Liquidity Management and Central Bank Strength: Bank of England Operations Reloaded, 1889-1910

Ugolini, Stefano Working Paper Liquidity Management and Central Bank Strength: Bank of England Operations Reloaded, 1889-1910 Working Paper, No. 10/2016 Provided in Cooperation with: Norges Bank, Oslo Suggested Citation: Ugolini, Stefano (2016) : Liquidity Management and Central Bank Strength: Bank of England Operations Reloaded, 1889-1910, Working Paper, No. 10/2016, ISBN 978-82-7553-927-2, Norges Bank, Oslo, https://hdl.handle.net/11250/2495719 This Version is available at: https://hdl.handle.net/10419/210099 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. 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If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by-nc-nd/4.0/deed.no Liquidity Management and Central Bank Strength: Bank of England Operations Reloaded, 1889-1910 10 | 2016 AUTHOR: STEFANO UGOLINI NORGES BANK’S BICENTENARY PROJECT WORKING PAPER NORGES BANK WORKING PAPER XX | 2014 RAPPORTNAVN 2 Working papers fra Norges Bank, fra 1992/1 til 2009/2 kan bestilles over e-post: [email protected] Fra 1999 og senere er publikasjonene tilgjengelige på www.norges-bank.no Working papers inneholder forskningsarbeider og utredninger som vanligvis ikke har fått sin endelige form. Hensikten er blant annet at forfatteren kan motta kommentarer fra kolleger og andre interesserte. Synspunkter og konklusjoner i arbeidene står for forfatternes regning. Working papers from Norges Bank, from 1992/1 to 2009/2 can be ordered by e-mail: [email protected] Working papers from 1999 onwards are available on www.norges-bank.no Norges Bank’s working papers present research projects and reports (not usually in their final form) and are intended inter alia to enable the author to benefit from the comments of colleagues and other interested parties. Views and conclusions expressed in working papers are the responsibility of the authors alone. ISSN 1502-8143 (online) ISBN 978-82-7553-927-2 (online) Liquidity Management and Central Bank Strength: Bank of England Operations Reloaded, 1889-1910 Stefano Ugolini* Abstract: Is a strong commitment to monetary stability enough to ensure credibility? The recent literature suggests it might not be if the central bank cannot perform pure interest rate policy and has to resort to balance sheet policy: the central bank’s financial strength (i.e. the long-term sustainability of its policy) is also a determinant of credibility. This paper provides historical evidence on the issue by focusing on the case of the Bank of England at the heyday of the classical gold standard. It shows that as the Bank was not perceived as having the means to fulfil all of its obligations, the efficacy of its interest rate policy was poor. Failing to reform for political economy reasons, the Bank eventually had to default on its formal convertibility mandate. JEL: E42, E43, E58, N13. Keywords: Central banking, institutional design, monetary policy implementation, reverse repos, term structure of interest rates, gold standard. * University of Toulouse (Institute of Political Studies and LEREPS). Contact: [email protected]. For their comments on previous drafts, I wish to thank Olivier Accominotti, Vincent Bignon, Olivier Brossard, Mark Carlson, Marcello de Cecco†, Marc Flandreau, Charles Goodhart, Clemens Jobst, Will Roberds, as well as participants to presentations at the Banque de France, Deutsche Bundesbank, Oesterreichische Nationalbank, London School of Economics, Geneva Graduate Institute, and University of Toulouse. Assistance from the archivists of the Bank of England is also gratefully acknowledged. The usual disclaimers apply. 2 Adm Boom: “How are things in the world of finance?” Mr Banks: “Never better. Money’s sound. Credit rates are moving up, up, up. And the British pound is the admiration of the world”. Walt Disney’s Mary Poppins. Credibility is key to the success of monetary policy. A priori, a central bank implementing pure interest rate policy only needs to be seriously committed to long-term price stability in order to reach this goal. But things are different when it comes to balance sheet policy. Here central bankers do not only need to prove that they are committed to their targets, but also that they have the means to pursue them. This means that credibility may also depend on the sustainability of monetary policy – or differently said, on the central bank’s financial strength.1 Is financial strength a necessary condition for successful liquidity management also when commitment to monetary stability is unquestioned? In order to shed light on this topical question, this paper provides out-of-sample evidence from a very different institutional framework than today’s. It focuses on Britain at the time of its financial heyday, when it stood at the very center of the international monetary system. The pre-WW1 Bank of England is universally considered as the symbol par excellence of an absolute engagement to conservative monetary policy. This paper points out that notwithstanding its strong commitment to the gold standard, the Bank faced credibility problems due to the inconsistency of the package of rights and obligations assigned to it. On the one hand, the Bank could not devote to pure interest rate policy because of a) its engagement to perform lending of last resort through its standing facilities and b) its lack of control over the opportunity cost of cash. On the other hand, though, the Bank also lacked adequate financial resources for performing balance sheet policy in a satisfactory way. This situation made monetary policy implementation increasingly difficult over time. Due to the strict constraints imposed on its balance sheet adjustment process, the Bank was unable to control interest rates. This exposed the country to violent fluctuations of domestic interest rates that were unanimously considered as obnoxious to the real economy. Such equilibrium was clearly