Jeremy Clift
Published Date:
October 2014
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Michel Camdessus

Well, friends, you can imagine that I am a bit overwhelmed by what I have just heard. I had the impression that you were talking about somebody else, Christine. But let me thank you for this kind introduction and, also, for the pleasure of being back here at the Fund. It’s like coming home, a very warm and welcome home.

It’s true that I spent 13 years at the IMF. And it’s my great pleasure to see many familiar faces in this huge audience.

Plenty of moments come to mind, all of them of very high pressure and you have mentioned a few of them, Madam Managing Director. Moments of high pressure, but higher excitement, I should say. And all of those moments contributing to create the very special atmosphere of this institution—dynamic, professional, focused, with people never satisfied with what they have just done and looking forward to finding ways of doing better. This is, to my judgment, the essence of the IMF.

So thank you again for this great pleasure and for the great honor, totally undeserved—of giving my name to this lecture. Totally undeserved, but this is something between you and I that we will have to discuss further later on. I am proud of it and the Chair of the Federal Reserve adds her prestige to the event and to the lecture series with her presence here today.

It does make great sense to devote further intellectual efforts to the issues around central banking. Even if many of you here know that I have not been a central banker all my life. I started in the French Ministry of Finance. At the time, the Banque de France was not yet independent. And we had a saying—in the words of Napoleon Bonaparte, who created the Banque de France—that the bank must be in the hands of the state, but not too much. And you can be sure that I did everything I could to comply with the second part of the sentence.

“Today, perhaps even more than in the past, everybody recognizes that the economic well-being of nations depends on the quality of their monetary policies.”

The Banque de France finally got her independence in 1993. At the time, yes, many other institutions made this change, a change that is certainly one of the most profound changes in central banking of recent decades. Today, perhaps even more than in the past, everybody recognizes that the economic well-being of nations depends on the quality of their monetary policies. So one couldn’t imagine a more important topic for a new lecture series here at the IMF.

But why is central banking so crucial? Obviously, because monetary stability is a key component of the common good, a global common as they say in New York, no? Yes, and by “stability” we mean low and stable inflation. And we know from bitter experience, and so many bitter experiences in the archives of the IMF, about the damage that high and volatile inflation can inflict. And we know much better now, also, the pernicious effects of deflation.

We also understand clearly now that to achieve price stability, we need a policy framework directed toward the financial sector, something that was not at all that familiar when I joined the IMF. The financial sector was an area where we were not allowed to go. And I remember a tremendous conversation with Mrs. Thatcher about that when I went to see her, and we started discussing suggestions I wanted to make to the banking community. She told me never to lecture the bankers. Never. We continued lecturing [each other] a little bit about the banks; nevertheless, we were on difficult ground.

There are additional reasons for the centrality of central banking and something that is unique: their ability to respond quickly to shocks. Fiscal and structural policies are fundamentally important, but they are not able to change course as quickly as monetary policy. And, of course, we have just had a very good demonstration of that with the crisis that erupted in 2007. Without the timely and decisive actions of the U.S. Federal Reserve and other central banks around the world, the crisis would have been much, much worse.

Well, suffice to justify the name of the lectures, but what about the principle of the lectures. If we go back to the history you have already helped us to revisit, Christine, we see many examples of the changes that have had to be introduced in the central banking universe.

“Without the timely and decisive actions of the U.S. Federal Reserve and other central banks around the world, the crisis would have been much, much worse.”

We had this huge transformation of Eastern Europe and the former Soviet republics. And there, of course, the IMF staff had to do the extraordinary job of being there and providing technical assistance and coordinating efforts to create central banking in a universe where money and monetary policy did not have the same meaning. As a matter of fact, they had no meaning at all, and all of that had to be created from scratch, creating the central banks along with the supporting banking, payments, accounting, and other financial infrastructure. That was enormous. And here I must take off my hat to the exceptional dedication of the staff working in this field.

And then we had the Asian crisis. It was a very different kind of episode. We had central banks there, and they were severely tested in the affected countries. We had a few false starts in some cases, but others took decisive stabilization measures. But more importantly, probably, are the lessons that were learned from them, by them, and by the IMF.

