CONCLUSION
A system of this kind … is really a system of rule by men and not by law and is extraordinarily dependent on the particular personalities involved.
—Milton Friedman (1962)
The conclusions of this book are simple but consequential: in managing the global financial system, individual central bank leaders and their personal ties with one another matter. In short, in a crisis, interpersonal cooperation greases the wheels of international cooperation. This is especially the case with bilateral and ad hoc liquidity assistance among central banks.
In March 2020, as the world went into COVID-19 lockdown, businesses shut up shop, and governments imposed travel bans, it was clear that financial troubles would follow close behind. As states, markets, and businesses braced for the economic shocks brought on by the health crisis, people everywhere wanted governments and policymakers to deploy their crisis management toolkits and do something, anything, to ease the blow of the oncoming economic downturn. The global crisis called for an international response. To manage the economic shocks brought on by the pandemic, financial experts and journalists called on the Fed to “to dust off an old, 2008 crisis-era tool of dollar liquidity management” and “bring back dollar swap lines.”1
In response to these calls for the Fed to re-up and expand these lines, others asked whether Jerome Powell, at the time the chair of the US Fed, had the capacity and clout among his international counterparts to carry out this task. The central bankers who helped forge the global financial crisis (GFC) swaps had by now left the offices they occupied over a decade prior. While Powell had been “forging collaborative relations” with his international colleagues, those relations had not been “battle tested—yet.”2 Unlike most of his Fed colleagues, Powell was somewhat an outsider in the central banking world when he first joined the Board in 2012. He was trained as a lawyer, not as an economist, and “spent his career toggling between two worlds: government service and private-equity dealmaking.”3 Since his arrival at the Fed, Powell had been wary of the distorting effects of Fed interventions on credit markets.
The concern that these lines would be difficult to negotiate in the future had been considered by the Fed. In a Federal Open Market Committee (FOMC) meeting in November 2009, Nathan Sheets proposed establishing standing swaps with the Bank of England, the European Central Bank (ECB), the Bank of Japan, the Swiss National Bank, as well as with Canada and Mexico. Standing lines would essentially provide these partner central banks with a more permanent backstop to dollar markets abroad without having to go through the difficulty of renegotiating these lines. Sheets was less worried about scaling up a program than the difficulty of renegotiating them from scratch in a future crisis. As discussed in chapter 4, a large part of this apprehension was rooted in the effect of changing personnel at the Fed, as those who had done the work during the GFC would likely no longer be in office during the next crisis.
In 2013, five standing lines were established with the ECB and the central banks of Canada, the United Kingdom, Japan, and Switzerland. So, in 2020, it mattered much less whether Powell was an “insider” or not. It also mattered less whether he shared collaborative relations with his counterparts abroad. That was the purpose of the Fed's standing swaps: to mitigate any obstacles to using these crisis-era tools under different leadership. Sheets had been right that it would be easier to scale up these arrangements than to start negotiations from scratch. In addition to the standing swaps, on March 19, 2020, the Fed announced temporary swap lines with the remaining nine central banks that it had assisted in the GFC.
Fed swaps have become a central pillar of the global financial safety net since the GFC. However, historical experience cautions against betting that swaps are here to stay, as some have suggested.4 The use and endurance of the Fed's standing swap network is not a certainty, as technically they are reinstated every year when the FOMC is annually reconstituted.5 The reasoning for this comes down to central bank leaders’ preferences: the role and existence of Fed swap lines in the global financial safety net relies on the Fed chair's discretion. In 2020, Powell's Fed made the choice to preserve and utilize the Fed's standing swap network. In 1996, Greenspan's Fed dissolved the standing swap lines that Coombs had created.
Even though these lines have repeatedly proved effective in managing systemic financial pressures, their central role in global financial governance brings with it a host of political conundrums. On recapping the key takeaways of the analysis and argument presented in this book, I return to discuss the implications highlighted in the book's introduction.
Key Findings
Bankers’ Trust was motivated by the question of why some crises are arrested through ad hoc and bilateral central bank cooperation while others are allowed to escalate. It addressed the related problem of access to the global financial safety net by highlighting a channel through which inequalities emerged between national economies over who benefits from access to easier, flexible, and lower-cost foreign exchange liquidity, and who is excluded: bilateral central bank cooperation. To understand why outcomes of cooperation vary in their form and scope over time, it is essential, first and foremost, to understand how these outcomes come about and who creates them. The patchy and inequitable record of monetary cooperation in times of systemic crises calls for a better understanding of why central banks are more willing to cooperate with some than with others to create ad hoc and innovative methods of crisis management.
