The Politics of Liberal Financial Governance

By most measures, liberal states are interventionist states. Their expenditures are large and they regulate more and more of our lives. Most critical scholars recognise this. Scholars now commonly open discussions of liberalism or neoliberalism by confidently affirming that liberal or neoliberal states do not deregulate but re-regulate or more fundamentally that they are not retreating but play a vital role in engineering our socio-economic reality. But pointing this out, is not the issue. As I argue in my book The Making of Modern Finance, the difficult part is to work out the profound implications of this recognition for the way we understand and study liberal and neoliberal governance. It is striking that the increasingly widespread adherence to the thesis of the interventionist liberal state has produced little in the way of reconceptualisation. Scholars continue to think of liberal financial governance (LFG) as entertaining a distinct symbiotic relationship with the market, either as a guarantor of market order or more fundamentally as a vital engineer. The result is often a weak constructivist account which highlights that liberal and neoliberal governance did indeed construct the market conditions they were supposedly only there to enable or liberate, but this changes little to what we think it constructed. Instead of simply problematising how we got there, my book seeks to draw out more fundamentally the implications for what we understand LFG to be constructing in the first place. It is, in this respect, a reflection on the agency of the liberal state.

The Making of Modern Finance addresses this task by examining the rise of this form of governance in Britain and its culmination with the emergence of the 19^th century gold standard; the iconic case of liberal governance. The basic theoretical argument of the book, which is more a methodological axiom than a proper theory, is that looking at historically situated political struggles is central to reveal the purpose of this practice of governance. Debates on 19^th century LFG show how scholars too often foreground their analysis with theories of liberal governance based on transhistorical features which can be said to define this form of governance irrespective of the context in which it was implemented. They often focus, for example, on the pro-market ideology usually associated with liberal governance and deal with politics in a deductive way, basically making assumptions as to who was favoured by these abstract market principles.

As I show in the book, the general axioms of liberalism, in the form of ideas of free market or market competition, have more rhetorical qualities than prescriptive force. They tell us very little about the purpose or significance of liberal governance. The actual politics were usually better revealed, in fact, by the specific ways in which agents reappropriated and often adjusted key themes of liberalism for their own purposes. It was the specificity of their claims which I found revealing rather than the common motifs that are too often read as bearers of an underpinning rationality. In tracing the concrete politics of LFG through this emphasis on specificity, I came to the conclusion that liberal financial governance under the gold standard was not about free market adjustments, market freedom or the growing discipline of the market. It had more to do with what was done in the name of these ideas which many shared but understood very differently. Accepting this point also meant that LFG could not be conceptualised in terms of its purpose, since these were too diverse to be captured in the form of a reified general theory. This is why I conceptualise LFG in terms of its means or tools, what I see to be its social technologies, which were developed during this time and which profoundly changed the ways in which state officials, and the state more generally, relate to the economy. The rise of LFG involved a paradigmatic transformation in the way monetary and financial governance was conceived which was not brought about by ‘new liberal ideas’ as in a classic constructivist narrative, but by the development of new institutions created for the purpose of establishing some form of control over developments in the economy and which changes the conditions of possibility.

More concretely, the book argues that the defining feature of LFG in the 19^th century, and more specifically the gold standard, was the construction of central banking, not the pursuit of sound money as it is often believed – the classic self-effacing intervention of the state often invoked by scholars of LFG. As I demonstrate, there is a long tradition of sound money in England which long preceded the rise of liberalism or capitalism. By the 19^th century, the key protagonists of monetary and financial governance did not debate over whether sound money should be a priority or not. The question lay elsewhere as social forces jostled about what should be done in the pursuit of sound money. Much more important was the fact that in the pursuit of sound money, the British government and the Bank of England ended up creating one of the defining tools of monetary and financial governance of the 20^th century: central banking.

At the heart of this process was the notion of the lender of last resort (LLR) which was arguably more important initially to the adoption of the gold standard than the development of central banking per se as we now commonly understand it (that is as an institution to support financial markets). That may seem counterintuitive but only because we project our own understanding of the LLR onto this period. The idea was initially developed in the early 19^th century to highlight the problematic responsibility of the Bank of England in fueling financial markets. It was argued that, as a LLR and the institution upon which the rest of the financial system depended, the Bank should be held responsible for causing the monetary and financial problems that state officials were grappling with. Imposing gold convertibility on the Bank was then a means to tightly limit the ability of the Bank to ‘support’ market growth for this was seen as the main cause of inflation. It is important to remember that the Bank was at the time still a semi-private institution governed in the interests of its shareholders. In this context, the LLR was perceived more as a problem to be resolved through governance, rather than as a formula for governance. This is why the gold standard, as a constraint to be imposed on the Bank was tightly connected to the notion of the LLR. Henry Thornton who first properly fleshed out the idea of LLR was an important architect of the gold standard and was keen to make sure that the Bank would only support the market in times of crisis. In other words, the goal was to limit not expand the function of lender of last resort, which the Bank was seen to be already carrying out as a market actor.

