Liquidity Policy and Central Banks in Historical Perspective

1. Liquidity Policy and Central Banks in Historical Perspective Harold James Princeton and EUI

2. First Central Banks Swedish Riksbank (1668) Bank of England (1694) Management of Public Debt

3. Bank of England 1825: “we lent it by every possible means and in modes we had never adopted before; we took in stock on security, we purchased Exchequer bills, we not only discounted outright, but we made advances on the deposit of bills of exchange to an immense amount, in short by every means consistent with the safety of the Bank, and we were not on some occasions over-nice.”

4. Walter Bagehot: Lombard Street 1866 Economist article: “The Bank agrees, in fact, if not in name, to make unlimited advances on proper security to anyone who applies for it….. the evident and intended implication is that under like circumstances the Bank would act again as it has now acted.”

5. …. to 2008 ECB, October 12, 2008: ``We need new steps if we can't face the situation with theinstruments we have.” “We imagine being even more open in the question of what's legitimate.''

6. The Reichsbank 1871 German Unification 1873 Financial panic (Gruenderkrach) 1875 Reichsbank

7. Liquidity Management in Crisis 1901: failure of Dresdner Kreditanstalt and Leipziger Bank Moral hazard problem: 1890-1910 cash reserves fell as proportion of liabilities from 15 to 7.6 percent

8. … in other extreme circumstances 1923/4 stabilization 1924 credit stop 1929 and 1931 credit rationing (under gold standard constraint)

9. … in more extreme circumstances Weimar hyper-inflation Rudolf von Havenstein appointed after panic of 1907 Viewed as liquidity problem: “It is not disputed that central bank credit increases the circulation of paper; but to the extent to which it gives economically desirable and needed credits, which help production and the sale of goods, it does not create artificial purchasing power.”

10. Federal Reserve 1907 Panic National Monetary Commission 1914 establishment of Federal Reserve

11. Swiss National Bank Real bills doctrine Main task “to regulate the monetary circulation in the country and to facilitate payments.” During WWI redefined: “to support work and create jobs.”