To explain these patterns, this book closely explored the decisions and discretion of the principal providers of global liquidity: central banks and those who run them. In a crisis, central bank leaders have a distinct and significantly increased influence and are the ultimate authority over their banks’ crisis management policies. Whether and how they exert their heightened influence is less well understood.
The central claim of this book is that central bank leaders’ personal relations matter. They can influence the types of liquidity assurance strategies available to their banks when they face financial pressures. I provided a framework that helps us distinguish the influence of individuals and interpersonal relations in international monetary affairs from structural and material factors. I found that leaders can and do influence their banks’ willingness to enter experimental crisis responses, such as ad hoc credits or swap arrangements. This willingness and ability to enter these cooperative arrangements is influenced by leaders’ personal relations with their counterparts.
At important moments, leaders could determine the choices and approaches of their banks. In many cases, they went against their institutions’ preferences or changed the way they operated. For instance, Norman's approach to returning sterling to prewar parity in 1925 went against the preferences of the British government and Treasury. In the 1960s, Coombs and Iklé similarly circumvented institutional constraints and preferences of their central banks in the arrangement of the earliest swap lines. In moments of uncertainty, leaders and high-level officials tasked with important crisis management goals can determine how their bank pursues various policy options.
More importantly, individual leaders, through their personal relations, are crucial to filling the gaps of the global financial governance system in times of crisis. In the absence of a robust financial governance framework, where monetary authorities and policymakers cannot rely on means that are automatic or mechanic, or even adequate to meet current needs, they often resort to ad hoc measures for liquidity provision. But to come to these arrangements, it is essential that leaders, in participating in the agreement, trust one another. Central bank leaders’ personal ties can influence the types of monetary transactions available to them to manage liquidity and financial pressures. When central bankers enjoy favorable personal relations of trust and goodwill, they are more likely to engage in ad hoc, bilateral cooperation to manage financial pressures. In the absence of these ties, central banks will have to turn to more costly measures.
Central bank leaders’ ability to engage in extensive bilateral cooperation relies on and is indeed facilitated by leaders’ independence from their governments. While this autonomy is protected for many central banks around the world today, statutory political independence is a relatively recent development in much of the world. The case of the 1920s highlighted the deeper historical origins of this idea and institution, as championed by Montagu Norman and Benjamin Strong in the 1920s. They secured their de facto independence through secretive and opaque policymaking, especially in the context of international policy. Moreover, they proselytized this idea to their foreign counterparts through their international lending practices, favoring independent banks and bankers in liquidity assistance programs and often requiring autonomy as a condition for bilateral credits. As such, central bank cooperation has evolved in an interpersonal, secretive and opaque manner, which has persisted since the days of Norman and Strong, and continues to the present day.
This dynamic of interpersonal cooperation was crucial in the interwar 1920s. The Norman-Strong partnership functioned primarily on this personal and relational level, where the two regularly went out of their way to help one another in managing their financial troubles. They also extended such graces to their friends elsewhere: Hjalmar Schacht in Germany, and Junnosuke Inoue in Japan, benefited similarly from bilateral and ad hoc assistance in the mid-1920s to finance their debts and stabilize their currencies.
One might suggest that this practice of central banking was only possible and unique to the institutional, political, and economic climate of the early interwar years. However, I have shown that despite changing and increasing institutional and legal constraints on central banks after 1945, the relational side of central banking has remained alive and well. In the 1960s, Charles Coombs's personal relations, friendship, and shared trust with Max Iklé, Johanes Tüngeler, and Guido Carli, underpinned Coombs's European efforts that led to the New York Fed's swap arrangement. These themes reemerge in the creation of the Federal Reserve's swap network with the outbreak of the GFC in 2007. When central bankers had little idea of the trajectory of the crisis, or the likelihood of success of these policies, they swapped hundreds of billions of dollars, overnight, to partner banks. The initial lines were made in no small part on the word of central bank leaders participating in these agreements. Strong's observation that “in none of our business relations has the personal relation played so large a part as in banking” still echoes in the corridors of central banks today.
Differential personal ties also shape access to foreign exchange liquidity programs and outcomes of crisis management. Central bankers implicitly or explicitly distinguish among their foreign colleagues. When leaders do not enjoy the personal trust and goodwill of their counterparts abroad, they must turn to more costly and conditional crisis management and liquidity policies. For instance, in chapter 1, loans to the Polish central bank extended for the purpose of currency stabilization were extended not through bilateral credits but instead multilaterally. These loans came with limits and political conditions attached to protect creditor banks who were engaging with colleagues some of them had never even met.