suboptimal, but reform was stopped by harsh lobbying from the banking sector. As a result, central bank policy started to be viewed as less and less credible by market participants, until a domestic confidence crisis forced the Bank to violate its formal mandate. This important historical episode suggests that even a core central bank strongly committed to “good housekeeping” rules can suffer from policy credibility issues when the prospective value of its rights and obligations is dubious. The paper is structured as follows. The next section reviews the recent literature on liquidity management and central bank strength. Section 2 reviews the state-of-art knowledge on the Bank of England’s monetary policy in the period preceding WW1. Section 3 assesses the central bank’s financial strength in the context of the British banking system. Section 4 analyses the strategies put in place by the Bank in order to cope with its situation. Section 5 concludes. 1 “Financial strength” is defined as the capability to meet financial engagements. It is determined by the amount of financial resources (available or callable) but also by the extent of risk transfer mechanisms (contingent assets and liabilities). For a discussion of the concept of central bank financial strength, see Archer and Moser-Boehm (2013). 3 1. Liquidity Management and Central Bank Strength: A Review Until the recent crisis, it was conventionally thought that central banks should implement pure interest rate policy. According to this view, central bankers are only supposed to signal the level of short-term interest rate they desire and set the opportunity cost of cash (i.e. the spread between the interbank rate and the rate of remuneration of banks’ deposits). The central bank does not need to perform any kind of liquidity management: if the central bank is credible, banks will behave according to its signal without any need for open market operations to be implemented. But this can only work in a world in which access to the central bank’s standing facility is totally exceptional, so that the size of the central bank’s balance sheet is completely determined by autonomous factors. If this is not the case, the monetary authority will be forced to engage into balance sheet policy and liquidity management operations (Borio and Disyatat 2010; Bindseil and Jabłecki 2011). The wave of aggressive balance sheet policy put in place by central banks during the recent crisis has brought to the front the issue of the actual solidity of their capital structure: to what extent is policy viable in the long term when the monetary authority becomes massively exposed to potential losses? Beyond the specificities of the current situation, this debate poses the more general question of the relationship between the strength of central banks as financial organizations and their capability of performing monetary policy in an effective way. This question has long been overlooked by the economic literature. In fact, textbooks assume that the right to issue cash allows the central bank to expand liabilities at will, thus subtracting it from the basic constraints to which common banks are subjected: as the financial strength of such an organization is basically infinite, its credibility as a money issuer is thought to depend only on its willingness to comply with a number of “good housekeeping” rules. But central banks are not merely money-issuing agencies: they are complex organizations endowed with a bundle of different (and possibly conflicting) tasks. As a result, their financial strength will depend on the combined prospective value of its rights (seigniorage) and obligations (contingent assets and liabilities from monetary intervention). As the effectiveness of monetary policy crucially depends on credibility, financial strength (or differently said, the sustainability of that policy) is then a fundamental determinant of central banks’ ability to pursue their targets effectively (Stella 1997; Bindseil et al. 2004; Archer and Moser-Boehm 2013). Monetary policy can be unsustainable because a real-world central bank does face concrete limitations to its balance sheet action. For instance, liquidity-absorbing open market operations may find a limit in the exhaustion of the bank’s portfolio of marketable assets, while liquidity-injecting ones may find a limit in counterparties’ unwillingness to hold deposits with it.2 If the risk exists that (for whatever reason) the monetary authority may become unable to adjust its balance sheet (as required by the pursuit of its targets) without 2 A central bank facing such problems can resort to alternative strategies (e.g. buying or selling derivatives), but these may happen to be only very imperfect substitutes to standard operations, and may henceforth not necessarily strengthen its position. 4 defaulting on its mandatory commitments, the credibility of the whole policy will be shaken.3 The literature outlines two strategies for coping with policy sustainability problems through a strengthening of the liabilities side of the central bank’s balance sheet. The first one consists of having more investment into the central bank: this means recapitalizing it through an injection of marketable assets. For obvious political economy reasons, this is generally an uneasy way to go for both monetary and fiscal authorities (Stella 1997). The alternative one consists of having more loans to the central bank: this may mean attracting either more voluntary loans (by issuing interest-bearing debt certificates, or by remunerating deposits)4 or more forced loans (by raising liquidity requirements). Also these ways may, however, be difficult to go. On the one hand, collection of voluntary loans/deposits is not always appealing: it may not necessarily succeed – and if it does, it may end up compromising monetary policy effectiveness in case it exacerbates the banking system’s structural liquidity surplus with respect to the central bank (Bindseil 