Gabriel Makhlouf: Rebuilding social capital - the role of central banks

Remarks by Mr Gabriel Makhlouf, Governor of the Central Bank of Ireland, at the 175th Anniversary of Banco de Portugal, Lisbon, 1 April 2022.

The views expressed in this speech are those of the speaker and not the view of the BIS.

Boa tarde,

Banco de Portugal's Money Museum is certainly an appropriate place to discuss today's topic. The museum's focus on the relationship between money, individuals and human societies is at the core of the role of central banks in building (or indeed rebuilding) social capital.

Back to the beginning

What is social capital? There are many definitions and the history of the concept goes back to Adam Smith, de Tocqueville and even Aristotle.

Ultimately, it's about how people connect to one another.

I like to think of it as "the social connections, attitudes and norms that contribute to societal wellbeing by promoting coordination and collaboration between people and groups in society."

This is still very nebulous for an audience of economists (and I will avoid discussing payoff matrices, dominant strategies, and game theoretic equilibria to make my point!). But social capital is essential to what we – central banks – do every day and why we do it.

To understand why, it is worth going back to the beginning.

Central banks today have many functions but, fundamentally, they exist to provide monetary stability.

In 1668 the world's oldest central bank, Sveriges Riksbank, was "founded from the ruins of Stockholms Banco" a failed private bank. Shortly afterwards in 1694 "the Bank of England began as a private bank that would act as a banker to the Government. It was primarily founded to fund the war effort against France."

Many of the early central banks were established to deal with monetary disarray.

Political and financial turmoil provides the context for the establishment of the Banco de Portugal 175 years ago.

In 1846 the Portuguese State was on the "brink of bankruptcy", the country was in civil war and as the museum exhibits explain "the armies of the Provisional Junta of the Supreme Government of the Kingdom, based in Porto, were advancing towards Lisbon in order to remove the new government of Costa Cabral." The Bank was granted the power to issue banknotes convertible into hard currency.

The Banque de France "was established by Napoleon in 1800 to stabilize the currency after the hyperinflation of paper money during the French Revolution, as well as to aid in government finance. Early central banks issued private notes which served as currency, and they often had a monopoly over such note issue."

Money is a symbol of stability and central banks play an important role in maintaining this stability.  It may be obvious but it's worth saying: the stability of money plays a critical role in the stability of society.

The role of money (as a store of value, a unit of account and a medium of exchange) is also an important instrument in how we connect with each other, through trade, commerce, and our everyday interactions and hence in building social capital.