The effects of a lack of trust and close personal relations among central bankers were most prominent early in the Depression, following the sudden death of Strong, and leadership changes elsewhere in Europe. As bank runs engulfed Central Europe, Hans Luther was not found to be the “right” type by Norman and was disliked by influential figures in the Bank of France. As a result, the Reichsbank had to resort to politically charged governmental assistance from France, which required large political and economic concessions and multilateral, conditional assistance from central banks through the Bank for International Settlements (BIS). The dismantling of the tight personal networks that Norman and Strong had cultivated hindered the international central bank response to the 1930s bank runs and the Great Depression.
Once again, this pattern of differential ties leading to differential monetary transactions is not limited to the interwar period but has persisted through the decades after. In the 1960s, due to the absence of personal trust among British central bankers in Coombs, in New York, Britain initially had to resort to central bank assistance through the BIS, as well as International Monetary Fund (IMF) loans, to manage sterling pressures. It was only when the governor of the Bank, Lord Cromer, and his European associates could vouch for Coombs to Roy Bridge that Bridge settled on a scaled-down swap line with the Fed.
Differential personal ties also helped determine the dividing line among the largest emerging markets as to who got a swap during the GFC. We see that some emerging economies—Mexico and Brazil—were able to secure a Fed swap, while India, which outmatched Brazil on the Fed's swap criteria, was unsuccessful. Where Duvvuri Subbarao (in India) did enjoy the trust and goodwill of Masaaki Shirakawa in Japan, they arranged a bilateral dollar swap between their two banks, and India could avoid the costly conditionality of multilateral assistance.
The close personal connections, and the confident and friendly environments that they generated, allowed central bankers to act on the trust of their colleagues in an atmosphere of grave uncertainty. Close personal ties were especially crucial in facilitating experimentation and innovation in the tools that they could deploy. Leaders who enjoyed the trust and goodwill of their partner bankers could more easily circumvent costly forms of liquidity assurance and adopt more rapid, flexible, and ad hoc solutions for their financial troubles.
Extensions and Limitations
This book has shed light on the distinct role of leaders and their interpersonal relations in the context of international finance and crisis management. My findings suggest that in issues of crisis management and cooperation more broadly, interpersonal relations among individuals can help us better understand decisions and policy choices in areas outside of international monetary relations. This book thus calls for further exploration of the role of relational dynamics such as interpersonal trust, in questions of cooperation, bilateral and otherwise, in crisis and uncertainty. The crises of the 1980s and 1990s, mentioned in chapter 3, present important test cases for my argument and also highlight a key scope condition that interpersonal trust facilitates cooperation among states within material and economic boundaries and can sway decisions on the margins. Trust alone will not carry countries not meeting key economic criteria over the boundary line.
Because central banking is a unique policy arena in several important ways, there are additional scope conditions for my argument. These aspects suggest that the theoretical framework would need to be adjusted to suit a broader set of policy areas outside of money and international finance.
First, central banks are unlike most independent agencies in that they are domestic institutions with a large international reach. The deeply interconnected nature of global finance makes states and national markets vulnerable and exposed to fluctuations and volatility overseas. Central banks’ mandates, to secure domestic financial stability, imply an interest in supporting financial stability in markets to which they are most closely connected. As such, the actual jurisdiction of central bank mandates is far less clear. Any other policy arena in which such dynamics may play a similar role would have to be similarly situated on the domestic-international boundary. One issue area that might fit this scope condition is that of climate governance. Climate crises do not emerge only or correspondingly in locations, say, where carbon emissions are the highest. One state's choices and problems can and have quickly become everyone's problem. As such, the climate policy space similarly negotiates this tension of local problems wanting global, cooperative solutions.
A second scope condition is the level of technical expertise that central banking and financial policy demands. The arena of international finance is especially technical, and esoteric, and maintains a high barrier around those in the know and those outside, pushing the activities of central banks into what Culpepper calls “quiet politics.”6 Much of central banks’ outsized power is sourced in this feature. Other policy areas in which individual and interpersonal dynamics are strongest would be those that share similar qualities to those of central banks. Again, climate cooperation and especially innovation to find solutions to the climate crisis require a high level of technical expertise in climate science. Cooperation over nuclear proliferation, deterrence in the security space, or nuclear energy policy also share a similarly high barrier to entry that can keep policymaking exclusive to a relatively small and insulated set of decision-makers, which is similarly undertaken in secret and behind closed doors. Given that conflicts of interests among parties in the security space are more severe than among central banks, this may limit the scope of affective ties in influencing cooperation relative to costly signals. These policy areas may provide fertile ground to further test the scope of the framework.