2004). On the other hand, forced loans are indeed more appealing, as they also have beneficial regulatory properties.5 Due to their poor performance as monetary policy tools during the postwar period, however, liquidity requirements have long been considered as a factor of financial instability, and have only been reevaluated by regulators in the aftermath of the recent crisis (Bouwman 2014). To sum up, an adequately strong central bank may not be a straightforward achievement, but lack of it is doomed to have an impact on the pursuit of monetary targets. The existence of a correlation between central bank strength and policy effectiveness has now been confirmed by a number of empirical studies (see e.g. Klüh and Stella 2008; Adler et al. 2012; Perera et al. 2013). All enquiries, however, have only covered recent time periods and one might wonder whether their conclusions are tied to the peculiarities of today’s international monetary system – especially in the case of peripheral countries, whose shortdated adoption of “sound” monetary targets might be at the root of weak credibility. As a result, it is interesting to ask whether also core countries with a consolidated record of policy target stability may be vulnerable to the same kind of problem. Pre-WW1 Britain provides valuable insights on this question. 2. The Bank of England’s Monetary Policy: A Review What monetary policy targets did the Bank of England pursue at the heyday at the classical gold standard? For many decades, a vast research effort has approached this question by trying to assess whether the Bank was actually complying with so-called “rules of the game” (see Eichengreen and Flandreau 1997 for a survey). What “rules of the game” of the 3 Policy unsustainability may also be due to the need to limit potential losses: although a central bank can well run with a negative capital, losses may be very costly from both a reputational and a political viewpoint (Archer and Moser-Boehm 2013). 4 Although formally different, the two are substantially equivalent from an economic viewpoint (Borio and Disyatat 2010). 5 The simple reason is that by increasing liquidity requirements, regulators expect to decrease leverage – and hence, risk-taking – in the banking system (Bouwman 2014). Liquidity requirements do not necessarily prevent banks from expanding liabilities as long as other sources of funding are available – provided, however, that there is perfect substitutability between cash and other liquid assets (Borio and Disyatat 2010). 5 gold standard actually meant in practice is far from straightforward (Flanders 1993). The most popular account of Britain’s pre-WW1 monetary policy – viz. the Cunliffe Report of 1918 – described the Bank as automatically adjusting the official discount rate to gold flows, in order to foster stabilizing changes in the monetary base (Cunliffe Committee 1997 [1918]). On this basis, both supporters and detractors of the Committee’s views started to conceive of the “rules” as a pro-active policy to magnify the effects of gold flows, implemented through open market operations to adjust the volume of commercial banks’ reserves. In particular, the influential contribution by Hawtrey (1934) consecrated the idea that an embryonic version of the reserve position doctrine had de facto been followed by Threadneedle Street already before the war.6 In order to test this, a wealth of historical studies have subjected data on the Bank’s securities holdings to a variety of empirical techniques. The results of the effort have been controversial. Some have rejected adherence to the “rules” (Bloomfield 1959; Goodhart 1986 [1972]; Giovannini 1986), while some other have restated it (Pippenger 1984; Dutton 1984; Davutyan and Parke 1995; Jeanne 1995). Irrespective of their conclusions, all of these papers share the same basic assumption: they all interpret variations in securities holdings as voluntarily-implemented changes in the monetary base. As pointed out by Moggridge (1984), however, this assumption is incorrect, because variations may have been determined by the functioning of the standing facility rather than by open market operations.7 As central banks are unable to check consistently the expansion of the monetary base, it is improper to try to infer the monetary stance by merely looking at the evolution of balance sheet items (Bindseil 2004; Disyatat 2008). In contrast to the traditional view, a number of scholars have emphasized that international adjustment under the classical gold standard took place through short-term capital flows rather than gold shipments, and that British interest rates had a paramount role in driving them (Bloomfield 1959; Goodhart 1986 [1972]; De Cecco 1974; Eichengreen 1987).8 International capital flows, however, were directly determined by interbank (“market”) interest rates, not by official (“Bank”) ones (Officer 1996). Building on extensive qualitative evidence, Sayers (1936, 1976) demonstrated that open market operations were aimed precisely at impacting the interbank rate in a context of limited control by the Bank over the money market. This substantially disproved Hawtrey’s (1934) claim that some sort of reserve position doctrine had already existed before WW1,9 as well as the idea that the Bank was 6 “The regulation of credit depends upon the power of the central bank to influence the lending operations of the competitive banks. The lending operations of the competitive banks are limited by their relation to their cash reserves, and the central bank has the power of increasing or decreasing those reserves by increasing or decreasing its own assets” (Hawtrey 1934, p. 150). 7 Among the above-quoted scholars, the only one who seems to have been aware of this issue is Hawtrey (1934, p. 151), to whom it was nonetheless not an issue. According to Hawtrey, in fact, in concomitance with open market operations the Bank kept the official discount rate high enough that voluntary changes in the monetary base were not offset by involuntary ones. This claim will receive serious qualification in Section 4.5. 