When extreme circumstances warrant setting up a lender of last resort within a larger currency union

From address by Professor Cormac O’Gráda, School of Economics, University College Dublin, to the Central Bank of Ireland Whitaker Lecture, 29 June 2011. The context is the Irish Free State’s 1 for 1 currency peg with the pound sterling, a continuation of the pre-1922 UK pound for Ireland —

The Emergency (World War II) also produced a defining moment in Irish banking history. Until then, Ireland’s lack of a central bank had not worried its joint-stock banks; on the contrary, they did not relish the idea. For over a century the Bank of Ireland had played the role of quasi-central bank, while looking on the Bank of England as its friend in need. Just a few days before the outbreak of war a delegation from College Green (Bank of Ireland HQ) traveled to London for reassurance about the availability of foreign exchange and the free repatriation of Irish bank assets held in London. In what must have been a difficult moment for the Irish bankers, the Governor of the Bank of England Montague Norman told them that:

notwithstanding the long and intimate relations between the two institutions he was not prepared to commit the Bank of England by promising to come to the assistance of the Bank of Ireland in an emergency of the nature under discussion. As an ordinary banking transaction there would be no question whatever about making an advance to the Bank, but in an emergency situation there was an important principal (sic) involved. The Bank of England looked upon Eire as a Dominion… Mr. Norman stressed the view that the Bank ‘whose centre of gravity was in Eire’ should look to their own Treasury or the Currency Commission to help them over difficult periods. Sir John [Keane, Deputy Governor of the Bank of Ireland] pointed out that the position in Eire did not admit of a solution in that way, as the [Irish] Treasury came to the Bank when it was short of funds, and the [Irish] Currency Commission was not a lender of the last resort. Mr. Norman then urged that as Eire was a separate political entity it should have a Central Bank of its own.

And so it took the Emergency and Montagu Norman to persuade the Bank of Ireland to switch its loyalty fully to the new state, and for the other joint stock banks to appreciate the need for an Irish central bank. The Central Bank Act followed in 1942.

The sterling currency union nonetheless survived up until Ireland joining the Exchange Rate Mechanism of the European Monetary System in 1979.

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