A third scope condition is that this theoretical framework is particular to the context of crisis and uncertainty. In more certain times, routine cooperation through traditional institutional or intergovernmental channels generally suffices. The need for interpersonal trust is especially heightened in situations of radical uncertainty, when conventional metrics and signals are less informative and system trust is compromised. Moreover, decisions in crises need to be made quickly and agents will not have the time to undertake long and arduous negotiations and deliberations. So, leaders and policymakers will instead rely on subjective reason, informal channels of cooperation, and interpersonal trust.
That is not to say that the argument will seamlessly travel outside of the monetary realm without adjustment. Many of the early-twenty-first-century crises are not limited to one issue or policy area alone. As we move into unfamiliar territory, such as the recent pandemic, and escalating climate crises, the unknowns will be far greater. What about when financial crises emerge from nonfinance sources? The COVID-19 health crisis once again reminded us that nonfinancial crises can have grave financial repercussions. Fortunately, central bankers during the GFC had put into place precautionary backstops to protect against this possibility.
Even when out of the central banking world, in situations of war and uncertainty, these interpersonal ties, and the unique frankness and openness among central bankers, have proved effective in addressing financial pressures. When the war in Ukraine began early in 2022, European policymakers were initially worried that Russia might get wind of looming US sanctions, anxious to put them in place, while Janet Yellen, a former Fed chair, and at the time US Treasury Secretary, “pored over the fine print.” But at this time, Yellen found herself working alongside Mario Draghi, former ECB head, then the prime minister of Italy. While sanctions agreements were slow to come about, the president of the European Commission, Ursula von der Leyen, asked Draghi to work out the details with Yellen: “We were all waiting around, asking, ‘What's taking so long?’” recalls an EU official. “Then the answer came: Draghi has to work his magic on Yellen.” By the evening, agreement had been reached.7
While these outcomes bode well for the prospect of future crisis management, it is not guaranteed that the right instruments or people will be in place in future crisis, especially those with nonmarket roots. To better understand the prospects for crisis management warrants further exploration of the role of leaders and relational dynamics among policymakers in crisis-prone, technical issue areas outside of the monetary realm.
Implications
My findings illustrated how monetary leaders negotiate structural, material, and institutional variables in shaping world politics. The narratives and analyses in this book highlighted the sensitivity of financial governance, crisis management, and policy innovation for navigating crises. But historical experience, namely the Great Depression, suggests a cause for concern when thinking of the prospects for the future of financial governance. The lasting personal connections that central bankers built were crucial in facilitating a collaborative crisis response from central banks in times of stress. But when these relationships fail to emerge or leaders are replaced, collectively navigating crises has been a more tortured effort, with devastating consequences. My study thus highlights the implications of the concentration of power in global financial governance.
Two broad theoretical implications emerge from my argument. The first is the need for further individual-level and relational analyses into the role of interpersonal trust in international politics to better understand the origins of important governance institutions and instruments. The second is to further our understanding of how political agents can and do shape and reinforce global hierarchies through their personal relations with their foreign counterparts.
Leaders in International Monetary Affairs
A key theoretical implication of this book is that monetary leaders matter, especially in conditions of crisis and uncertainty. Leaders matter in two meaningful ways: first, their own individual discretion and influence in international monetary affairs is apparent in their ability to influence the policy disposition and preferences of their bank. Second, they can influence patterns and outcomes of crisis management and bilateral cooperation through their interpersonal relations with their foreign counterparts.
In addition to leaders’ influence in shaping domestic policy, leaders also influence how their banks engage with foreign entities and in their disposition toward risk-taking and experimentation. The power and influence of Norman and Strong in shaping the trajectory of the monetary system, through the 1920s and for decades after, is indisputable. Strong's singular influence in US banking circles and his ability to maintain the New York Fed's independence is evident not only in his lifetime but also in his death. Coombs, Iklé, and Cromer were central players in shaping their banks’ practices and policy choices, willing to go off message from their institutions’ traditional practices or their home governments’ interests. Bernanke and Jean-Claude Trichet's leadership and persuasive negotiating capabilities were integral in fostering a united front among some of the world's largest central banks to manage the crisis.
The unique influence of central bank leaders is also evident in how leadership changes were followed by policy changes and a change in access to liquidity assistance from partner banks. Leaders’ individual influence thus cannot be overstated, especially in the relational context. We therefore cannot be sure that every next leader will adopt the same policies, share the same personal ties with foreign partners, or enjoy access to the same types of liquidity assistance.