8 Studies of the determinants of the Bank of England’s interest rate policy during this period include Goodhart (1986 [1972]); Contamin and Denise (1999); Tullio and Wolters (2008); Morys (2013). 9 Sayers’ (1936) argued that before 1914 the Bank’s open market operations had nothing to do with the reserve position doctrine: they had merely consisted of occasionally “borrowing in the market” (i.e., reducing the amount of short-term loanable funds in the money market, not the amount of commercial banks’ cash) with the aim of reducing the spread between the official and the interbank rate. This was confirmed by Goodhart’s (1986 [1972]) finding that the level of cash reserves was not determined by the Bank’s policy, but by real economic activity. 6 actively operating to magnify the effects of gold flows. However, Sayers (1936, 1976) did not present systematic quantitative evidence on the Bank’s intervention strategy. Moreover, while the relationship between the Bank’s institutional constraints and the forms taken by its action has been studied for some specific aspects of its functioning – such as branching (Ziegler 1990), lending of last resort (Flandreau and Ugolini 2014), or gold dealing (Ugolini 2013) –, no such analysis has yet been performed for the case of its interest rate policy. This paper fills this gap by resorting to previously unused archival material. 3. The Bank of England’s Strength: An Assessment 3.1) Assessing Central Bank Strength: Issues Measuring central bank financial strength is difficult. This is due to the eminently contingent nature of many of the factors determining the financial solidity of the moneyissuing organization. Estimating the strength of today’s central banks requires access to a substantial amount of soft information which is not only often unavailable, but also subjected to serious comparability issues due to differing accountability standards across countries (Klüh and Stella 2008; Archer and Moser-Boehm 2013). While a number of different indicators of strength have been proposed, all of them revolve around the same idea – viz., capturing the prospective “net worth” of the package of rights and obligations assigned to the central bank. Constructing a precise quantitative indicator of the pre-WW1 Bank of England’s financial strength would plainly be impossible on the basis of available historical information. As a consequence, this section tries to assess this by analyzing the prospective value of its privileges and constraints. The goal is not to evaluate the Bank’s capability to avoid defaulting tout court (i.e. its solvency risk), but the Bank’s capability to avoid defaulting on its formal obligations (i.e. the sustainability of its policy).10 This implies focusing, in particular, on the question of the Bank’s ability to adjust its balance sheet in order to perform monetary policy operations. The assessment of the Bank of England’s financial strength is based on a complete reconstruction of the Bank’s consolidated balance sheet at a high frequency (weekly) from original archival sources (see Figure 1). The period covered runs from January 1889 to February 1910, corresponding to the entire time span during which the Bank implemented open market operations alongside ordinary standing facility lending (Sayers 1936, 1976). In order to complement the analysis, a number of international comparisons with a sample of eight European central banks for a benchmark year (1909) are also provided in Table 1. Figure 1 and Table 1 about here 10 “Financial strength means the capacity to continue performing the functions for which the central bank is responsible. As there is usually no legal lower limit for equity, continuity of performance involves the ongoing ability to fund and implement operations without the central bank being obliged to do things that would prevent it from attaining its objectives” (Archer and Moser-Boehm 2013, p. 65). 13 context of full capital mobility, the coexistence of a fixed-exchange-rate mandate with a demand for monetary independence might appear somehow at odds with the constraints posed by the trilemma in the long run. Yet, 19th-century central bankers completely assumed such expectations, and tried to work out solutions enabling to meet them in the short run (Ugolini 2012). In view of what precedes, interbank rates’ volatility will be interpreted here as an indicator of monetary policy ineffectiveness.19 4.2) Was the Bank Happy with Its Interest Rate Policy? In the decades preceding WW1, Britain was an extreme case as far as interest rate policy was concerned. As illustrated by Figure 6, while the average level of both bank and market interest rates was not too dissimilar from that of most other major European financial centers, their volatility was substantially higher.20 At that time, the instability of short-term interest rates was considered as particularly obnoxious to the real economy. This was due to the fact that commercial and manufacturing activities were generally financed through threemonth loans: because it impeded correct expectation formation in these sectors, short interest rate volatility morphed into macroeconomic instability and hampered real growth. This was a serious concern for a country that considered itself as rapidly losing its international economic lead. Industrialists, politicians, but also authoritative economists started to complain loudly about the Bank of England’s monetary policy (see e.g. Palgrave 1903). Figure 6 about here The Bank’s aggressive interest rate policy was a matter of necessity rather than choice. It did not reflect a deliberate commitment to pure interest rate policy: after all, many members of the board came from the business community that was particularly damaged by volatility. That the Bank was not happy with it is proved by the fact that it did engage into “unconventional” liquidity management practices, in order to avoid taking its use of the interest rate instrument to the extreme. There were mainly two such practices. The first one was known as “gold devices” (Sayers 1936, 1976) and consisted of changing bid and ask prices on different kinds of gold assets. Ugolini (2013) shows that unconventional gold policy was deployed in connection with interest rate policy in order to help the Bank adjust its balance sheet. The second one was known as “Bank’s borrowings” (Hawtrey 1934; Sayers 1936, 1976) and consisted of implementing liquidity-absorbing open market operations (reverse repos). The following sections reconstruct the rationale of this liquidity management probably in consequence trade will be steady too – at least a principal cause of periodical disturbance will have been withdrawn from it” (Bagehot 1873, p. 121; my italics). 