Interest Groups and Central Bank Credit Policies: Evidence From 1600-1914

Before the 19th century, nearly all central banks financed government spending, but as the centuries passed direct government financing became taboo. Using original data from 69 central banks established between 1600-1914, this study traces a shift away from government financing and towards increased support for private sector credit via discounting commercial bills of exchange beginning in the 18th century. What drove this transformation in central bank credit policies? Evidence suggests that central bank credit policies are driven by the composition of a government’s supporting coalition, rather than structural economic forces. Security-minded interest groups motivate governments to establish central banks that lend back to themselves, while economic interest groups motivate governments to establish central banks that discount bills of exchange. Discrete time survival analysis supports these contentions. This research highlights how political-historical context and the preferences of specific interest groups shaped the long-term evolution of central banking.