A deeper understanding of global economic and financial governance would result from exploring individual-level influences, not only in the management of financial crises but in the specific conditions and contexts in which leaders have shaped governance innovation and cooperation in other areas of the international political economy. After all, the first ideas for the BIS emerged in Norman's personal conversations and correspondence with Strong and Schacht. The origins of this most crucial institution for financial management are as much rooted in very particular personalities and personal relations as in structural determinants or a convergence of ideas among policymakers. The swap network created in 1961 has a similar origin story. Informal and personal interactions between friends influenced the liquidity provision strategies that central banks adopted to meet their foreign exchange funding pressures in the 1960s.
Historians have suggested that “such a climate of trust, a blessing as far as cooperation is concerned, is a curse as far the historian's work is concerned.”8 I could not agree more. Disentangling the role of trust from broader material and ideational variables is murky and complicated. But understanding the importance of trust in cooperation underscores a need to identify it and better incorporate it into our explanations of various types of cooperation. Understanding the origins of these crucial financial governance innovations can deepen our understanding of the past, present, and future of the global governance system. There is therefore much value in further exploring the individual and relational dynamics among leaders, not only in financial crisis management but also in governance and policy frameworks in all areas of the international economy and in global governance more broadly.
This book made a case for further exploring the role of leaders in a broader range of issue areas. Leaders’ influence and interpersonal relations may also play a crucial role in crisis management in conditions of uncertainty outside finance. It also highlights the need to understand the conduct of international monetary affairs from the perspective of leaders themselves. The firsthand insights demonstrate that we cannot understand outcomes and decisions in international politics as distinct from the policymakers who shape them.
Hierarchy in International Relations
The patterns of crisis and cooperation discussed in this book highlight a second theoretical implication: financial crises and international crisis management can create and reinforce hierarchies and inequities in the international monetary system. The GFC once again brought the Fed into the position of an international lender of last resort. This significantly expanded the reach of the Fed's powers, responsibilities, and influence far outside its borders, in a way that it could impinge on economies and publics to whom it does not answer. The crisis illustrated that the Fed's role, capacity, and power in financial governance today far exceeds that of the international financial institutions that comprise the governance system. Even many central bankers acknowledge these problems and their own discomfort with how the system operates. Donald Kohn, who was vice chair of the Fed during the GFC, recalled that the Fed's swap program “put the FOMC in the ‘uncomfortable’ position of being an ‘arbiter of the soundness of other countries’ policies, the liquidity requirements of their banks, and their systemic importance.’”9
As scholars have argued, in determining crisis management policies to save the world, central bankers are saving some more than others.10 I have shown that this is not only in the case of protecting private finance domestically but also in terms of international central bank assistance and international crisis management: crisis resolution efforts can also perpetuate the existing hierarchy and inequities in the global economy. As illustrated in chapter 4, frustration over these powers of the Fed was felt by foreign central banks, especially those in emerging markets who undoubtedly faced a higher bar to accessing swap lines but depended on the Fed for assistance. Most emerging and developing economies lacked the international clout and competitiveness to give them access to lower-cost, conditionality-free liquidity through the Fed swap network.11 Instead, they were forced to turn to the IMF and other costly channels.
Similar patterns emerged in the twentieth-century crises. Through their close personal relations with Schacht and Inoue, Norman and Strong solidified banking connections and Germany and Japan's positions in the core of the global economy. Of course, these ties were further supported by broader economic and political relations, reinforced over time. But as the 1920s show, central banking and monetary relations offered another channel to construct and cement these hierarchies.
The differentiated nature of central bank assistance between the core central banks and those outside this community served to further distinguish states within the hierarchical order. Specifically, currency stabilization in Eastern Europe was decidedly multilateral, contingent on political conditions, and ultimately sought by France. Distrust and personal differences between Norman in Britain and Émile Moreau at the Bank of France hindered Norman's participation and willingness to lead multilateral credit support for Poland. France, which eventually took the lead, took on a more politically charged effort in Poland. Indeed, a similar pattern emerged in these stabilization efforts in Romania and Bulgaria, and elsewhere in Eastern Europe, separating these states from those that received extensive, bilateral support from Norman and Strong alone.12
These hierarchies have been entrenched since the GFC, with the establishment of the standing swap lines, and the Fed's response to the emerging pandemic. Powell's Fed went even further in its domestic and global crisis interventions in 2020. On the international side, in addition to re-upping GFC-era swap lines, on March 31, the Fed also announced a temporary repurchase facility (repos) for foreign and international monetary authorities (FIMA), which was also more widely accessible than the swap network. Through these lines, FIMA account holders could borrow US dollars in exchange for their US Treasuries holdings in the New York Fed. These more expansive lines gave a larger number of emerging markets access to dollar liquidity and were likely created because the pandemic was far more global and generated an economic environment very different to that of the GFC.13
However, the Fed's broader-ranging liquidity arrangements once again reinforced hierarchies in the global financial system. Major central banks’ ability to access larger amounts of dollar funding dwarfed that of smaller central banks using the FIMA repos. The Fed's varying foreign facilities, the standing swaps, the temporary swaps, and the FIMA repos, each less attractive than the previous, represent the same concerns that the Fed had discussed in 2009—that by excluding, say, Mexico or Korea from the standing arrangements, or continuing to exclude other large emerging markets from the swap network at all, the Fed signaled to these economies that they were not seen in the same category as those that could access the larger and unlimited dollar liquidity arrangements, as discussed in chapter 4. Parallel to the Fed's GFC interventions, its pandemic interventions, although broader, once again reinforced global hierarchies and perpetuated inequities in the existing global finance governance system.
