The evolution of central banking

Institutions known as central banks emerged or were established as commercial banks or government banks. Their evolution into central banks came with their monopoly issuing notes and their role as lender of last resort, among other functions. Carrying out commercial business on a large scale created a conflict of interest, so this practice was abandoned. Establishing the right degree of dependence was difficult, and changed in times of crisis. Independence is important: it helps to establish reputation, which is everything in banking. The Great Depression, widely attributed to inept Central Bank behavior, interrupted central bank independence, but poor price behavior brought about its return. In the 19th century, laissez faire and the gold standard encouraged and sometimes allowed for considerable independence. Greater changes came in the new dirigiste environment following the Great Depression and the rise of the managed economy. Economies in transition confront high inflation and the problem of maintaining monetary stability just as newly independent developing countries did in the 1960s. How can inflation be controlled? Under fiat regimes, the money supply is controlled by the domestic monetary authority. But can they control monetary growth? Prior and current records are not encouraging. Will authorities have the credibility they need? Options include maintaining a fixed exchange rate or reviving currency boards. Currency boards function like an independent central bank, holding reserves and tying domestic currency to strong foreign currency. There are drawbacks to currency boards, especially for countries in transition. They require a considerable sacrifice of sovereignty, and are unlikely to appeal to countries that are only beginning to recover lost sovereignty.Financial Intermediation,Payment Systems&Infrastructure,Banks&Banking Reform,Economic Theory&Research,Financial Crisis Management&Restructuring,Banks&Banking Reform,Economic Stabilization,Financial Intermediation,Economic Theory&Research,Financial Crisis Management&Restructuring

Organisational Control an English Commercial Bank Lending to Industry in the decades before Wowrld War I

Editada en la Fundación Empresa PúblicaLos años 1880-1914 fueron de crecimiento institucional y de sistemática consolidación en el sector bancario inglés. A principios del siglo XIX se produjeron una serie de crisis que afectaron seriamente a los bancos de Inglaterra y Gales. Una de sus consecuencias fue generar preocupación sobre la liquidez de los bancos, planteándose simultáneamente interrogantes sobre la adecuada composición de los créditos al sector privado. El artículo examina los procedimientos utilizados por los bancos para minimizar los riesgos y estudia algunos aspectos de las prácticas crediticias que se aplicaron en las regiones más industrializadas de Gran Bretaña. En la primera parte se resume la organización y los métodos de control adoptados por las principales sociedades anónimas bancarias. La segunda presenta un esquema para la evaluación y seguimiento de los créditos. Y la tercera analiza las prácticas de los bancos en sus préstamos al sector industrial.The years 1880-1914 were years of institutional growth and systemic consolidation for English banks. In the early and middle decades of the nineteenth century there had been a number of crises which had affected the banks of England and Wales. On effect was to raise anxieties about the liquidity of bank balance sheets, including fundamental questions about the composition of lending to the private sector. In particular, the paper discusses the procedures used by the banks to minimise risk and examines some aspects of actual lending practice as it applied to the industrial regions of Britain. There are three parís to the paper. The fírst briefly summarises the organisational and control structures that were introduced by the large joint-stock banks to standardise lending at their numerous branches. The second section introduces a schema íot the assessment and monitoring of loans, and the third discusses some of the banks' pre-1914 practices with regard to loans to industry.Publicad

Surveys on Electronic Money

This paper investigates the views of electronic money operators and innovators on the possibilities and implications of e-money, especially with respect to replacing central bank money as well as technical issues regarding e-money, its implications for the financial industry and central banking. This has been done using surveys of major e-money innovators and operators, based on the assumption that these operators and innovators are likely to shape the future framework for e-money schemes. It seems that innovators and operators are quite confident about the future of e-money – despite problems and obstacles surrounding current testing – and that central banks’ monopoly of the issuance of money as a medium of exchange will no longer be unchallenged.electronic money; financial regulation; central banks; financial innovation

Transparency and financial reporting in mid-twentieth century British banking

Post-print draft dated 30 November 2007. Final version published by Elsevier; available online at http://www.journals.elsevier.com/Until 1970, British banks were firm believers in the merits of ‘non-disclosure’, which obscured their ‘true’ profits and capital through profits smoothing and the use of hidden reserves. Many other companies adopted the same view for as long as legislation permitted, but there were special reasons why non-disclosure endured for longer in banking. This paper examines the persistence and demise of non-disclosure in banking, placing it in the context of the wider development of financial reporting in Britain, and highlights similarities and differences in financial reporting between banks and other types of company

The slope of the term structure and recessions: evidence from the UK, 1822-2016

This paper investigates whether the inversion of the yield spread, with short-term rates higher than the long-term rate, has been and remains an effective predictor of recessions in the U.K. using monthly data from 1822 to 2016. Indicators of recession are constructed in a variety of ways depending on the availability and properties of the data in the pre-World War 1, inter-war, and post-World War 2 periods. It is found that, using peak-to-trough recession indicators and a probit regression model, there is reasonably strong evidence to support the inverted yield spread being a predictor of recessions for lead times up to eighteen months in all three period

The Quantity Theory of Money is Valid. The New Keynesians are Wrong!

We test the quantity theory of money (QTM) using a novel approach and a large new sample. We do not follow the usual approach of first differentiating the logarithm of the Cambridge equation to obtain an equation relating the growth rate of real GDP, the growth rate of money and inflation. These variables must then again be ‘integrated’ by averaging in order to obtain stable relationships. Instead we suggest a much simpler procedure for testing directly the stability of the coefficient of the Cambridge equation. For 125 countries and post-war data we find the coefficient to be surprisingly stable. We do not select for high inflation episodes as was done in most empirical studies; inflation rates do not even appear in our data set. Much work supporting the QTM has been done by economic historians and at the University of Chicago by Milton Friedman and his associates. The QTM was a foundation stone of the monetarist revolution. Subsequently belief in it waned. The currently dominant New Keynesian School, implicitly or explicitly denies the validity of the QTM. We survey this history and argue that the QTM is valid and New Keynesians are wrong