would like to sing to governments:

We don’t need no intervention
We don’t need no policy control
No dark sarcasm in the boardroom
Government, leave us central banks alone

Hey,  Government, leave us central banks alone  

All in all it’s a another crack in our wall 
(All in all you’re just) another crack in our wall.


Happy to figure what governments would sing in reaction….

Policy dilemmas and the role of the central bank in advising government (Lessons for India?)

November 9, 2018

Karnit Flug, the outgoing Governor of Bank of Israel gave her farewell speech.

In Israel, the Governor plays an official role as an advisor to the government. This often leads to questions over independence:

A natural question that arises in this respect is why at the Central Bank? Should the economic advisor to the government be the Governor of the Central Bank?

This question was debated within the bank of Israel, among some of the people sitting here today. While we were discussing the new Bank of Israel Law, Stan was initially of the view that the role of an economic advisor to the government puts the bank in a constantly contentious position Vis a Vis the government and may undermine the banks’ independence in its core responsibility. I was the Director of the Research Department at that time, and argued in favor of maintaining the role of economic advisor in the law, which was eventually what was decided. Several years later, when I became Governor, I met Stan (in Basel, at a BIS meeting) following one of the heated debates I had with the government, and told him that now I understand and sympathize with his initial view against having the role of the economic advisor. Stan surprised me when he said that looking from the outside, he is even more convinced of the importance of this role of the Bank of Israel.

 This question was also posed to an independent evaluation committee which was invited to evaluate the BOI’s research department back in 2012. In their report, they said, and I quote: “We came to the Bank very skeptical of any central bank having the responsibility of being an advisor, much less the advisor, to the government on economic policy”. Following a thorough discussion with many relevant stakeholders within and outside the bank, they concluded: “Absent fundamental changes in other Israeli institutions, we agree that the Bank must continue to play the critical role of advisor to the government policy”

 Indeed, the argument against the CB’s role in economic policy advice because it enhances the friction between the Bank and the government and thus may undermine the Bank’s independence in its core responsibilities is not unique to the role of economic advisor.  In fact, this debate resembles the discussion regarding the question that is debated extensively among central bankers as to how wide should our responsibilities and mandates be defined. I have heard the argument that in some issues the decisions reflect political priorities as opposed to pure economic welfare maximization decisions, and therefore should be left to the politicians, or that they may undermine the central banks’ credibility or independence. These are valid arguments, and certainly, my tenure as governor has demonstrated that providing a well-grounded position on some sensitive or publically debated policy issues does raise the level of friction with the government.

 However, when we think about designing institutions, we should not think in the abstract, and we never start from scratch. We should take the starting point into account, and asses what is the likelihood that a change will get us closer to some “ideal institutional design” (if such exists). Given that this role has been defined in the original BOI law from 1954 as one of the main responsibilities of the BOI and its Governor, the basic infrastructure of knowledge and highly professional staff, and reputation has been built at the BOI to serve this responsibility. I also believe that the credibility of the central bank is enhanced, not damaged, by the quality research and policy recommendations it provides. In that regard, it may even contribute to the public support of an independent central bank. 

And as to friction between the central bank and the political system, during my term it was in fact most intense around issues related to the core activity of the Bank of Israel in supporting financial stability. The quest for enhancing competition in the provision of financial services, which we all share, led to heated debate as to the scope, the speed and the specifics of the financial sector reform. It centered around our insistence on ensuring that the reform does not undermine financial stability that was sometimes taken for granted by our partners in the design of the reform. In the past, the friction was most intense regarding the disinflation process, and Jacob Frankel who sits here, can certainty testify to that.

So, we’ve had frictions in the past and will probably have them in the future, and we should be able to withstand them. We should provide a quiet, behind closed doors policy advice in some cases, and contribute to a better-informed public debate on key policy questions. I believe that within the current political context, where policies tend, more than in the past, to focus more on short term benefits and ignore longer term risks and costs, it is essential that an independent well regarded institution provides solid policy analysis and advice, and helps explain this to the public.  So, I believe that retaining the economic advisory role by the Central Bank in the 2010 BOI law has served the country well.

