A European Credit Council? Lessons from the History of Italian Central Banking after World War II

Table of Contents

1. Introduction

2. Origins of the Debate

3. Bringing Central Banks “Back” to Democracy?

4. The Bank of Italy and the “Technocratic” Circuit of Credit after WWII

   1. The de Facto Power of the Bank of Italy over the CICR

   2. The Crisis of Credit Policy

5. Concluding Remarks

6. References

Toward a European Credit Council?

1. The Democratic Challenge of Central Bank Credit Policies, by Eric Monnet, https://doi.org/10.1515/ael-2022-0113.

2. The Changing and Growing Roles of Independent Central Banks Now Do Require a Reconsideration of Their Mandate, by Charles Goodhart and Rosa Lastra, https://doi.org/10.1515/ael-2022-0097.

3. Is Asking Questions Free of Charge? Questioning the Value of Independent Central Banks through the Lens of a European Credit Council, by Matthias Thiemann, https://doi.org/10.1515/ael-2022-0108.

4. The Democratic Dangers of Central Bank Planning, by Nathan Coombs, https://doi.org/10.1515/ael-2022-0063.

5. A European Credit Council for Consistent and Informed Policymaking, by Agnieszka Smoleńska, https://doi.org/10.1515/ael-2022-0065.

6. The Case for a European Credit Council: Historical and Constitutional Fine-Tuning, by Jens van ’t Klooster, https://doi.org/10.1515/ael-2022-0074.

7. A European Credit Council? Lessons from the History of Italian Central Banking after World War II, by Mattia Lupi, https://doi.org/10.1515/ael-2022-0071.

8. The Power of Coordination and Deliberation, by Eric Monnet, https://doi.org/10.1515/ael-2022-0114.

9. The Credit Council in the US Context, by John Davis Feldmann, https://doi.org/10.1515/ael-2023-0134.

10. Democratic Central Banking: Power Not Deliberation, by Leah Rose Ely Downey, https://doi.org/10.1515/ael-2022-0073.

1 Introduction

The dynamism of history never stops providing us with the necessary enthusiasm to continue the never-ending debate on the role of central banks. The topic of interest of this convivium intersects a variety of disciplines and academic backgrounds, ranging from economics and law to sociology and political science – the ideal type of cross-fertilization that I think is needed to fulfil the ambitious plan of how to interpret and eventually re-design contemporary central banking (Mayes & Wood, 2009; Coombs & Thiemann, 2022).

Eric Monnet’s contribution falls squarely within this strand of interdisciplinary studies. His insights and proposal of reform are of great interest not just for economists and monetary experts but for all social scientists and people interested in the politics of central banking and the future of the eurozone at large. However, when one takes on the arduous but necessary task of bridging the gap between different disciplines and making reform proposals accordingly, one may run the inevitable risk of treating some issues too hastily, attracting criticism of various kind. What follows is my critical reaction to a text that lucidly addresses some of the most pressing institutional and political issues in contemporary Europe. The final aim is not to reject the idea of a European credit council, but to highlight some historical trends to possibly contribute to a better design of it.

In this paper, I will try to engage in the difficult exercise of critically analysing some of Monnet’s persuasive insights on a field of analysis where the author is particularly well versed, namely that of historical research. His proposal of establishing an EU credit council as a democratic “counterweight” against the dangerous “self-referentiality” of the ECB based on the experience of post-WWII credit councils is a very interesting idea which however is based on a “model” which, I argue, needs to be further explored and historicized. Paradoxically, what in my view can be further discussed is Monnet’s historical interpretation of credit councils as institutions capable of filling the “vacuum” created in the aftermath of the 1970s, when the democratic central bank lost its attractiveness.

