Stefano Ugolini

What Do We Really Know About the Long-Term Evolution of Central Banking? Evidence from the Past, Insights for the Present

The ongoing financial crisis is shaking central bankers’ certainties about their mission, and a rethinking of such mission can greatly benefit from a non-finalistic reassessment of how central banking has evolved over the centuries. This paper does so by taking a functional, instead of an institutional approach. The survey covers the provision of both microeconomic (financial stability) and macroeconomic (monetary stability) central banking functions in the West since the Middle Ages. The existence of a number of important trends (some unidirectional, some cyclical) is underlined. The findings have implications for the current debate on the institutional design of central banking, both in the U.S. and in the eurozone. Historical evidence suggests that neither changes in the organizational model of central banks nor government deficit monetization should necessarily be seen as evil; what is crucial to the success of any solution, is that the institutional agreement backing the existence of money-issuing organizations must be credible. The appendix provides a case study on Norway.

The Payment System

The payment system is a highly strategic infrastructure displaying strong network externalities and scale economies, and can thus be seen as a natural monopoly. Natural monopolies can alternatively be internalized by the public sector, externalized to some private contractor, or fully liberalized. Historically, liberalization has actually been the preferred option in many contexts (e.g. late medieval Venice and nineteenth-century United States), but this solution has constantly proved unstable, to the point of forcing reluctant authorities to eventually embrace nationalization. In other contexts (e.g. nineteenth-century Europe), the natural monopoly was out-contracted to a private monopolist, subject to a number of conditions. Today, state-owned and privately-owned payment systems generally coexist, but only by virtue of government policies expressly aimed at fostering competition.

The Crisis of 1866

The collapse of Overend Gurney and the ensuing Crisis of 1866 was a turning point in British financial history. The achievement of relative stability was due to the Bank of England’s willingness to offer generous assistance to the market in a crisis, combined with an elaborate system for maintaining the quality of bills in the market. We suggest that the Bank bolstered the resilience of the money market by monitoring leverage-building by money market participants and threatening exclusion from the discount window. When the Bank refused to bailout Overend Gurney in 1866 there was panic in the market. The Bank responded by lending freely and raising the Bank rate to very high levels. The new policy was crucial in allowing for the establishment of sterling as an international currency.

The International Monetary System, 1844-1870: Arbitrage, Efficiency, Liquidity

This paper analyses the architecture of the international monetary system which preceded the international gold standard (1844-1870). It builds on a newly-created database made up of more than 100,000 weekly observations on exchange rates, interest rates, and bullion prices in the world’s six most important financial centers of the time. Market integration, substitutability of money market instruments, choice of the correct monetary standard reference, and currency liquidity are tested; moreover, an historical analysis is run, with special reference to financial crises. Contrary to received wisdom, the results point to a trend towards increasing multipolarism in the international monetary system before 1870.

The Evolution of Central Banking: Theory and History

This book is the first complete survey of the evolution of monetary institutions and practices in Western countries from the Middle Ages to today. It radically rethinks previous attempts at a history of monetary institutions by avoiding institutional approach and shifting the focus away from the Anglo-American experience. Previous histories have been hamstrung by the linear, teleological assessment of the evolution of central banks. Free from such assumptions, Ugolinis work offers bankers and policymakers valuable and profound insights into their institutions. Using a functional approach, Ugolini charts an historical trajectory longer and broader than any other attempted on the subject. Moving away from the Anglo-American perspective, the book allows for a richer (and less biased) analysis of long-term trends. The book is ideal for researchers looking to better understand the evolution of the institutions that underlie the global economy.

The coevolution of money markets and monetary policy, 1815-2008

Money market structures shape monetary policy design, but the way central banks perform their operations also has an impact on the evolution of money markets. This is important, because microeconomic differences in the way the same macroeconomic policy is implemented may be non-neutral. In this paper, we take a panel approach in order to investigate both directions of causality. Thanks to three newly-collected datasets covering ten countries over two centuries, we ask (1) where, (2) how, and (3) with what results interaction between money markets and central banks has taken place. Our findings allow establishing a periodization singling out phases of convergence and divergence. They also suggest that exogenous factors – by changing both money market structures and monetary policy targets – may impact coevolution from both directions. This makes sensible theoretical treatment of the interaction between central bank policy and market structures a particularly complex endeavor.

Lending of Last Resort and Supervision

The banking sector is inherently fragile as it is plagued by a number of market failures (especially those due to information asymmetries); its heavy regulation is justified by the large negative externalities generated by bank failures. Regulatory tools include both ex-ante interventions (legislation and supervision) and ex-post interventions (lending of last resort, bailouts, and deposit insurance). Historically, heavy regulatory frameworks featuring rule-based ex-ante interventions have prevailed in some contexts (e.g. early modern Venice and nineteenth-century United States), while light-touch regulatory frameworks featuring discretionary ex-post interventions have prevailed in other contexts (e.g. nineteenth-century Europe). The heritage of these diverging approaches is still well visible today, as national regulatory frameworks continue to differ substantially.

L’Invention d’un Système Monétaire National: Banques d’Émission, Supervision Bancaire et Développement Financier en Belgique 1822-1872 (The Invention of a National Monetary System: Banks of Issue, Banking Supervision, and Financial Development in Belgium 1822-1872)

In most 19th-century centralized states, national monetary unification has been attained thanks to the creation of provincial branch networks by banks of issue. Through a case study on Belgium, this paper investigates the causes and consequences of this phenomenon, as well as its operational implications. It shows that political pressure – aimed at reducing credit rationing, and hence at fostering economic development – was a key factor in pushing reluctant central bankers to extend their operations outside domestic financial centers. The success of monetary unification crucially depended on the incentive structure embedded in the implemented supervisory policies – aimed at reducing risk-taking in the provinces.

Universal Banking and the Development of Secondary Corporate Debt Markets: Lessons from 1830s Belgium

This paper proposes a reassessment of the old-age debate on universal banking and growth by putting it on a different plan. Modern financial economics are used to provide new theoretical foundations to Gerschenkron’s (1962) hypothesis: universality is interpreted as a strategy for banks to reach the critical size needed in order to perform successful securitization of corporate debt. A relevant natural experiment in universal banking and industrialization (Belgium in the 1830s) illustrates the argument. The conclusion is that creating a new financial market also implies establishing intermediaries to supply crucial functions such as underwriting, certification, and liquidity provision.