19 Central banks’ inability to make interbank rates coincide with policy rates is often taken as an indicator of policy ineffectiveness also today, although institutional differences across countries matter in determining such spreads (Bindseil and Jabłecki 2011). 20 Morys (2013, p. 212) also shows that over the period 1883-1913, the Bank of England performed 5.7 changes of the official discount rate per year – i.e., almost twice the average of core gold standard countries. Germany was the only other country to experience relatively high volatility of interest rates. This is consistent with the fact that the Reichsbank was the only other major central bank to be relatively small with respect to its national economy system (see Section 3.5). 14 practice that has traditionally been seen as the ancestor of 20th-century monetary policy implementation frameworks. They show that the Bank’s resort to this instrument was not at all an ante-litteram “monetarist” attempt to stabilize the quantity of high-powered money, but a way to “make Bank rate effective” – or differently put, a symptom of the central bank’s lack of control over interbank rates. 4.3) Liquidity Management: Rationale Nowadays, central banks attempt to stabilize the interbank rate around a given level that they deem appropriate to the current state of the economy (the policy rate). The market rate can fluctuate within a band surrounding the policy rate (the corridor), whose ceiling is set by the central bank’s lending facility rate (seen as a “penalty rate”) and whose floor is set by the central bank’s deposit facility rate. Before WW1, however, monetary policy implementation frameworks were very different than today. The central bank’s policy rate and lending facility rate coincided in what was then called “Bank rate”, while the deposit facility rate was constantly set at zero; unlike today, standing facility lending was the standard liquidity-injecting operation and was not surrounded by stigma (Jobst and Ugolini 2016). This means that while central bankers could impede the upward divergence of interbank rates from the desired level through conventional standing facility lending, they could not prevent their downward divergence without implementing liquidity-absorbing open market operations. In both cases, volatility-smoothing action implied resort to balance sheet policy. Balance sheet policy, however, could only be effective as long as it could be deployed on an adequate scale. As said, the Bank of England’s official rate was a nonstigmatized lending facility rate. When the market rate was lower than the Bank rate, only few money market participants used to borrow from it. When the spread disappeared, however, the market came “in Bank” – meaning that the standing facility became actively used by all sorts of money market participants. As pointed out in Section 3.5, however, the Bank only had limited room for balance sheet policy. As a result, once the market was “in Bank”, Threadneedle Street tried to push it back to Lombard Street by tightening rates. But then a vicious circle could set in motion. Expecting further tightening, borrowers could be tempted to take profit from current rates and hurry to the standing facility. If the Bank’s margins for accommodating demand were thin, the Bank would then be obliged to increase the official rate very sharply in order to prevent the process from degenerating and stop inflows to the standing facility. The result was that the slightest monetary disturbance could actually morph into a major tightening, with serious macroeconomic consequences. In order to try to prevent such vicious circles from taking place when little room for balance sheet policy was available, the Bank tried to beat the market to the draw. The gamble consisted in triggering an early increase in market rates in order to avoid an escalation of the official rate afterwards. To do so, the Bank artificially generated expectations of an imminent tightening by producing an inversion of the yield curve. Because an inversion of the yield curve is generally a predictor of economic downturns (Estrella and Mishkin 1998),21 its 21 The reason is that a yield curve inversion typically occurs when the supply of short-term credit rarifies, but the need to fund ongoing business remains high. 15 manifestation was bound to cool down market sentiment and induce lenders to stick to liquidity. As a result, credit growth would slow down before becoming excessive, and the three-month rate would rise to a level considered as more appropriate by the Bank. The fact that inversions of the yield curve are associated with worsening economic conditions was fully understood at the time. For instance, an early student of the statistical behavior of financial time series, Edward Gordon Peake, noticed that during the period 18831913 a positive spread of overnight rates over six-month rates had been a good predictor of higher interest rate levels in the following month. Curiously, Peake (1923, pp. 14-5) considered the hypothesis that such a correlation might have been determined by some intervention by the monetary authority, but only to reject it. Although the accuracy of his very conclusion will be questioned here (see Section 4.5), Peake’s discussion is nonetheless very interesting per se: actually, it provides evidence of the fact that the Bank was trying to make use of widespread beliefs in order to impact expectations, and that its actual intervention was impossible to appreciate for external observers. 