What is A Useful Central Bank? Lessons from the Interwar Years

Abstract

The paper reviews various aspects of central banking in the interwar years to try and see if any suggestion can be drawn for the current and future similar situations. Besides monetary policy, an issue on which rivers of ink have already flown, central bank cooperation, lending of last resort and central bank independence are discussed. The paper argues that three ‘lessons’ of the 1930s have been learned in 2008-9: (i) a major financial shock requires immediate reaction of adequate size, (ii) lending of last resort should use all available tools, and (iii) international cooperation is essential. Other “lessons” may provide guidance for the future: avoid the recurrent belief that - this time the business cycle has been conquered for good, establish policy guidelines for future credit and asset booms, expect long ‘exit’ periods from oversized central bank balance sheets and unconventional assets, cooperate with the government while at the same time maintaining mutual independence.

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