Official or non-official, central bankers are advisers to the government. Frictions between central banks and government should be celebrated as it gives different viewpoints. But these frictions are best held behind closed doors as Governor Flug says.

This is how it used to be in India/RBI as well. Reading volumes of RBI History, one goes through several of these frictions. Pity and tragic that these frictions are coming out in open and bit too regularly at that…

Implications of e-krona project on different aspects of Swedish monetary and banking system

November 9, 2018

Superb research by team of Riksbank economists.

The Riksbank is investigating the possibility and consequences of introducing a Swedish central bank digital currency, a so-called e-krona. The latest issue of our journal Economic Review is a special theme issue discussing the e-krona from different perspectives. What is the role of the central bank in the payments market? What might the demand for an e-krona be? What consequences will this have for the banks? How will rate-setting be affected, and what further effects might the e-krona have for monetary policy and economic developments in the long run?

It includes following articles:

  • Why did the Riksbank receive a banknote monopoly? 
  • What is money and what type of money would an e-krona be? 
  • Implications of an e-krona for the Riksbank’s framework for implementing monetary policy
  • The e-krona and the macroeconomy
  • How many e-kronas are needed for payments?
  • When a central bank digital currency meets private money: effects of an e-krona on banks

Must read for those interested in digital money and even money in general…

The Government makes changes in RBI Board….

November 7, 2018

Some interesting changes last evening. Apparently, the media knew of these changes on Oct 4 2018, but RBI informed the public only yesterday evening.


Montagu Norman: learning economic history from his home at St Clere

November 5, 2018

Superb guest post from Prof Barry Eichengreen on Bank of England’s blog.

Last May, the Bank organised an economic history workshop at the St Clere Estate, home of former governor Montagu Norman. In this guest post, one of the speakers, Barry Eichengreen from the University of California Berkeley, looks back at Montagu Norman’s time as governor.

Montagu Norman’s aura is palpable at St. Clere. It is said that Norman spent many of his weekends and holidays at his estate in Kent, overseeing improvements and admiring the vistas. His legacy is, if anything, even more prominent at the Bank of England. Norman supervised the design of the present Bank building. His portrait, along with those of the other members of his Court, was displayed on the first-floor landing in the Bank’s main atrium; he is only a handful of governors so honored. The Bank’s recent St. Clere workshop thus provided an opportunity to ponder some of the enduring themes and legacies of Norman’s quarter-century as governor.

It will not surprise the reader that many of these, to my mind, revolve around the decision to return to the gold standard at the prewar parity in 1925 and abandonment of that arrangement in 1931.

Prof Eichngreen lists several lessons to learn from Norman’s tenure and even suggests writing a new biography of the person…

The birth of inter-war central banks – building a new monetary order

November 5, 2018

Bank of Greece (their central bank) organised a fascinating looking conference on its 90th anniversary. The conference theme was: The birth of inter-war central banks – building a new monetary order.

It is really nice to review central banking history from an inter-war period angle as quite a few banks emerged during the period: South Africa, Greece, India, New Zealand etc. Interesting to see Prof Balachandran, the main author of the 2nd RBI History Volume, presenting a paper titled: Central banking and colonial control: India, c. 1914-39. Looking forward to reading all the papers especially the one by Prof Balachandran.

The welcoming remarks by Yannis Stournaras, Governor of Bank of Greece, gives a preview of their history. It is not very different from Indian story:

It is my great pleasure to welcome you to this international conference, devoted to the Birth of inter-war central banks, organised by the Bank of Greece, itself one of the offspring of this institutionally fertile period.

It was 1926 when the Greek government first approached the Financial Committee of the League of Nations, seeking its help to settle old debts and raise a new loan on international markets. The money was needed quite urgently. After a decade of wars, which had culminated in the abortive Asia Minor campaign and the forced population exchange of 1922, the Greek economy needed an injection of capital to heal its wounds, settle its refugees and build up its economic infrastructure. Yet its international credit standing lay in tatters; wartime obligations remained unsettled; expenditures far outstripped public revenues; inflation was soaring, and the drachma had lost more than 90% of its value.

