How the Bank of England managed the financial crisis of 1847

by Kilian Rieder (University of Oxford)

lancs-new-branch-bank-of-england-manchester-antique-print-1847-249638-p
New Branch Bank of England, Manchester, antique print, 1847. Available at <https://www.antiquemapsandprints.com/lancs-new-branch-bank-of-england-manchester-antique-print-1847-101568-p.asp&gt;

What drives a central bank’s decision to grant or refuse liquidity provision during a financial crisis? How does the central bank manage counterparty risk during such periods of high demand for liquidity, when time constraints make it hard to process all relevant information? How does a central bank juggle the provision of large amounts of liquidity with its monetary policy obligations?

All of these questions were live issues for the Bank of England during the financial crisis of 1847 just as they would be in 2007. My research uses archival data to shed light on these questions by looking at the Bank’s discount window policies in the crisis year of 1847.

The Bank had to manage the 1847 financial crisis despite being limited by a legal monetary policy provision in the Act to back any expansion of its note issue with gold. It is often cited as the last episode of financial distress during which the Bank rationed central bank liquidity before fully assuming its role as a lender of last resort (Bignon et al, 2012).

We find that the Bank did not engage in any kind of simple threshold rationing but rather monitored and managed its private sector asset holdings in similar ways to central banks have developed since the financial crisis of 2007. In another echo of the recent crisis, the Bank of England also required an indemnity from the UK government in 1847 allowing the Bank to supply more liquidity than it was legally allowed. This indemnity became part of the ‘reaction function’ in future financial crises.

Most importantly, the year 1847 witnessed the introduction of a sophisticated discount ledger system at the Bank. The Bank used the ledger system to record systematically its day-to-day transactions with key counterparties. Discount loan applicants submitted bills in parcels, sometimes containing a hundred or more, which the Bank would have to analyse collectively ‘on the fly’.

The Bank would reject those it didn’t like and then discount the remainder, typically charging a single interest rate. Subsequently, the parcels were ‘unpacked’ into individual bills in the separate customer ‘with and upon ledgers’ where they were classified under the name of their discounter and acceptor alongside several other characteristics at the bill level (drawer, place of origin, maturity, amount, etc.). By analysing these bills and their characteristics we are better able to understanding the Bank’s discount window policies.

We first find evidence that during crisis weeks the Bank was more likely to reject demands for credit from bill brokers – the money market mutual funds of their time – while favouring a small group of regular large discounters. Equally, firms associated with the commercial crisis and the corn price speculation in 1847 (many of which subsequently failed) were less likely to obtain central bank credit. The Bank was discerning about whom it lent to and the discount window was not entirely ‘frosted’ as suggested by Capie (2001).

But our findings support Capie’s main hypothesis that the decision whether to accept or reject a bill depended largely on individual bill characteristics. The Bank appeared to use a set of rules to decide on this, which it applied consistently in both crisis weeks and non-crisis weeks. Most ‘collateral characteristics’ – inter alia, the quality of the names endorsing a bill – were highly significant factors driving the Bank’s decision to reject.

This finding supports the idea that the Bank needed to be active in monitoring key counterparties in the financial system well before formal methods of supervision in the twentieth century, echoing results obtained by Flandreau and Ugolini (2011) for the later 1866 crisis.

 

Decimalising the pound: a victory for the gentlemanly City against the forces of modernity?

by Andy Cook (University of Huddersfield)

 

1813 guinea

Some media commentators have identified the decimalisation of the UK’s currency in 1971 as the start of a submerging of British identity. For example, writing in the Daily Mail, Dominic Sandbrook characterises it as ‘marking the end of a proud history of defiant insularity and the beginning of the creeping ­Europeanisation of ­Britain’s institutions.’

This research, based on Cabinet papers, Bank of England archives, Parliamentary records and other sources, reveals that this interpretation is spurious and reflects more modern preoccupations with the arguments that dominated much of the Brexit debate, rather than the actual motivation of key players at the time.

The research examines arguments made by the proponents of alternative systems based on either decimalising the pound, or creating a new unit worth the equivalent of 10 shillings. South Africa, Australia and New Zealand had all recently adopted a 10-shilling unit, and this system was favoured by a wide range of interest groups in the UK, representing consumers, retailers, small and large businesses, and media commentators.

Virtually a lone voice in lobbying for retention of the pound was the City of London, and its arguments, articulated by the Bank of England, were based on a traditional attachment to the international status of sterling. These arguments were accepted, both by the Committee of Enquiry on Decimal currency, which reported in 1963, and, in 1966, by a Labour government headed by Harold Wilson, who shared the City’s emotional attachment to the pound.

Yet by 1960, the UK had faced the imminent prospect of being virtually the only country retaining non-decimal coinage. Most key economic players agreed that decimalisation was necessary and the only significant bone of contention was the choice of system.

Most informed opinion favoured a new major unit equivalent to 10 shillings, as reflected in evidence given by retailers and other businesses to the Committee of Enquiry on Decimal Coinage, and the formation of a Decimal Action Committee by the Consumers Association to press for such a system.

The City, represented by the Bank of England, was implacably opposed to such a system, arguing that the pound’s international prestige was crucial to underpinning the position of the City as a leading financial centre. This assertion was not evidence-based, and internal Bank documents acknowledge that their argument was ‘to some extent based on sentiment’.

This sentiment was shared by Harold Wilson, whose government announced the decision to introduce decimal currency based on the pound in 1966. Five years earlier, he had made an emotional plea to keep the pound arguing that ‘the world will lose something if the pound disappears from the markets of the world’.

Far from being the end of ‘defiant insularity’, the decision to retain a higher-value basic currency unit of any major economy, rather than adopting one closer in value either to the US dollar or the even lower-value European currencies, reflected the desire of the City and government to maintain a distinctive symbol of Britishness, the pound, overcoming opposition from interests with more practical concerns.

RECONSTRUCTION OF MONEY SUPPLY OVER THE LONG RUN: THE CASE OF ENGLAND, 1270-1870

by Nuno Palma (University of Manchester)

This paper provides the first annual time series of coin and money supply estimates for about six hundred years of English history.

It presents a baseline set of estimates, but also considers a variety of alternative plausible scenarios and provide several robustness checks. It concentrates on carefully setting out the details for the data construction, rather than on analysis, but the hope is that these new estimates – the longest such series ever assembled, for any country – will open new vistas to help us understand the complex interaction between the real and the monetary sides of the English economy, at both business-cycle and long-run frequencies. Many applications are possible; for instance, O’Brien and Palma (2016) use it in their analysis of the Restriction period (1797-1821). Furthermore, the new methodology set out here may serve as a blueprint for a similar reconstruction of coin and money supply series for other economies for which the analogous required data is available.

The paper proposes two new estimation methods. The first, referred to as the “direct method”, is used to measure the value of government-provided, legal-tender coin supply only. This method does not consider broader forms of money such as banknotes, deposits, inland bills of exchange, government tallies, exchequer paper or private tokens, which became increasingly important from the seventeenth century onwards. The second method is an “indirect method,” which relies on a combination of information about nominal GDP with the value of coin supply or M2 known at certain benchmark periods. This permits estimating the volume of a broader measure of money supply over time. Figure 1 shows the main results.

pic
Figure 1. English nominal coin supply, 1270-1870 (log scale of base 2). The periods when direct method A cannot be seen means it coincides with the baseline method (aka direct method B). Source: my calculation based on a series of sources; see text for details.

This paper is forthcoming in The Economic History Review (currently available in early view), and the underlying data has now been included by the Bank of England in their historical database

To contact the author:
nuno.palma@manchester.ac.uk
@nunopgpalma