Differential personal ties have worked to differentiate between states in the core and the periphery in international monetary relations. Through their personal, informal channels, bolstered by preexisting institutional and resource-based hierarchies in global finance, central bankers can shape and reinforce system-level hierarchies and inequities among states.
These theoretical implications highlight two key political and policy implications. First, the management of systemic financial crises inevitably relies on ad hoc and experimental efforts, and monetary leaders regularly seek to sidestep the existing governance system. This pattern of cooperation calls into question the legitimacy of independent central banks at the domestic and international levels. Second, the global financial safety net is riddled with gaping holes. This suggests the institutional setup of central bank independence should be rethought while protecting their necessary emergency powers for crisis management.
The Politics of Central Banking
The post-GFC years have highlighted the extent to which central banks and central bankers influence our daily lives. These crises remind us of the outsized power held by unelected policymakers in politically independent agencies. From this realization has emerged widespread and even bipartisan backlash against central banks across the world. At the heart of the influence of these powerful individuals lies a tension between central banking and the core principles of democratic governance—accountability, representation, and transparency.14
In the last century, if not longer, central bank cooperation has been shrouded in secrecy, and leaders have relied on closed door conversations and substantial opacity in undertaking these operations. This practice of secrecy took hold in central bank practices under Norman and Strong. Central bankers regularly met in private and often did not publicize their travels to see one another; they even travelled in disguise and under false names, and to all in these circles, this was not unusual. Norman even kept his dealings quiet within his own bank.
Undoubtedly, this ability to arrange liquidity support in the face of shortages and financial pressures, quickly and without any political interference, is essential for crisis management. Even more, in undertaking experimental and innovative policies, as tends to be the case in the gravest circumstances, a confidential environment, proved to be necessary. Crucial conversations took place in private, informal settings, in a “walk and talk,” a “fortuitous happenchance” or a gathering in an elevator. This allowed for productive brainstorming, sharing of ideas and proposals, and keeping one another informed of important developments, without causing market reactions. However, this secrecy in central banking has generated a transparency deficit for central banks, who are now facing increased pushback for their policies and opacity.
The crisis also drew attention to the international layer of the contradictions between central banks and democratic governance. Central banks’ foreign lending practices are yet another mechanism (in addition to domestic policies) through which they protect the interests of private finance: they can choose who to rescue in a crisis, both domestically and internationally. In doing so, they delegate more powers to foreign central banks to decide who will benefit from these liquidity lifelines overseas. These cooperative liquidity programs can also serve to influence the policy decisions and preferences of foreign partners who participate in them.15
This is not a new concern. These practices of independence and cooperation are rooted in a longer history, dating back until at least as early as the interwar period. The institution of central bank independence was declared in Norman's 1921 central bank manifesto, where he wrote that “autonomy and freedom from political control are desirable for all central and reserve banks” and that it was upon conforming to this principle that cooperation was also a desirable policy.16 Moreover, central bank autonomy strengthened the personal ties among central bankers internationally, which allowed banks to access liquidity assistance from partner banks. Creditor central banks privileged more independent banks, creating an incentive for this institutional setup to be widely adopted.
The nature of such policymaking is at odds with key democratic norms. The case study of interwar financial governance identified the origins of such practices, the personal and interpersonal dynamics of central banking, and how they influenced and institutionalized central bank independence and cooperation. In the 1920s, these practices were developed in a context of little political accountability, limited political representation, and outsized amounts of autonomy for leaders to shape the way their banks evolved and the activities they undertook.