By directly engaging with the historical phase on which Monnet built his political proposals, I will advance a more critical view of the role played by credit councils in the post-war period. I will focus on the case of Banca d’Italia, which, as it has been recognized, had together with other central banks, but with the Banque de France in particular (Andrieu, 1984; Conti, Feiertag, & Scatamacchia, 2009; Monnet, 2018), a model of central bank intervention which can serve as an inspiration for the normative proposal advanced in this convivium. The reference to the post-war model, broadly defined, is in fact increasingly used by many scholars as a historical reference to justify the need for more coordinated and interventionist policies, for example to accelerate the green transition (Bezemer et al., 2021; Gabor et al., 2022; Smoleńska & van ’t Klooster, 2022).

A focus on the post-war Italian experience will allow some potential theoretical limitations of Monnet’s credit council idea to be clarified. The first mainly concerns the recognition that the balance of power between institutions is not necessarily guaranteed by law, and that the de facto interaction between democratic politics and credit allocation processes does not exist in the abstract, but strongly depends on contextual factors that are difficult to predict. This means that, especially in the current EU institutional framework – if one considers Monnet’s assumptions on central bank independence – the new credit council will not automatically rebalance the central bank’s technocratic power. On the contrary, should the council really be empowered to regain full control over credit policy,^[1] in my opinion the risk of pushing the central bank back into a state of dependency seems real. The attempt to institutionalise ex-ante forms of control could undermine the speed and effectiveness of central bank action and may empty its function of social utility (Ciocca, 2016). The second has to do with the central bank’s ability to ultimately resist the politicisation of credit, with the risk of becoming the financial arm of economic planners. The way clientelism privileges fractional interests at the expense of “sound” macroeconomic management could reveal how a welfare-oriented central bank can lead to less transparent distribution mechanisms.^[2]

One may wonder whether the Italian case, given its peculiarity and complexity, can be of any relevance to the wider debate on the development of today’s central banking. However, even though any possible lesson to be drawn from this historical experience should be carefully contextualized,^[3] I think the post-war “model” of the Italian central bank can provide useful insights to better reflect on the contemporary design of central banking and eventually further problematise proposals for reform. The final conclusions will be in line with some of the caveats already suggested by Monnet, but I hope they will provide the reader with an additional perspective on the de facto role played by credit council(s) in the post-war period, against any uncritical euphoria about a simple and easy “return to the past”.

I will proceed as follows: In the first part, I will briefly discuss the origins of this need for reform and critically engage with some of Monnet’s ideas. In the second part, I will focus on the case of Italy after WWII using secondary sources and elaborated material from my research,^[4] highlighting how the attempt to democratize central banking through a credit council was neither always linear, nor necessarily democratic and successful. Finally, I will write some concluding remarks with the aim of summarising my observations to this Monnet’s seminal piece.

2 Origins of the Debate

Central banks, like other institutions, do evolve and change.^[5] Many scholars have attempted to trace this evolution and provide a “theory of history” so to better understand their long-term features (Goodhart, 1988; Giannini, 2011; Ugolini, 2017). Their functions and goals have in fact changed over time, reflecting a variety of institutional contexts and societal needs, so it is highly likely that they will continue to evolve and adapt to these changing political economy equilibria (Ugolini, 2020; Coombs & Thiemann, 2022). As emphasised by Forrest Capie, central banks can in fact be seen as the result of a complex mix resulting from the ebbs and flows of both evolution and design but with the latter prevailing in the “modern” period^[6] (Mayes & Wood, 2009, p.22).

However, since the 1980s there has been a growing convergence on a rather specific and “monolithic” design of monetary policy, which has been eloquently defined as “holy trinity paradigm”^[7] (Braun & Downey, 2020). One of the most significant, but often overlooked, consequences of this evolution has been the de-institutionalisation of the role of central banks in credit policy – understood as their direct or indirect intervention in the allocation of credit in the economy to replace free market mechanisms deemed inadequate and/or insufficient. These “credit policies” were replaced by a supposedly more neutral, indirect, and less intrusive “monetary policy” under the assumption that its distributive impact would have been less severe. In this way, Monnet argues, central banks lost their traditional democratic coordination with the welfare state (Monnet, 2018; 2021).

