Who Owns and Controls Your Country’s Central Bank? It May Not Be Who You Think
I recently ran across some intriguing papers by Professor Jannie Rossouw, a former manager at the South African Reserve Bank and now an economics professor. He reported that among central bank professionals, there is little awareness that a number of national central banks are still privately owned, today. These include the central banks of Belgium, Greece, Italy, Japan, San Marino, Switzerland, Turkey, and the United States of America.
(Within the central banker profession) it is not generally known that a small number of central banks have shareholders… Central bankers have surprisingly little insight into or knowledge of the institutional structures of other central banks… Monetary policies are usually compared without any focus on institutional structures that might influence policy implementation. Only a very small number of central banks have private shareholders and the conditions of such shareholding differ considerably between these institutions.1
But what really caught my eye was that Professor Rossouw described a very rapid evolution of central bank ownership and control over the last century. I wanted to see the evolution that he was talking about visually, but I couldn’t find the evolution that Rossouw was describing visualized in any academic papers, books, or central bank reports. So, I compiled the necessary data and produced the below visualizations. It revealed a number of fascinating things…
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Central Banks Are Brand Spanking New
Today, economists, financiers, politicians and the media talk about central banks as though we’ve always had them. But in the grand sweep of history (and even the 800 year history of European banking), they are a very a new phenomena.
Most countries only got their first central bank in the last 70 years. This means that in most countries there are still people alive today who remember a time before their country had its first central bank. That’s quite new for institutions as powerful and entrenched as central banks are today!
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Government-owned Central Banks Barely Existed Before the 1940s
Most people don’t realize that almost all central banks in the early days of central banking were for-profit banks owned by private shareholders. They were started in many cases to recruit private investment for the financing of governments going to war, such as in England and France. Over the last century they have gained the economy-shaping powers that many of them have today: issuing the paper and coin money, providing emergency lending to banks during panics, selling government bonds, regulating banks, and setting interest rates, to name just a few.2
The private ownership of central banks started to change during the Great Depression and World War II when crisis led many countries to reconsider allowing a private, for-profit entity to control their nation’s money supply. Many countries began nationalizing their central bank. This ensured that the first-use of new money issued into the economy would go towards meeting public needs, which were urgent during the crises of the Great Depression and WWII.
When central banks for newly de-colonized countries were established following WWII, they followed the trend begun by the European nations that had nationalized their central banks. It is worth noting that since the nationalization of central banks began, no country has re-privatized their central bank. The evolution has been one-way.
Today, only eight countries have central banks with private shareholders:
Belgium
Greece
Italy
Japan
San Marino
South Africa
Switzerland
Turkey
United States of America
In the United States, the Federal Reserve System is comprised of 12 branch banks overseen by a governing board. The 12 branch banks are privately-owned for-profit corporations not subject to freedom of information requests and many other federal regulations. The shareholder owners of the 12 branch banks are the private commercial banks in each region. The bank “member” shareholders select 2/3s of the governing boards of each branch.3 In practice, these branch banks and their bank shareholders have substantial independence from the Federal Reserve governing board4 while maintaining tremendous sway over the Federal Reserve’s policies and operations. If one doubts their influence, just read the 2010 congressional investigation of the bail-out of AIG in which members of Congress are furious about NY Fed President Timothy Geithner’s wholesale adoption of JP Morgan Chase's bail-out plan, which enriched JP Morgan Chase to the detriment of tax payers and AIG shareholders.
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Governments Lose Control of Their Central Banks
While it appears that the one-way transition to state-owned central banks stabilized around 1980, that picture is a little misleading. Starting in the 80s, many national governments lost control of their central bank, despite officially retaining ownership. This was due to something dubbed the “central bank independence” movement.
The push to separate central banks from government influence was predicated on the idea that government-controlled central banks could be used by politicians to print money to boost their economy ahead of elections, thus causing inflation. While there are some examples of governments doing that, it is far from common.5
So why did governments give up control of their central banks and with it the control of their nation’s money supply? In many cases because governments were convinced or compelled to do it by the International Monetary Fund (IMF) and other international agencies. In the 1980s, many countries faced a debt crisis. Loans that they had taken out to get through the 1970s oil embargo skyrocketed in cost after the US Federal Reserve Chairman Paul Volcker hiked interest rates up to 17%. When countries turned to the Washington DC-based International Monetary Fund (IMF) for assistance in refinancing their debts, the IMF required that their governments make their central banks independent of government influence as a condition of the loans.
Crucially, it is in the 1990s that many countries lost the ability to have their central banks lend them new money at low interest rates to pay for public investments and expenditures. This meant governments had to switch to borrowing from banks at higher interest rates, whenever tax revenues were insufficient to meet public needs. Naturally, this further deepened their indebtedness to the commercial banking sector.
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Today, some researchers strongly question the logic and the evidence that independent central banks are better for a country’s inflation and economic performance.6 Perhaps that is why the central bank independence trend plateaued. Some countries, especially in Latin America, have begun moving back towards greater government control of their central banks since the 2000s.7
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In Summary
Central banks are very new in most countries
Their ownership structures and relationship to their governments differ substantially
In the last 100 years, there have been three major eras of central bank ownership and control: private ownership, public ownership, political independence
The Data
If you would like to download the dataset and use it yourself, please do! I collected the data from De Kock’s Central Banking and Professor Roussow’s papers. Because they did not cover all countries, I supplemented their data with Wikipedia data. De Kock and Roussow’s datapoints matched Wikipedia’s data very closely where there was overlap, so in the end I credited Wikipedia as my primary data source since that is more accessible to people than De Kock’s out-of-print book and Roussow’s papers.
