Liquidity Policy Liquidity Policy and Central and Central

Banks in Banks in Historical Historical

PerspectivePerspectiveHarold JamesHarold James

Princeton and EUIPrinceton and EUI

First Central BanksFirst Central Banks

Swedish Riksbank (1668)Swedish Riksbank (1668) Bank of England (1694)Bank of England (1694) Management of Public DebtManagement of Public Debt

Bank of EnglandBank of England

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

Walter Bagehot: Walter Bagehot: Lombard StreetLombard Street

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

……. to 2008. to 2008

ECB, October 12, 2008: ``We need ECB, October 12, 2008: ``We need new steps if we can't face the new steps if we can't face the situation with thesituation with theinstruments we have.”instruments we have.”

““We imagine being even more open We imagine being even more open in the question of what's legitimate.''in the question of what's legitimate.''

The ReichsbankThe Reichsbank

1871 German Unification1871 German Unification 1873 Financial panic 1873 Financial panic

(Gruenderkrach)(Gruenderkrach) 1875 Reichsbank1875 Reichsbank

Liquidity Management in Liquidity Management in CrisisCrisis

1901: failure of Dresdner 1901: failure of Dresdner Kreditanstalt and Leipziger BankKreditanstalt and Leipziger Bank

Moral hazard problem: 1890-1910 Moral hazard problem: 1890-1910 cash reserves fell as proportion of cash reserves fell as proportion of liabilities from 15 to 7.6 percentliabilities from 15 to 7.6 percent

… … in other extreme in other extreme circumstancescircumstances

1923/4 stabilization1923/4 stabilization 1924 credit stop1924 credit stop 1929 and 1931 credit rationing 1929 and 1931 credit rationing

(under gold standard constraint)(under gold standard constraint)

… … in more extreme in more extreme circumstancescircumstances

Weimar hyper-inflationWeimar hyper-inflation Rudolf von Havenstein appointed after Rudolf von Havenstein appointed after

panic of 1907panic of 1907 Viewed as liquidity problem: “It is not Viewed as liquidity problem: “It is not

disputed that central bank credit disputed that central bank credit increases the circulation of paper; but to increases the circulation of paper; but to the extent to which it gives economically the extent to which it gives economically desirable and needed credits, which help desirable and needed credits, which help production and the sale of goods, it does production and the sale of goods, it does not create artificial purchasing power.”not create artificial purchasing power.”

Federal ReserveFederal Reserve

1907 Panic1907 Panic National Monetary CommissionNational Monetary Commission 1914 establishment of Federal 1914 establishment of Federal

ReserveReserve

Swiss National BankSwiss National Bank

Real bills doctrineReal bills doctrine Main task “to regulate the monetary Main task “to regulate the monetary

circulation in the country and to circulation in the country and to facilitate payments.”facilitate payments.”

During WWI redefined: “to support During WWI redefined: “to support work and create jobs.”work and create jobs.”