4.4) Liquidity Management: Choice of the Technique In theory, at least three techniques were available to the Bank of England in order to implement liquidity-absorbing open market operations. The most obvious one consisted of selling securities for cash: by reducing the banking system’s aggregate cash reserves, sales are supposed to rarify money supply at the shortest end of the yield curve. The second one consisted of borrowing unsecured from money market participants, which would at one time decrease the supply of cash and increase the demand for short-term credit. The same effect could be produced through the third technique, which consisted of borrowing secured from money market participants – i.e., of implementing reverse repos (i.e. selling securities short and repurchasing them forward). Among these three options, the Bank only resorted to the third one. According to Hawtrey (1934), this was due to the fact that the first one exposed the Bank to the risk of losses on securities operations, while the second one exposed the Bank to informational leaks hindering policy effectiveness.22 While Hawtrey’s explanation of the Bank’s antipathy towards unsecured borrowing is convincing and vindicated by archival evidence (see Section 4.5), his justification of the Bank’s rebuttal of plain securities sales does not appear fully satisfactory. Sure, the Bank was concerned with profitability, but pledging Consols also implied costs (in terms of interests due) that were not necessarily smaller than the losses potentially engendered by selling them. There must have been another reason for the Bank to avoid securities sales, and this might have been related to the low reactiveness of commercial banks’ cash reserves to central bank intervention. As seen in Section 3.4, the absence of reserve requirements and the laxity of 22 “It is the function of the sales of securities to make Bank rate effective. This can also be accomplished by the central bank itself coming into the market as a borrower. In the 19th century the Bank of England adopted a compromise between the two methods by what was called “borrowing on Consols”. If it simply sold Consols it might suffer a capital loss. If it borrowed in the market like a discount house [i.e. unsecured], its operations might attract attention to an inconvenient extent among those dealing in the money market. The Bank therefore adopted the plan of selling Consols for cash and at the same time buying an equal amount forward for the next account. The net result was that the Bank borrowed from the Stock Exchange for a fortnight or less at a rate of interest equal to the contango rate” (Hawtrey 1934, p. 151). 16 disclosure requirements allowed commercial banks to be extremely flexible in their management of cash, making the aggregate amount of reserves relatively insensitive to changes in the portfolio composition of investors. As a result, absorption of cash by the Bank from a given counterparty did not necessarily morph into an increase of commercial banks’ deposits. This means that while sales of Consols would directly impact the long end of the yield curve (through a decrease of Consols prices, i.e. an increase of long-term interest rates), they would only indirectly impact its short end (see Figure 7.1). This was not the outcome the Bank desired to produce. Only concerned with impacting the three-month interest rate, it was in need of a more efficient technique of intervention. By surgically absorbing very short-term loanable funds without entailing noisy effects, reverse repos proved an ideal instrument to the Bank (see Figure 7.2). The perfect substitutability of very-short-term monetary assets is a necessary prerequisite to the effectiveness of the reserve position doctrine. This condition being unmet because of commercial banks’ (almost) complete freedom to set the amount of their central bank deposits at their will, the Bank of England simply could not rely on such a doctrine. As a consequence, Threadneedle Street had to intervene directly on the short end of the yield curve rather than relying on the indirect effects of interventions on its long end. This is why reverse repos started to be systematically implemented in order to “make Bank rate effective”. Figures 7.1 and 7.2 about here 4.5) Liquidity Management: Evidence Figure 8 gives the behavior of the main market rate (the three-month rate) between the ceiling rate (the central bank’s standing facility rate) and the “surrogate” floor rate (commercial banks’ deposit rate). The periods in which the Bank was implementing liquidityabsorbing open market operations are emphasized. It is shown that intervention was generally associated with increases in the official rate. Because the Bank rate had no clear role in the determination of the market rate (the spread between the two was variable and often very large), an increase of the former was a poor signal that might not necessarily have an impact on the latter. To make contractionary policy credible, therefore, the Bank had to couple the interest rate rise with a liquidity management operation that would spur the interbank rate to follow the same direction as the official one. The goal was not to make the market come “in Bank”,23 but to create more solidarity between the Bank’s intentions and market sentiment. Figure 8 about here Contrary to Peake’s opinion (see Section 4.3), the Bank’s policy did play some significant role in determining the shape of the yield curve. During the whole 1889-1910 23 Hence the confusion in Hawtrey (1934: see above, ft. 7): it is true that the Bank coupled borrowings with high official rates in view of discouraging use of the standing facility, but the aim was to avoid changes in the assets side of its balance sheet (discounts and advances) – not to offset changes in its liabilities side (bankers’ liquidity reserves). 