- Dr.Sanjaykumar Pawar
Montagu Norman and the BIS: Do Central Banks Know Best?
 |
Montagu Norman hoped bankers, not politicians, would steer global money. Illustration: AI-generated, for editorial use. |
Do Central Bankers Really Know Best?
Montagu Norman wanted finance run by bankers, away from politicians and reporters. A century on, his idea has become the system we live in.
Few people have ever shaped global money as quietly as Montagu Norman. In 1925 he wrote to Benjamin Strong, head of the Federal Reserve Bank of New York, hoping to found a private and select club of central banks, small at first and growing over time. He got his wish. The club became the Bank for International Settlements, and its descendants still meet in Basel every other month.
This piece looks at how that happened, why the timing was so ironic, and what the story says about central banking today: independence, coordination, bubbles, and the limits of what any policymaker can control.
The man behind the Bank
Norman ran the Bank of England from 1920 to 1944, longer than any governor before or since. Nothing about him fitted the image of a banking titan. Contemporaries describe a shy, anxious, private man who disliked publicity and suffered repeated collapses in his health. He dressed like an artist rather than a financier, and he reportedly sought advice from Carl Jung before the First World War. Accounts of his temper, and of his habit of slipping through London unnoticed, have become part of the legend.
Yet when he was reappointed in 1932, the American press treated him as the ruler of an unseen British empire of money. The point of the anecdote is not gossip. It is that the people who set the price of credit are individuals, with moods, blind spots and loyalties, however impressive the institution behind them.
Think of a pilot in heavy turbulence. The cockpit is full of instruments, but in the end someone has to decide what to do, and that judgment is never purely technical.
How the BIS came about
The official reason for the BIS was practical. Germany owed reparations after the First World War, and the Young Plan of 1929 needed an agent to receive and move the payments. Norman saw a larger opportunity. He wanted a permanent home for central bankers, a place to compare notes and coordinate without answering to parliaments or being followed by journalists.
In his view, monetary affairs were too delicate for elected politicians. Central bankers, he thought, should look after them among themselves.
What the institution became
- The BIS opened in Basel, Switzerland, in 1930 and is generally described as the oldest international financial institution.
- Today it has 63 member central banks, together covering the large majority of world output.
- It convenes governors, publishes research, and hosts the committee behind the Basel banking standards.
- It also offers banking services to central banks themselves, which is why people call it the central banks' bank.
Norman's phrase about a club that is "small at first, large in the future" describes the outcome well. What began with a handful of European institutions and a group of American banks now includes central banks from every region.
1929: a market that believed in itself
While Norman was planning, the American stock market was climbing on pure confidence. Prices rose month after month. Radio Corporation of America shares jumped by roughly half in a single month. Ordinary people who had never followed markets were passing on tips, and brokers were even reported to be planning trading desks on transatlantic liners.
The mood is familiar. Compare it with more recent episodes:
| 1920s | Recent equivalent |
|---|---|
| Tips passed on by shoeshine boys | Retail traders coordinating on Reddit forums |
| RCA up around 50% in a month | GameStop up more than 1,000% in January 2021 |
| Share dealing at sea | Around-the-clock crypto trading on phones |
| A belief that shares only rise | The 2021 meme-stock and crypto boom |
A well-known market saying, often linked to Joseph Kennedy Sr., holds that when strangers start handing out stock tips, prices are probably near a peak. It is a rule of thumb, not a law, but it has a decent history.
Norman's own verdict came later. At a bankers' dinner in London in October 1932, after the collapse, he acknowledged that the disorder in the world economy was more than any one person, government or country could control. The man who wanted bankers in charge was admitting that nobody had the answer.
Then and now
1. Anchors for money
In Norman's day the argument was over the gold standard. Today the arguments are over cryptocurrency, central bank digital currencies, and how long the dollar can keep its place as the main reserve currency.
2. Independence under pressure
Norman guarded the Bank's freedom from politicians fiercely. That question is live again. U.S. presidents, including President Trump, have publicly criticised the Federal Reserve over interest rates. Turkey's president has replaced several central bank governors who resisted his push for lower rates. In India, the relationship between government and the Reserve Bank has been a recurring subject of debate.
3. Coordination
What Norman imagined as a private arrangement is now routine, through the BIS, the IMF and the G20. Yet coordination has plainly failed at times, as in the 2008 crisis and the uneven global response to the pandemic.
The record, honestly assessed
The old phrase "the bankers know best" deserves scrutiny. On the evidence, the answer is sometimes.
Where central banks got it right
- Bringing down the high inflation of the 1970s and early 1980s, under Paul Volcker at the Fed.
- Stabilising the financial system in 2008 and 2009, including large-scale asset purchases.
- Acting fast to calm markets in the first weeks of the pandemic in 2020.
Where they got it wrong
- Failing to stop the 1929 crash or the Depression that followed.
- Treating the post-pandemic price surge of 2021 as temporary, before inflation reached multi-decade highs. Fed Chair Jerome Powell said in late 2021 that it was time to stop using the word "transitory".
- Keeping rates near zero for long stretches, which many economists link to inflated asset prices.