This “depoliticized” framework has not yet been formally replaced, although many substantial changes have taken place since the 2008 financial crisis. New doctrines in central banking are emerging (Cœuré, 2022) and so there are now calls to redesign the existing institutional set-up to address the negative consequences that this “disconnected” central banking model is deemed to amplify rather than mitigate.^[8] Among these, many have increasingly emphasised the distributive consequences of any central bank operations, especially of the “unconventional” monetary policies, with also criticism of being even openly biased towards the financial sector (Cour-Thimann & Winkler, 2013; Aklin & Kern, 2021). This call for change is thus supposed to fix the democratic deficit inherent in the actual framework, include the so-called “societal responsibility” of central banks in their mandate (Scialom 2022; Vallet, 2021; Schnabel, 2021) and thus making sure that they finally “serve the people” (Dietsch et al., 2018).

As Eric Monnet writes, these “structural changes should prevent us from thinking that central banking will revert to its 1990s model”, thus we are very likely to enter a new phase^[9] in which central banks will not be equipped with the necessary legitimacy to make these important choices. The current consensus does not allow to democratize them and to acknowledge their newly discovered political and “macro-financial” role in the wider system of credit (Gabor, 2020). For this reason, some corrections and adjustments are needed to better design this central banking’s brave new world^[10] (Pisani-Ferry, 2021), as any form of denial can no longer be considered an option (Eichengreen, 2021). In the euro area, an EU credit council is one of the solutions proposed to reform the institutional apparatus of credit, going beyond the “myth of market neutrality” (van ’t Klooster & Fontan, 2020) and make central banking democratic again.

3 Bringing Central Banks “Back” to Democracy?

Central banking is political and is too important to be left to technocrats. This is Eric Monnet’s main argument. The underlying message is to re-integrate (Epstein & Schor, 1989) central banks into both the debate and institutions of democracy. Re-integrate, because since the 1980s, the neoliberal process of convergence diverted central banking from other economic policies, with harmful consequences for the economy, financial stability, and inequality. In other words, despite warnings, central bank independence has really turned into loneliness (Padoa-Schioppa, 2004; Mabbett & Schelkle, 2019) and we must do something to bring it back into a democratic circuit. The long-term importance of price stability cannot be considered as isolated from other social and economic objectives.^[11]

In fact, according to Monnet, independence “should not mean absence of coordination and bargaining with other political actors”.^[12] The traditional principles of delegation (Tucker, 2019) that are currently in place are necessary but not sufficient to ensure the necessary legitimacy. If credit policy intersects with other public policies and the central bank is de facto involved in it, it is necessary to make this involvement democratically explicit. In fact, he argues, it is not a matter of questioning their independence, which historically has always been one of their fundamental characteristics, albeit to varying degrees and intensities, but of restoring forms of coordination (which does not mean substitution), to not let central banks be “the only game in town” (El-Erian, 2016). “Redefining independence” is therefore vital after considering the new challenges central banks are facing in new domains like the ecological transition, the management of public debt and the creation of digital currencies (Massoc, 2022; Siderius, 2022; Smoleńska & van ’t Klooster, 2022; Cukierman, 2020).

To democratize central banking in Europe, Monnet proposes to improve the epistemic authority of the EU Parliament to have a better balance of knowledge,^[13] but most importantly, the creation of a “European Credit Council” entrusted with the duty to analyse the consequence of monetary policy on the economy and make central bank decisions coherent with other European political and social policies.^[14] This will represent a first step towards a new type of institutional coordination. Based on the historical examples of “credit councils” in the past, the new EU credit council, put under the authority of the EU Parliament, should be able to challenge the current modus operandi of the ECB, develop its own independent assessment of the distributional consequences of monetary policy and propose alternative scenarios so to improve the overall democratic process through deliberation and reflexivity^[15] (Rosanvallon, 2011).

