http://weber.ucsd.edu/~jlbroz/broz_grossman_EEH.pdf

Paying for privilege: the political economy of Bank of England charters, 1694–1844

Certain domestic institutions are sources of international power, by way of their abilities to encourage investment and to mobilize social resources in wartime. For example, states with democratic institutions almost always win the wars they e ght, a regularity known as the ‘‘democratic advantage.’’1 This result is intriguing since it rests on intuition about the effects of military competition on domestic institutions: rivalry among states may put pressure on sovereigns to provide the political foundations for secure markets in order to enlarge future military capabilities. In this article I address the role of war in inducing domestic institutions that allowed governments to credibly commit to promises to pay their debts—a probable source of democracies’ edge in war. Rather than investigate the entire range of protections affected by democratic institutions—a life’s endeavor, as the work of Douglass North attests—I focus on a single e nancial element of the reforms: the innovation of central banking. Britain’s superior e nancial, economic, and military performance after 1689 rested in large part on the establishment of the Bank of England. 2 The central bank provided a commitment technology that improved the government’s ability to borrow, a need impelled by intense military competition. 3 My motivation derives from puzzles concerning the origins and the diffusion of credibility-enhancing institutions like central banks. Institutions resolve collective action problems, but institutions themselves are public goods, meaning that their origins are subject to the same dilemmas they are meant to resolve. 4 What then explains the incentives of self-interested and free-riding individuals to contribute to

/pdf/the-origins-of-central-banking-solutions-to-the-free-rider-130g984yfq.pdf

The Origins of Central Banking: Solutions to the Free-Rider Problem

In the last two decades, there has been a global sea change in the theory and practice of central banking. The currently dominant ‘best practice’ approach to central banking consists of the following: (1) central bank independence (2) a focus on inflation fighting (including adopting formal ‘inflation targeting’) and (3) the use of indirect methods of monetary policy (that is, short-term interest rates as opposed to direct methods such as credit ceilings). This paper argues that this neo-liberal approach to central banking is highly idiosyncratic in that, as a package, it is dramatically different from the historically dominant theory and practice of central banking, not only in the developing world, but, notably, in the now developed countries themselves. Throughout the early and recent history of central banking in the US, England, Europe, and elsewhere, financing governments, managing exchange rates, and supporting economic sectors by using ‘direct methods’ of intervention have been among the most important tasks of central banking and, indeed, in many cases, were among the reasons for their existence. The neo-liberal central bank policy package, then, is drastically out of step with the history and dominant practice of central banking throughout most of its history.

https://www.econstor.eu/bitstream/10419/63574/1/513074155.pdf

Central Banks as Agents of Economic Development

This article argues that the institutional mandates of central banks have an important influence on inflation outcomes in the advanced industrialized countries. Central banks that are also responsible for bank regulation will be more sensitive to the profitability and stability of the banking sector and therefore less likely to alter interest rates solely on the basis of price stability objectives. When bank regulation is assigned to a separate agency, the central bank is more likely to enact tighter monetary policies geared solely toward maintaining price stability. An econometric analysis of inflation in 23 industrial countries from 1975 to 1999 reveals that inflation is significantly higher in those countries with central banks that are vested with bank regulatory responsibility, although this effect is conditional on the choice of exchange rate regime and the relative size of the banking sector. We also conduct a case study of the Bank of England, which lost its bank regulatory authority to a new agen...

https://www.jstor.org/stable/10.1017/S0022381608080687

Financial Regulation, Monetary Policy, and Inflation in the Industrialized World

Monetary policy regimes encompass the constraints or limits imposed by custom, institutions and nature on the ability of the monetary authorities to influence the evolution of macroeconomic aggregates This chapter surveys the historical experience of both international and domestic (national) aspects of monetary regimes from the nineteenth century to the present We first survey the experience of four broad international monetary regimes: the classical gold standard 1880–1914; the interwar period in which a short-lived restoration of the gold standard prevailed; the postwar Bretton Woods international monetary system (1946–1971) indirectly linked to gold; the recent managed float period (1971–1995) We then present in some detail the institutional arrangements and policy actions of the Federal Reserve in the United States as an important example of a domestic policy regime The survey of the Federal Reserve subdivides the demarcated broad international policy regimes into a number of episodes A salient theme in our survey is that the convertibility rule or principle that dominated both domestic and international aspects of the monetary regime before World War I has since declined in its relevance At the same time, policymakers within major nations placed more emphasis on stabilizing the real economy Policy techniques and doctrine that developed under the pre-World War I convertible regime proved to be inadequate to deal with domestic stabilization goals in the interwar period, setting the stage for the Great Depression In the post-World War II era, the complete abandonment of the convertibility principle, and its replacement by the goal of full employment, combined with the legacy of inadequate policy tools and theory from the interwar period, set the stage for the Great Inflation of the 1970s The lessons from that experience have convinced monetary authorities to reemphasize the goal of low inflation, as it were, committing themselves to rule-like behavior

Chapter 3 Monetary policy regimes and economic performance: The historical record

Introduction On the occasion of the 300th anniversary of the Bank of England there is a natural tendency to look back at the historical record of central banks, to examine their development to the present time, and, more daringly, to speculate about their future. Although it is hard to depart from a chronologically ordered narrative (particularly since two of the authors are economic historians), we have tried to structure our paper by concentrating on the key functions undertaken by the central bank. The main objective of central banks, over the centuries, has been the maintenance of the (internal and external) value of the currency, and we, therefore, turn in section 1.2 to an historical account of central bank macroeconomic policy. While the maintenance of the value of the currency has, historically, almost always been achieved via the same instrument, varying the central bank's discount rate, this objective has not always meant the same thing. Under the classical gold standard the objective was cast in terms of metal convertibility: that is, the value of central bank notes was expressed in terms of their metal (gold) ‘content’, which central banks attempted to maintain at stated levels over time. The purchasing power of currency relative to goods in general (i.e. to a price index) was thus only indirectly an objective of central banks, with gold acting as the true nominal anchor. With the gradual erosion of the gold standard throughout the first half of the twentieth century, and its replacement everywhere by a pure fiat standard, the objective of central bank policy has now been recast in terms of price stability.

Forest Capie

Papers

The development of central banking