What was then the impact of the Gold Standard? As one may assume, it made it harder for the Bank to serve as a lender of last resort, if we take this term to mean the ability and commitment of the Bank to step up in order to provide liquidity in times of financial difficulty. A series of crises in the mid 19^th century led to the repeated suspension, or partial suspension, of gold convertibility as the Bank found itself unable to respond to growing demands for liquidity under the constraints posed by the gold standard. As a result, it had to retract increasingly from playing this role. But the outcome for the Bank of England was that it lost its influence over financial markets as financial institutions sought alternatives to their reliance on the Bank. This became a great concern by the late 19^th century when the growing amounts of capital piling up in London increasingly threatened the ability of the Bank of England to maintain the gold standard. A significant international crisis could lead to the rapid exit of capital, quickly exhausting the reserves of the Bank. Precisely because the Bank could not act as a lender of last resort, it decided to experiment with new tools by which it hoped to regain some form of control over financial markets. The modern practices of open market operations, the dynamic use of the discount window, the so called ‘gold devices’ which were a set of practices to control gold markets, and the various colonial monetary practices of the time were all developed in this context. They were meant to control the financial system rather than simply support it in times of crisis and this was done to address a vulnerability of the Bank, not because it was required by the financial system per se. In other words, central banking was developed by the Bank of England in order to avoid being placed in the position of having to serve as a lender of last resort. And indeed, when the Baring crisis hit the British financial system in 1890, the Bank was woefully prepared to respond to it.

This short historical foray highlights the importance of tracing out the concrete political struggles and the problems they posed in terms of governance, none of which can be deduced theoretically. It would be easy, of course, to take a step back and boil down the significance of The Making of Modern Finance to another demonstration of the fact that the liberal state is not passive but intervenes actively in the economy. But the stakes lie elsewhere. For too often state intervention is conceived in terms which accommodate the idea of the market, as scholars emphasise the ‘supporting’ functions of the state, or the ways in which it promoted the development of market forces. The result is always a form of normalisation of this intervention as if it was what the market or capitalism needed. The idea of the lender of last resort, for example, casts central banking as a straightforward invention almost common sensical to the point that commentators often wonder why it took so much time for it to develop. To simply state that there was nothing preordained is not enough. The challenge is to convey concretely how much of a leap the advent of central banking was; to establish this through facts. As I show, central banking was a late development which was largely unintended. For it was only once the new tools of intervention had been developed by the Bank of England in its own interest, that it suddenly became an attractive institution for the purpose of financial governance; a development which would ultimately lead to its nationalisation in 1946.

Accounts of LFG which emphasise the functions of the liberal state that are supportive of market development are not only inaccurate, but also come at high conceptual costs. In the case of central banking, this is clearly reflected in the fact that mainstream and critical scholars have been unable to articulate the history of the gold standard with that of central banking despite the fact that they emerged in the same place in more or less the same period. It demonstrates how concepts can impact in profound ways how we deal with history. We can thus end up completely inverting the dynamic behind the development of central banking to the point that it now appears anathema to the gold standard. But this is only because we misunderstand the nature of British central banking in the first place. Moreover, it illustrates once more how much we struggle to think of LFG as anything other than a passive practice. For despite all the claims about the interventionist nature of the liberal state, scholars continue to rely on notions of state power that are devoid of agency when it comes to the liberal state. These statements too often seem to make little difference to our understanding other than to register that they had a part in the story we know so well. Hence, the gold standard, for example, is usually cast as a restrictive policy with a very limited legacy in terms of governance other than in producing a reaction in the form of Keynesianism. My goal with this book was to demonstrate that the interventions of liberal states can only be understood if we defined them in terms of power, as a form of discipline which always applies on certain market actors and which will contribute in reshaping their practices. Understanding how liberal states are key agents in the making of finance and the global economy requires that we stop thinking of them as underlabourers, only there to set the preconditions for markets to develop.