These “credit councils” were established in several countries after WWII with the aim of ensuring forms of coordination between monetary and fiscal policy and thus support the general economic policy of the state. At a time when central banks were integrated in various field of state intervention and their role in credit allocation was widespread (Monnet, 2018), the objective of credit councils was in fact to “democratize” money (after the disappointing experience of the 1930s) and coordinate the public management of credit. In this way as a purely “technocratic” and “apolitical” activity, central banking would have been mitigated and made part of a more complex democratic circuit. This model clearly provides important and interesting food for thought for the new designers of contemporary central banking interested in democratizing the existing set-up.

However, I argue, the historical “perimeter” of the model is often too easily “crossed”, with the risk of leading to parallels that pay little attention to the contingencies, contradictions, and nuances of a specific historical phase. The history of post-war central banking bears similarities to some of today’s challenges, but it was also a specific period, characterised by a peculiar set of material and ideational conditions that allowed for a peculiar combination of economic development and monetary stability (Marglin & Schor, 1991). Most importantly, the period also displays a variety of central banking and policy practices, which can hardly be captured by a single encompassing “democratic” model to refer to. The optimistic and sometimes euphoric debate on a supposedly coherent and democratic post-war credit policy framework needs to be further problematized by focusing also on other historical experiences and their long-term trajectory.

4 The Bank of Italy and the “Technocratic” Circuit of Credit after WWII

The period after WWII, also known as the Trente Gloriouses or the world of “financial repression” (McKinnon, 1973), was a moment of institutional re-design after the tumultuous experience of the 1930s. Under Bretton Woods, many central banks became part of the nation state as agents of economic development (Epstein, 2013; Monnet, 2016, pp. 451–488). In a logic of cooperation with other state institutions, these central banks engaged in credit allocation and used direct instruments such as credit ceilings, interest rate controls and reserve requirements for banks to steer credit flows and control the politics of liquidity^[16] (Hodgman, 1973). They have also been involved at various levels in debates on economic planning, thus contributing to the “blurring of the boundaries” (Coombs & Thiemann, 2022) between fiscal policy and monetary policy. Within this framework, one institutional innovation was the creation of credit councils – bodies that were supposed to be the “democratic transmission” between the technical and the political side of state intervention in the economy.

In this paper, I will put forward a twofold argument. First, I will argue that, although formally designed and conceived as a body responsible for the democratic supervision and control of credit policy, the Italian Inter-ministerial Committee for Credit and Savings (CICR)^[17] was de facto dominated by the power and influence of the Bank of Italy^[18] – the institution that historically possessed the natural links with the credit system and the related technical knowledge over it. Despite in the post-war environment, central banks have generally been considered subservient institutions, the Bank of Italy appears to be a powerful actor, enjoying a level of operational autonomy and power over all levels of economic policy^[19] as well as on the banking system, which were often used simultaneously as instruments to achieve the selected objectives of growth and investment. The peculiar political and economic situation in the country thus led to a sort of “central bank dirigisme” that resulted in a delegation of the major choices regarding the allocation of credit to the central bank^[20] (Nardozzi, 1988, p. 16).

Secondly, I will argue that this model of multi-mandate central banking soon prompted a devitalisation of democratic politics, which paradoxically increasingly resorted to monetary and credit tools to adjust domestic economic policy. This tendency however strongly affected and diminished the central bank’s room for manoeuvre, which during the inflationary 1970s started to be curtailed under the growing monetary requests of the treasury and the need to maintain the external equilibrium of the balance of payments. The politicisation of credit policy led to an exhaustion of the competitive stimulus in the country, fostering inefficiency as well as irrational and clientelistic practices. Overall, I think the Italian experience can show the problematic relationship that credit councils have historically had with respect to the democratic attempt to “control” central banks. Moreover, this interpretation appears to back the idea expressed elsewhere in this convivium, according to which Monnet’s proposal may bolster rather than challenge technocracy and that welfare-oriented central banks could lead to less transparent distributional mechanisms (Coombs & Thiemann, 2022).

