The quest for stable money

Caught up in the costly Napoleonic wars, Austria went into sovereign default in 1811. Five years on, the public authorities founded a national bank to be financed and run by private shareholders, the idea being that an independent bank would help rebuild trust in money.
During the 200 years that followed, the Nationalbank emerged from the treasury's banker of choice into a central bank, and from a private stock corporation into a public institution. Yet the challenges facing today's Nationalbank are a surprising echo of the past: How to provide stable money? How far must central bank independence go? How does monetary policy making work in a multinational monetary union? How to provide stable money?
This engaging book provides the first extensive overview of monetary history in Austria, from the Nationalbank's predecessor, the Wiener Stadtbanco, to Austria's integration into the euro area today.

Leseprobe
Introduction Milestone birthdays present an opportunity to reflect not just on one's own age but also to anticipate upcoming family birthdays of significance or recall past family anniversaries. Central banks are no different in this respect. Many central bank histories start with a reference to the oldest surviving member of the family, the Swedish Riksbank, founded in 1668. In the genealogical table of the oldest central banks in the world, drawn up by Forrest Capie, Charles Goodhart and Norbert Schnadt in their seminal contribution marking the tercentenary of the Bank of England, the privilegirte oesterreichische National- Bank (OeNB) comes in sixth. Apart from the above-mentioned Sveriges Riksbank and the Bank of England (1694), the only central banks founded before the OeNB were the Banque de France (1800), the Bank of Finland (originally established as the Finnish Office for Exchange, Lending and Deposits in 1811) and De Nederlandsche Bank (1814). Finishing sixth was in fact close for the OeNB: Founded on June 1, 1816, it is just 13 days older than Norges Bank. Yet this genealogy does not list defunct family members like the Banco di San Giorgio (1407-1805), the Bank of Amsterdam (1609-1820), or the Wiener Stadtbanco (1706-1816), precursors who would change the ranking had they survived. Moreover, central banks' birth dates are frequently stated with the reservation that early on, these banks had few similarities with contemporary monetary authorities, evolving into central banks as we know them only in a slow process and over an extended time span. Passage to adulthood, to continue the analogy, is generally linked to the assumption of a lender-of-last-resort role, meaning the provision of sufficient central bank money during a financial crisis if required. To this end, the central bank must have "grown up" to be a neutral, nonprofit-oriented economic agent who acts in the general economic interest rather than competing with other commercial banks. Two recurring challenges Now, if the OeNB was born in 1816, when did it reach adulthood? The eventful history of Austria's central bank does not lend itself easily to a teleological interpretation according to which early banks of issue developed into modern central banks at a determinable point in time. Thus, rather than judging at what point and to what degree the OeNB fulfilled modern-day criteria of central banking, a more appropriate approach is to view the bank as an institution that operates in a space that both in the past and today is defined by two dimensions: monetary stability and financial stability. Of course, the meaning of monetary and financial stability has changed during the past 200 years. Originally, money was considered to be stable if all coins were struck with consistent amounts of metal; later, the notion of monetary stability was linked with the convertibility of paper money against coins with a specified metal content. Not until the 20th century was monetary stability understood as the stability of a broadly defined index of consumer prices. Financial stability, on the other hand, has typically been a much broader concept, embracing the smooth operation of payment systems; last resort lending; the supervision of individual banks and other financial intermediaries; or the prevention of macroeconomic imbalances such as real estate price bubbles driven by excessive mortgage lending, which may jeopardize the stability of the entire financial system. The basic issue of monetary and financial stability has always been the same: Since money has been around, the sovereigns who exercised the right of coinage had an incentive to finance their expenditure by debasing the currency, either by reducing the weight of coins or by adding base metals to the alloy. Numerous instances of inflation from Classical antiquity to the modern age demonstrate this process; paper money, once it had been invented, made debasement only easier. As money and credit are closely related, financial crises have a long history as well. Thus, upon its birth in 1816, the privilegirte oesterreichische National-Bank entered a well established area of politics in which it came up against a traditional player, the state, and the legacy of a municipal bank that was in some ways its predecessor and that used to be closely associated with the state: the Wiener Stadtbanco. The arrival of a "national bank" was a game changer insofar as the new bank was endowed with tasks and decision-making duties that had formerly been under the jurisdiction of the finance ministry. At the same time, the new bank received (at least some) independence from the state and some freedom from direct state control. Over time, the actual allocation of individual monetary policy responsibilities among the bank and other economic agents, especially the state, changed several times, as did the general economic and political setting within which monetary policy was run. Looking at the 200-year history of the OeNB reveals that monetary policy again and again faced conflicting choices: first, the provision of a stable legal tender versus inflationary incentives to finance the state and boost the economy; second, the delegation of economic policy to an independent central bank versus the need to control this bank; third, transparency and accountability versus confidentiality; and fourth, a close versus a more arms-length relationship with the banking sector. Similarily, the issues that needed to be resolved against this backdrop of conflicting choices resurfaced time and again: Should exchange rates be flexible or fixed, and to which currency should fixed exchange rates be pegged? How should wars be financed? How should excess money in the aftermath of wars be handled? How should illiquid or insolvent banks be dealt with? How can the build-up of imbalances in the financial system be stopped? Should internal or external stability take precedence? Should capital movements be restricted? With regard to the broader institutional framework conditions, the latest game changer was the creation of the Eurosystem. In the Eurosystem, which comprises the European Central Bank (ECB) and the national central banks of the euro area countries, including the OeNB, central banking decision-making has largely shifted to the European level. Yet here, too, the same issues arise and the same decisions need to be taken as in previous decades and centuries. Reading the past in the light of the present These recurring themes are also reflected in the narratives of the OeNB's history. Of course, as a central actor in domestic and occasionally, like in 1857 or 1931, international economic policy, the bank deserves a prominent place in any account of Austria's political and economic history. Often, the questions and methods with which the history of the OeNB has been interpreted were influenced by big conceptual swings in historical science. An example of the significance of international trends for the historiography of Austria is the ab…