17 period, there were thirty-two episodes of inversions of the short end of the yield curve – viz., a positive spread between overnight and six-month rates, as defined by Peake (1923).24 Of these, fourteen were associated with Bank of England’s interventions in the money market: these “artificially-induced” inversions were slightly more intense than “natural” ones.25 Figure 9 suggests that the Bank’s action actually contributed to transforming the yield curve: the beginning of intervention periods was generally followed by an increase of market interest rates, while their end was followed by a decrease. As the Bank intervened on the very short end of the curve, the impact of intervention was particularly strong on the overnight rate, but transmission to the three-month rate (the Bank’s actual target) appeared to be rather effective.26 The precise impact of liquidity-absorbing operations is analyzed by Figure 10, which presents the relation between daily variations of the “borrowings” and the variation of interest rates over the ensuing week. The charts confirm that an increase in the amounts borrowed was indeed generally followed by an increase in interest rates, and vice-versa; again, interventions had a stronger effect on overnight rates, but the three-month rate was also impacted. Figures 9 and 10 about here These results are remarkable in view of the fact that the size of intervention was not very large.27 Yet, intervention could not have been conducted on a much bigger scale by the Bank. Despite being sometimes labelled as “borrowings on Consols”, liquidity-absorbing operations did not generally consist of reverse repos on government bonds. In order to be able to impact expectations, the Bank needed to keep its operations secret. But the Act of 1844 was strict about the way the Bank had to disclose information on its situation once a week. Had the Bank really borrowed on Consols, the size of intervention would have been visible in its published balance sheet as a decrease in government securities – normally a very stable item. Unlike Treasury bonds, corporate bonds and stocks were not accounted as an independent item, as they were merged with “Discounts and advances” in the Banking Department’s balance sheet. Because changes in this aggregate item were far more difficult to interpret for external observers, the Bank preferred to absorb liquidity by pledging corporate bonds and stocks from its investment portfolio (see Figure 11). Such a portfolio, however, was not infinite, and the Bank’s operations found a natural limit in the depletion of marketable 24 Note that this is a lot by nowadays’ standards: today, inversions of the yield curve are relatively rare events (Estrella and Mishkin 1998). The highest frequency of such episodes in the pre-WW1 Britain might be interpreted as evidence of the fact that in those times, a comparatively larger share of ongoing business was funded through short-term loans (see Section 4.2). 25 For inversions associated with Bank interventions, the average spread is 0.70% and the median 0.50%, while for the other ones the average is 0.61% and the median 0.47%. 26 Unfortunately, for 1889-1905 we only have little information about the Bank’s intervention, viz. 1) the start date, 2) the end date, and 3) the maximum amount borrowed during the period. Figure 9 is constructed on the basis of this information. Only for 1905-1910 we have detailed information on the Bank’s borrowings on a daily frequency. These data are used to construct Figure 10. 27 In 1905-1910, the mean size of interventions was £3.75m and the median £3.40m. The biggest liquidityabsorbing operation in the whole 1889-1910 period amounted to £10.85m (January 1906). This can be compared with the size of the monetary base, which exceeded £200m in those very years (Capie and Webber 1985, p. 52). 18 securities.28 Once more, balance sheet policy was constrained by the obligations imposed on the Bank. The Old Lady could not fully deploy liquidity management in support to interest rate policy, and this seriously undermined the Bank’s effort to control market rates. Figure 11 about here 4.6) Epilogue: The Credibility Crisis In what precedes, the fragilities of pre-WW1 Britain’s banking system have been pointed out. It has been shown that within this system, the central bank’s financial strength had been seriously eroding over time. The result was a diminishing capability to control interest rates, which the Bank of England could only marginally palliate by secretly implementing liquidity-absorbing open market operations. Therefore, the Bank’s ability to cope with a big shock had started to be openly questioned in the financial milieu. Concerned with the possibility that the Bank could default on its convertibility mandate, commercial banks had started to keep a non-negligible share of their cash reserves directly in gold (De Cecco 1974; Roberts 2013). In view of this, it is instructive to conclude this analysis by reviewing the circumstances in which the Bank was eventually led to violate its formal mandate on the eve of WW1. Such circumstances actually seem to confirm our finding that the central bank was financially weak due to the suboptimal design of the set of rights and obligations imposed on it. On Tuesday, July 28th, 1914, news of Austria-Hungary’s declaration of war to Serbia made the London money market grind to a halt. The Bank of England stood ready to provide lending of last resort to the market, and asked commercial banks to keep funds with it. But commercial banks thought that the moment had come when the Bank would no longer be able to fulfil its obligations. Instead of