The weekend Wall Street Journal for May 18-19, 2013 brought with it a magazine supplement, and with that came an interview with Christine Lagarde, managing director of the International Monetary Fund. Lagarde tells WSJ reporter David Wessel that the industrialized world is suffering from crisis fatigue. “A lot of the advanced economies’ leaders, thinkers, decision-makers are tired with crisis management.” This is a bad thing, she continues, because there is still crisis-related work to be done. When I read those words, the phrase that popped into my head was one that takes us back a century, one that comes to us due to radical agitator Randolph Bourne who was writing amidst the First World War. “War is the health of the state,” Bourne said. The fact of a war, or we might say of a crisis, lines people up and engenders complacent acceptance of hierarchy to a degree incompatible with any more peaceful crisis-free environment. Indeed, a cynic might infer that this explains why we have since Bourne’s day found ourselves fighting ill-defined wars against abstractions, against “terror” or “drugs.” In contrast to the Kaiser, drugs will never do anything so inconvenient as surrender. Likewise, I submit, and Lagarde probably knows, the circles in which she moves consist of people who are not at all fatigued by endless crises over banking solvency and sovereign debt. Such crises are the health of the central bank. U.S. History Lesson In U.S. history, the nature and desirability of a central bank was a contested point at the start. It was, as all American schoolchildren learn, one of the big issues separating Jefferson and Hamilton around the cabinet table during the Washington administration. With the trauma, the crisis, of the War for Independence still fresh in everyone’s minds, with all-too-dramatic news from France coming into ports in the diplomatic dispatches and the foreign newspapers carried by every ship, President Washington thought he had to side with his Secretary of the Treasury. A new nation’s central bank was born. The charter of the first Bank of the United States ran out in 1811, and then-President James Madison was happy to see its end. But Madison then attempted to fight a war without a central bank – it proved awkward – and he ended up fleeing the capital city just ahead of redcoats. Chastened, Madison signed a bill bringing a new Bank of the United States into existence in April 1816. After President Jackson managed to kill that one, the issue of central banking lay dormant for a while. But the greatest of crises for any nation, a civil war, brought it to the fore again, although in somewhat disguised form. A civil war gave the United States its first experience with fiat money, and allowed Secretary of the Treasury Salmon Chase to press successfully for a system of the national chartering of banks. After the war, Congress tried to turn itself into the country’s central bank, and this gave rise to the long late 19th century debate over bimetallism. Coining silver as well as gold was the deliberate inflationary policy, the quantitative easing, of the day. But after some time the unthinkable occurred … the supply of crises dried up. Crisis as we have stipulated is the health of a central bank, and by the time Woodrow Wilson became President in March 1913 there had been no really good money-related crisis for decades. Surely the little war with the decayed Spanish Empire had forced no radical change. So throughout this period Congress had failed to settle healthily into their role as a pseudo-central bank. Tranquility was the illness of this central bank. Congress had looked about for someone to whom to delegate the now-boring banking role, in some circumstances making an implicit delegation to J.P. Morgan. Eventually, indeed before the year 1913 was out, Congress approved of the creation of a Federal Reserve System. This was just in time of course for the war that brought about Bourne’s gloomy assessment about the health of a state, and that war with its related crises cemented the role of the Federal Reserve for another century. What remained to be decided was whether the new central bank would co-exist with a gold reserve system, or whether the one would overthrow the other. We know how that turned out. Europe and the 21st Century Excuse the history lesson but it does all bring to mind the building pressures in Europe in 2009-10, and how they led to the creation of the European Financial Stability Facility in May 2010. Then the continued crises in Europe and how that led to the decision in June 2012 that the ECB will take up banking supervisory duties by the middle of 2014. Now a campaign is on to couple unified supervisory authority with unified resolution authority. While this process, this bumbling from crisis to crisis, this increasing centrality and centralization of the central banks, is underway it may feel fatiguing, but the participants in the high government and central banking councils seem to be invigorated by it all just the same, and the image that it brings to my mind is that of a line of firecrackers setting each other off, each louder than the one before, without apparent end.
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Crisis is the Health of the Central Banks
May 20, 2013