- Asset purchases that lifted share and property values, benefiting people who already owned assets.
| Year | Fed funds rate (upper bound) | CPI, December over December |
|---|---|---|
| 2019 | 1.75% | 2.3% |
| 2020 | 0.25% | 1.4% |
| 2021 | 0.25% | 7.0% |
| 2022 | 4.50% | 6.5% |
| 2023 | 5.50% | 3.4% |
| 2024 | 4.50% | 2.9% |
Sources: FRED and Bureau of Labor Statistics. Figures rounded. Check both sites for the latest readings before republishing.
The 2021 misjudgment is the biggest credibility hit central banks have taken in decades. It echoes Norman's 1932 admission: even well-resourced institutions can misread events.
Central bank power in numbers
The scale of central bank balance sheets has changed beyond recognition since the 2008 crisis. These are rounded, approximate figures for comparison, not precise totals.
| Central bank | Around 2008 | Peak or recent level |
|---|---|---|
| Federal Reserve | about $0.9 trillion | about $9 trillion at the 2022 peak, near $6.6 trillion in 2025 |
| European Central Bank | roughly €1.5–2 trillion | above €8 trillion at the 2022 peak, lower since |
| Bank of Japan | roughly ¥100 trillion | about ¥750 trillion |
Source: central bank publications and the BIS Quarterly Review. Verify current values before quoting.
That is influence on a scale Norman could hardly have pictured, with its own risk: the more central banks do, the more they are blamed when things go wrong.
Five lessons for today
- Be careful when everyone is optimistic. Universal enthusiasm is a warning sign.
- Policymakers are human. They err, and often act late.
- Coordination helps but does not immunise. Cooperation did not prevent 2008.
- Openness matters. Norman's secrecy has given way to more disclosure, though not enough for some critics.
- Power needs accountability. Independence works best when institutions can explain themselves.
Frequently asked questions
- Who was Montagu Norman?
- Montagu Norman governed the Bank of England from 1920 to 1944. He was among the most powerful financial figures of his time and pushed for the creation of the Bank for International Settlements.
- What is the Bank for International Settlements?
- The BIS, founded in 1930 and based in Basel, is often called the central banks' bank. It hosts policy meetings, publishes research and supports international banking standards. Its membership today is 63 central banks.
- How does 1929 compare with today's markets?
- Both periods saw speculative excitement, heavy retail participation and doubts about how far monetary policy can steer an economy.
- Do central banks really know best?
- Their record is mixed. They tamed 1980s inflation and stabilised markets in 2008, but missed the 1929 crash and misjudged inflation in 2021.
- What can investors learn from Norman's era?
- Be wary when optimism is universal, remember that policymakers are fallible, and do not assume international coordination prevents crises.
Conclusion
Norman believed bankers, shielded from politics, could bring order to world finance. Central banks today are far more powerful than he could have imagined, yet the 2021 inflation miss showed they still get big calls wrong. The hard question for our era is how to keep their expertise and independence while keeping them accountable and modest about what they can do. Norman never settled it. We have to.
Sources and further reading
- Bank for International Settlements: member central banks
- Federal Reserve Economic Data: federal funds rate
- U.S. Bureau of Labor Statistics: Consumer Price Index
- BIS Quarterly Review
- IMF: Global Financial Stability Report
- Liaquat Ahamed, Lords of Finance (Penguin, 2009)
- Adam LeBor, Tower of Basel (PublicAffairs, 2013)
Central Banking in Three Visuals
Companion charts for "Do Central Bankers Really Know Best?" Each one comes with a plain-language reading guide.
1. Rates versus inflation, 2019–2024
What it shows. The Fed's policy rate (upper bound, year-end) against consumer price inflation (December over December).
How to read it. In 2021 the orange line jumps to 7.0% while the teal line stays flat at 0.25%. The gap is the "transitory" misjudgment: policy stayed loose while prices were already accelerating. The teal line then climbs steeply in 2022 and 2023 as the Fed caught up.
Why it matters. It is the clearest recent example of central bankers missing the call, which echoes Montagu Norman's 1932 admission that events had outrun the people managing them.
Sources: FRED and the Bureau of Labor Statistics. Figures rounded.
2. How big the Fed's balance sheet became
What it shows. Approximate size of the Federal Reserve's assets, in trillions of U.S. dollars, at three points in time.
How to read it. The first bar is the pre-crisis baseline. The middle bar is the peak after years of large-scale asset purchases. The last bar shows some shrinkage, but the balance sheet remains several times its 2008 size.
Why it matters. This is power Norman never had: central banks now hold trillions in assets, so their decisions ripple through mortgages, share prices and government borrowing costs.
Approximate values from Federal Reserve data. Verify current figures before quoting.
3. Norman's era at a glance
- 1920Montagu Norman becomes Governor of the Bank of England.
- 1925Norman writes to Benjamin Strong of the New York Fed, hoping to start a private central banks' club.
- 1929Stock markets peak and crash while the Young Plan sets up the BIS to handle German reparations.
- 1930The Bank for International Settlements opens in Basel.
- 1932Norman is reappointed and, at a London dinner, concedes that the world's economic disorder is beyond any one person's control.
- 1944Norman leaves the Bank after twenty-four years.
What it shows. The key dates in the story, in order.
How to read it. Follow the line down. The dream of a private club (1925) is realised as the BIS (1930), but only after the crash (1929) had already shown the limits of what bankers could control.
Why it matters. The sequence explains the article's central irony: the institution built to bring order arrived just as disorder took over.
Comments
Post a Comment