After 1945, when central banks became answerable to governments, these practices became increasingly embedded in the normal operations and institutional structures of central banks. International organizations, especially the BIS, and the technical knowledge required for their work, offered them a safe haven outside political influence. Through their foreign operations, central banks in the 1960s could expand their jurisdictions and shape policy choices overseas through their personal encounters, conversations, and agreements. And because central banks now operated as agents to their finance ministries, secrecy was a crucial tool for their activities.
While this was largely accepted (or perhaps ignored) in the past, today, central banks have come under fire for bailing out foreign economies, widening their jurisdictional reach, and expanding their mandates to take on new activities and responsibilities.17 In the GFC, while economic considerations certainly influenced decision-making, the interpersonal dynamics underlying cooperation shaped the crisis effort. Central banks took unprecedented risks in their crisis management approach, and although they did ultimately work, that they would work was unknown when these policies were first adopted.
At the same time, we cannot disregard the role that central banks can and have played in arresting financial crises and the need for them to act quickly in the guaranteed event of a future financial meltdown. When given the room and independence to take unprecedented actions, central banks have also proved that they are indispensable institutions. In many instances, their autonomy from governmental interference has been essential for monetary policymaking, allowing central banks to set appropriate targets and goals. And the confidence and privacy of their meetings has been an essential element to facilitating their actions, allowing for open debate, and for catalyzing experimentative governance when it is needed the most. In turn, as chapter 2 showed, the implications of central banks’ failure to act can be ghastly.
But central banks today find themselves facing a legitimacy crisis across the world and on all points of the political spectrum. It is clear that this institutional setup needs a fundamental rethink. Their favoring of wealth and those who hold it shows that central bank neutrality is a myth.18 As unelected powers, their lack of representation, accountability, and transparency has hindered public trust in the institution. But public support and trust is critical to affording central banks their authority and their independence.19 This concern is even more pronounced when we factor in the expansion of central banks’ toolkits, the increasingly broad interpretation of their mandates, and the new powers and responsibilities that central banks have assumed since the GFC.
The tensions between independent central banking and democratic principles pervade central banks’ activities at the domestic and the international levels. The consequences of central bank policies do not only affect domestic publics but also those abroad, especially through these ad hoc governance frameworks and in the context of systemic crises.
A Global Financial Safety Net?
Bankers’ Trust showed how, with a global governance system that time and again proves to be ill-equipped to deal with the most severe financial crises, central bankers’ ad hockery, innovation, and experimentation have repeatedly saved the day. Indeed, when they have been unwilling or unable to pursue drastic firefighting strategies, as in the 1930s, disaster has ensued. We thus need these agencies and these agents—central bank leaders—to step up to the task, as both first- and last-resort responders, to any future crisis.
But while these ad hoc solutions have effectively managed financial pressures, they raise questions about the robustness and durability of the existing system of global financial governance and highlight serious inefficiencies in the use of time and resources outside of crisis conditions. Since the 1920s, and even more after 1945, states have invested tremendous amounts of time and resources toward building a more robust framework for global financial governance. The IMF was created for the very purpose of providing financial assistance to struggling economies and playing the role of international lender of last resort in the face of liquidity shortages.
However, as shown in chapters 3 and 4, these institutions have been ill equipped to play this role in the face of systemic pressures. During the 1960s sterling crises, there was a real risk that if the IMF stepped in to rescue Britain, it would no longer have the resources to arrest the inevitable dollar crises that did indeed follow. During the GFC, once again the Fund did not possess adequate resources to assist struggling states as the crisis spread across the world. Even more concerning was that in both periods, states actively sought to avoid going to these large international organizations for help and instead pursued alternative, quick, and low-cost financing from creditor central banks to avoid the costs of multilateral liquidity strategies.
This recurring pattern shines a light on the deep underlying fault lines of the current governance system in international monetary and financial affairs. Despite the huge amount of investment in creating international financial institutions, and systems and mechanisms to deal with financial crises, central bankers and monetary authorities regularly and decidedly opt to circumvent this system to go for ad hoc arrangements instead. This eagerness to shy away from the existing system, to avoid its costs, and because of its inadequacies, poses at least two significant problems for global financial governance moving forward.
First, the availability of ad hoc assurances at least for a few of the largest and richest, systemically important economies in global finance may serve to generate and reinforce a deeper underlying inertia preventing an effective reform of the system. Indeed, the GFC spurred a few important governance reforms in the Bretton Woods institutions in the last decade, but as scholars have argued, these reforms remain wanting.20 Moreover, the scope of any sufficient and inequitable efforts remains at the mercy of the United States, on whom the world has come to rely, both in the institutional system as well as for ad hoc alternatives, such as the Fed swap program.21
A related and even more worrying problem is that this reliance on ad hoc policies in the absence of a robust governance system heightens the discretionary power of a few leaders in times of crisis. This leaves the stability and prosperity of national economies and the international financial system critically reliant on central bank leaders’ personal preferences and personal relations when it is at its most vulnerable. As I showed in chapter 2, most frequently during the early years of the Great Depression, but also at other times in the earlier interwar years, and in the Bretton Woods era, the management of financial crises is not immune to the fickleness of human temperament.