The League of Nations, relying heavily on input from the Bank of England and the Treasury, promptly dispatched a group of experts to study the Greek situation and report back to Geneva. Their report was published in 1927. Along the inevitable admonitions about fiscal prudence and administrative reform, the foreign experts highlighted the absence of a modern central bank: an institution charged solely with the conduct of monetary policy, free from political or business interference. The sole note-issuing authority at the time was the National Bank of Greece (or Ethniki, as most in this audience know her). But Ethniki also happened to be the country’s largest commercial bank, with strong ties to business and politics. If Greece were to re-join the gold standard and thus return to the fold of ‘stable’ countries, the National Bank would have to give up its commercial operations and focus exclusively on central banking – or so the League argued, at least.

The report was not well received. Neither by Greek politicians, who lamented foreign interference in the country’s domestic affairs; nor by the National Bank itself, which faced the prospect of giving up its most profitable line of business. After several months of acrimonious negotiations, a compromise was finally struck: the National Bank would maintain its commercial activities and cede responsibility for monetary policy – along with all corresponding assets and liabilities – to a new institution, which would simply be called the Bank of Greece.

And so it was. With a League of Nations Protocol as its birth certificate, the new bank began its operations in the spring of 1928. The product of an unpalatable deal to obtain much needed foreign credit, the bank was greeted with scepticism, if not outright animosity at first. 

Keynes and others had suggested to convert then Imperial Bank into a central bank. But the idea was not well received. This led to formation of a new entity which was called Reserve Bank of India.

Then Great Depression happened and Greece like others got into trouble challenging the new central bank.


For the Greek experience was hardly unique: the 1920s and 1930s witnessed the creation of a string of new central banks, across several countries. More often than not, their birth was midwifed by ‘money doctors’ from the Bank of England, the Banque de France or the Federal Reserve: people such as Niemeyer, Siepmann or Strakosh, whose names litter the archives of many inter-war central banks, including that of the Bank of Greece. Some of the new institutions were established to exorcise wartime inflation and restore access to credit; others were born out of the dissolution of empires, or the weakening of ties to imperial colonies; all of them reflected an attempt to ‘return to normalcy’, by rebuilding an international monetary order and restoring cooperation in the aftermath of a devastating world war.

This ‘return to normalcy’ proved an illusion. The Great Depression soon challenged the viability of this order and forced many of the new-born institutions to re-evaluate their priorities and their relationship to the state and with each other. The questions facing each one were similar; the answers they gave – less so. Over the next two days, fifteen prominent scholars from eleven countries will present their work on different institutional or national experiences in the inter-war years; I thank them for being here and look forward to listening to their contributions.

I would also like to thank the Centre for Culture, Research and Documentation of the Bank of Greece, and its Director, Mr. Panagiotis Panagakis. Our economic historian and Scientific Advisor to the Historical Archive, Mr. Andreas Kakridis, who is the heart and soul of the conference. The staff at my Office, our valuable Communication Section, the security officers, as well as numerous other colleagues at the Bank of Greece, without whom this conference would not be possible.

The Bank of Greece is committed to promoting historical research, particularly research in economic history. Yet the past is most interesting when it informs our understanding of the present and future. Policy reactions to the recent financial crisis were shaped by perceptions – and often misperceptions – of the past, particularly the inter-war years. In this context, I am also pleased to welcome several of my esteemed colleagues from other European central banks, who are joining us for this conference. Their presence honours us and underlines the connection to the present and future of central banking. We will have much more time to talk about this later today, during our panel discussion.

But first, let us turn our gaze to the past and start our journey through the inter-war years. I wish everyone a fruitful conference and look forward to stimulating discussions!

Really nice to read all this. Good to see Bank of Greece willing to learn from history and making others learn too….

Demonetisation and patriotism?

November 5, 2018

The RBI independence drama is over us once again. The media is full of discussions over how government is trying to undermine RBI independence. The frequency with which this one topic keeps coming is quite something. Perhaps, RBI Governors are judged less based on their macro management but more on whether they cry “we are not independent”.

Though, this time the troubles were clearly invited by RBI and its Board. It is quite amazing that experts did not see this coming. It was brewing and was just a matter of time.

Yet, experts side mostly with the central bank and blame the government alone. For instance, this piece:


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