5 Concluding Remarks

Historically, credit policy and support to industry have been an important and distinctive feature of Italian central banking (Toniolo, 1995). However, contrary to widespread opinions, in the post-World War II period the supposedly democratic “circuit” of credit policy proved to be still heavily influenced by the technocratic and regulatory power of the central bank. Despite the attempt to “democratise” credit and allow for an extensive politically driven state interventionism, the complex and variegated system of inter-ministerial committees did not prevent the emergence of an influential central bank, as democratic coordination was not necessarily guaranteed by law. Even the decisions to pursue an accommodative monetary policy seems to derive more from a voluntary commitment of the central bank itself than from a status of institutional subservience.

The post-war period can therefore be seen as a first attempt by central bankers to somehow separate “monetary policy” from “credit policy”– a distinction that, according to some scholars, was previously “masked” by the apparent position of the central bank outside the system of credit control in a climate of relative distrust against technocracy (Belli, 1976). Therefore, even during the democratic age (Conway, 2020) some authors already identified early symptoms of “disconnection” between the democratic circuit and an “uncontrolled autonomy” of the central bank, pushing like today for institutional changes such as the strengthening of Parliament’s role of direction and control or the merging of the CICR and CIPE.

The de facto balance of power between the Bank of Italy and the CICR saw the former prevailing thanks to its “natural” relationship with the financial system and the technical knowledge over it. The attempt to democratically control an autonomous central bank through the creation of a credit council did not materialise as expected and, in the absence of clearer and more transparent mechanisms of interaction, the risk of the same fate befalling the European Credit Council proposed by Monnet could, in my opinion, be high.

However, despite this hegemony, the Bank of Italy was often accommodative towards the treasury and the credit needs of a growing economy, taking on allocative responsibilities. During the 1970s, what seemed to be a democratic system of coordination revealed its limits and contradictions, pushing the central bank to actively withdraw from the same system it contributed to support. The central bank’s room for manoeuvre decreased substantially during the 1970s, limited by the “external constraint” of the balance of payments and the growing monetary requests of the treasury – the so-called “fiscal dominance” (Gaiotti & Secchi, 2012). The extensive use of subsidized credit degenerated into clientelism and forms of crony capitalism, revealing the potential side effects implicit in an economy in which market mechanisms are persistently and systemically constrained.

Proposals to establish political counterweights to central banks are therefore not entirely new. However, the way central banks will be directly involved in the allocation of credit might differ substantially. My impression is that Monnet’s proposal to establish a Credit Council tends to downplay both the ECB “infrastructural power” as well as its level of epistemic authority in the EU (Braun & Downey, 2020; Coombs & Thiemann, 2022). If, as Monnet argues, “the central bank will retain full operational autonomy and policy independence in this new institutional framework”, it becomes unclear what concrete operational role the new council should play. By contrast, in the case the council is truly empowered (Downey in this convivium), in my opinion the risk of pushing the central bank back into a status of dependence appears concrete. An ex-ante check would risk negate the independence of the central bank, it might prejudice the rapidity and effectiveness of its action and can deprive the function entrusted to the central bank of its social utility (Ciocca, 2016). Cooperation and deliberation might also be improved through existing channels, even if some observers have documented that for example the monetary dialogue between the ECB and the European Parliament does not guarantee an appropriate balance of power (Jourdan & Diessner, 2019).

To conclude, despite the recent euphoria to take inspiration from the post-war model, we should remind ourselves that in practice democratic credit policies were neither uniform nor necessarily “democratic”. Democratic credit policy does not exist in the abstract but comes out of a balancing of different interests and carried out by multiple actors. In the Italian case, the political colonization of credit eroded its “public function”, paving the way for irrational practices and opaque waste of resources to the advantage of narrow political and business groups. As Monnet recognizes, it would be in fact “a mistake to revive credit policies without maintaining central bank independence, strengthening parliamentary oversight, and isolating the administration from the central bank management” (p.26). The delicate task of re-designing contemporary central banking in line with the new challenges should therefore assess more carefully the tout-court re-proposition of these models, which need to be further explored and discussed.