The global financial governance system is always going to need a reliable and robust financial safety net that can be made available in times of need. But the record of the system working effectively in the face of financial crises is at best patchy. Instead, time and again, such a system is almost never adequate and therefore inherently unreliable. Even in the worst crises that were still resolved successfully enough, the most powerful central banks take the lead in playing the part of a global lender of last resort.
The standing swap lines were established precisely to remedy the stopgap nature of financial crisis management and may provide a more reliable, long-standing alternative that the Fed can scale up with ease, in the next crisis. As the rapid use and expansion of this program in March 2020 illustrates, the Fed's expansive liquidity arrangements once again proved to be an efficient response to the global health and accompanying financial crisis. For that reason, many scholars and experts on the topic posit that these instruments are likely to see continued use. However, historical experience suggests caution in making these bets, and the reasoning for this comes down to the particular preferences of central bank leaders.
The 1962 Fed swap network also evolved into a series of standing arrangements. While they were in place for several decades, they quickly fell out of use by the early 1970s, even during grave crises such as those of the 1970s. A few decades later, in a 1996 FOMC meeting, these lines were discontinued. During that meeting, Yellen observed that the Fed's swap network represented an “important symbol of [the Fed's] commitment to international cooperation.” Her remarks during that meeting intimated that Alan Greenspan, then Fed chair, found them to be “by and large a legacy of times past and may have become something of an anachronism.” During that meeting, William Joseph McDonough, then vice chair of the Fed, essentially articulated and illustrated the central themes of the argument made in this book:
If we were to assume a world in which the swap network no longer existed, would any formal mechanism have to be created to replace it? My own working hypothesis on that would be “no.” In my view, what would replace it is what in a way already replaces it. A good many of us spend a fair amount of our time—I spend essentially 10 percent of my time—attending BIS meetings. I don’t do that because I like the Basle Hilton, I can assure you, but rather because of the close personal relationships that come from that activity. What that means is that if we have a problem with any of the people that the Chairman sees, say, at four meetings a year and I see at ten meetings a year, we are talking with someone we know very well. So what replaces the swap network is that personal relationship. It does not mean that we do them a favor or they do us a favor. What it does is to make it possible for two individuals representing their central banks to agree on what is in the mutual interest of their central banks and more importantly their countries.22
Yellen also suggested that Greenspan “look for an opportunity in Basle or elsewhere to discuss the future of these arrangements quietly with [the Fed's] central bank partners.”23 Greenspan, known for his free-market, anti-interventionist preferences, was not eager to keep these going, and under his Fed chairmanship, the midcentury RCAs were unilaterally dissolved. Even though ad hoc bilateral agreements that are reconstituted into standing arrangements ought to fill in some of the gaps in the financial governance framework, one cannot guarantee that they will remain standing lines. While today's standing arrangements seem more widely accepted, future Fed leaders may choose to follow in Greenspan's steps, if they too find them unfavorable.
Personality Is Policy
For long, technocratic governance has been praised and preferred for being purely scientific, and based in technical knowledge, science, and data, and consequently immune to the influences of messy politics and human temperament. But central bankers themselves are concerned about the impact on policymaking and cooperation when those who forged the last arrangements would have moved on to other things. Some even fear that a change of guard might hinder the ability of central banks to create them anew in the event of a future crisis, which raises alarm bells for the future of global finance and its governance. Bankers’ Trust highlights the sensitivity of the financial system not only to the structures, interests, and ideas that frame policymaking but also to the people in charge.
The stories told in this book have mostly been success stories of how certain leaders were able to carry national economies through crises. But the experience of the Great Depression shows that this cannot be guaranteed if the “right” people are not in charge. This feeling is shared among bankers throughout the twentieth and twenty-first centuries, as I’ve shown in this book.
While this presents a sobering conclusion, it need not necessarily be that way, as this project demonstrates. But success stories abound, we know of no one formula for a successful and equitable response to systemic financial crises. For at least the last century, financial governance has relied far less on the financial governance system as we know it. Rather, the management of finance and the prevention of cataclysmic crises has taken the form, time and again, of ad hoc, stopgap arrangements created to manage the pressures that financial systems generate. The provision of these fixes ultimately lies in the hands of a few powerful people.