One lesson was that financial vulnerabilities can build even when microeconomic fundamentals appear sound. This was one of the surprises of that moment.

Another was that the risks from large and volatile capital flows equaled large, or larger foreign exchange buffers. And, of course, we had some difficulties in convincing our membership that you had to add a zero to the numbers of our loans in several countries. We had some problems with that, but we did it.

And then we had the changes in central banking policy frameworks introduced here, also, with an enormous effort from the staff, and they have paid off. And we had a demonstration of this payoff in the fact that all these countries have been extremely quick in weathering the recent global crisis.

Of course, one could regret that the advanced economies had not realized completely enough after the Asian crisis that their own financial systems, too, might be vulnerable and other kinds of surprises might emerge in this world. And we paid a certain price for that, a very certain price.

But after expressing these thoughts, I must say that on the positive side—in Europe, which launched the extraordinary experience of creating a new currency—we have seen the central banks and, more broadly, the governments draw two important lessons from this crisis.

One lesson is the importance of adhering to fiscal rules. They adhere intellectually to this concept, but adhering to changing the landscape is another thing. But this lesson has been well received.

And another lesson is the importance of common arrangements for banking and financial supervision and crisis resolution, an issue for which my predecessor, our predecessor here, Jacques de Larosière, has made a very superb job of over the last few years.

Another change was inflation targeting, a Canadian invention at the end of the 1990s, which went around during my last stay here and was an enormous transition that continues running its course.

All of this is to say that one of the features of the central banking, which was for so long an archetype of immobility, of superb immobility, is that it is always changing.

Now, the definition of central banking is change. Changes are at times small; at others they are deep and widespread. Changes are often induced by outside pressures, but can also happen by design. We know all of that. In any case, it is important that the implications of such changes be carefully considered.

One anecdote. When I was appointed central bank governor in Paris, I went immediately to see my predecessor, Renaud de La Genière, to have his instructions. And he gave me only one. “Remember, my friend, in central banking nothing is urgent. Nothing is urgent. Always take all the time needed to carefully think about [an issue] and then finally either the crisis will be over or you will make the right decision.”

Well, I was not 100 percent sure that he was right, but, nevertheless, I kept that in my mind. And the conclusion I drew is that you are to think well and do two things: one, invest in capacity, talent, applied research, and analysis to try to stay on the cutting edge, and second to remain open to new ideas and perspectives.

Now, in a new period of questioning, due to the global financial crisis, I couldn’t agree more with what the managing director just said, the crisis has taught us that monetary policy, rules, principles, practices, were in the past years a bit too simple; monetary policy can creatively—the word “creatively” was not very popular in central banking several years ago—can creatively deploy temporarily nonstandard or unconventional measures when necessary, that financial stability equals new tools, such as macroprudential policies. And, of course, the eternal lesson that preventing crises is substantially less costly than managing and containing them.

But this crisis has left us also with major unanswered questions in the immense, uncharted field that central banks have in common: the international monetary system.

Here, I couldn’t do better than to echo the words of my elder brother in central banking, Paul Volcker, who, in his remarks at the Annual Meetings one month ago here, among plenty of interesting points, alluded to the so-called exorbitant privilege. Paul has been a kind of missionary around the world since the beginning of the 1970s. History should keep that on record.

Well, but what I wanted to say is that I would like really wholeheartedly to repeat your plea for attention to the need for developing a rule-based, cooperatively managed monetary system worthy of our time. I look forward with high expectations to the measures the central banking community will adopt to face this challenge in their continuing quest for frameworks and policies that would lead us to greater global stability and prosperity.

I have no doubt that the IMF, faithful to its purpose to promote international monetary cooperation and to provide the machinery for consultation and collaboration on international monetary problems, will contribute, and—these are Paul’s words—provide the necessary analysis and well-conceived approaches that could command attention and support in this long journey toward a better system. May our new lectures contribute to it. Thank you.

Thank you all very much.

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