being happy with the liquidity reserves the Bank might have infinitely provided to them, they tried to accumulate another type of cash: gold. By suddenly stopping all payments in gold to their depositors, they generated a run of banknote holders on Threadneedle Street. The Bank desperately tried to resist by using the traditional instruments, and implemented a number of consecutive sharp increases of the official rate (from 3 to 10%). Faced with the powerlessness of interest rate policy, however, the Bank soon had to capitulate, and as early as Friday, July 31st, Governor Cunliffe found himself obliged to ask the Chancellor of the Exchequer for the suspension of Peel’s Act (De Cecco 1974; Roberts 2013). While the magnitude of the July 1914 shock should not be underemphasized, it must nonetheless be noticed that the British central bank’s default on the convertibility mandate occurred before those of its German and French counterparts, and well before Britain’s involvement in the conflict could be given for granted.29 Unlike in all other countries, it was 28 Note that in order to perform the biggest liquidity-absorbing operation of the 1889-1910 period (the one implemented in January 1906), the Bank was unable to exclusively resort to corporate securities and had actually to borrow on some of the Consols in its portfolio (see Figure 11). 29 Recall that Germany only mobilized on Saturday, August 1st, after a British diplomatic attempt at preventing France’s intervention failed on that day. Britain entered the war (to the astonishment of many) after Germany 19 therefore not directly related to the country’s enrollment in the war. Neither was it related to a foreign drain of gold, as it took place in coincidence with an unprecedented appreciation of sterling. Hence, the crisis was determined by a purely domestic run on the central bank (Keynes 1914). This is unsurprising once one takes into account the fact that the inadequacy of its gold reserves had been commonplace in financial circles for more than two decades. The dramatic events of July 1914 appear to confirm that, at the heyday of the classical gold standard, the central bank that stood at the very center of the system suffered from a serious credibility problem. Although there were no doubts about the Bank of England’s willingness to fulfill its convertibility mandate, serious questions existed about its ability to do so. Faced on the one hand with the obligation to expand assets (performing lending of last resort) and on the other hand with the impossibility to expand liabilities (having its money held by commercial banks), the Bank eventually had no other choice than defaulting on its convertibility mandate. The restoration of central bank credibility after the war would come at an extraordinarily high price for the real economy. 5. Conclusions At the eve of WW1, the Bank of England was universally considered as the stronghold of the international gold standard. Yet the sustainability of the central bank’s policies had become less and less obvious over time. The Bank had become relatively small with respect to the domestic financial system, and its margins for intervention had gradually eroded. Its commitment to perform standing facility lending prevented it from performing pure interest rate policy, but the constraints imposed on it by legislation prevented it from performing large-scale balance sheet policy. As a result, the Bank lacked control over domestic interest rates, as the credibility of the signals it sent to the market (i.e. changes in the official rate) was poor. Interest rates were hence very volatile, which was a serious issue for the real economy. The Bank was not happy with this situation. It proposed solutions for strengthening its position (paying interests on deposits and introducing reserve requirements), but commercial bankers’ lobbies watered down the reforms because of the general reduction of domestic interest rates they would have entailed. As a second best, the Bank engineered some “unconventional” liquidity management measures in order to smooth interest rate volatility, but the extent of intervention was – again – limited by formal constraints. The overall weakness of the Bank’s situation was exposed by the crisis of July 1914, when commercial banks refused to accumulate central bank reserves – hence triggering the fall of the gold standard well before the beginning of the war. This important episode of monetary history suggests that the long-term sustainability of central banks’ policies cannot be taken for granted: if the equilibrium between the rights and obligations assigned to the monetary authority is unsatisfactory, a strong commitment to sound policy may not be enough for preventing a deterioration of credibility. Central banks are complex organizations with multiple tasks, and there is much more to central banking than the mere adherence to strict money-issuance rules. This means that even arch-conservative violated Belgium’s neutrality, on Tuesday, August 4th. The German and French central banks defaulted on their convertibility mandates only after their governments did declare war. 20 central banks may found themselves obliged to default on their commitments if such commitments are made mutually inconsistent by evolutions in the surrounding environment.30 Central banks’ mandates may well be set in stones, but their meaningfulness and applicability is fatefully bound to change over time. This is a lesson that can only be forgotten at a price. Archival Sources Bank of England Archive: − C1/37-58 (Daily Accounts of the Deputy Governor, 1889-1910). − C40/736 (Chief Cashier’s Policy Files: Bank’s Borrowings, 1910). References − Adler, Gustavo, Pedro Castro, and Camilo E. Tovar (2012), “Does Central Bank Capital Matter for Monetary Policy?”, IMF Working Paper 12/60. − Anderson, Bruce L., and Philip L. Cottrell (eds.) (1974), Money and Banking in England: The Development of the Banking System 1694-1914, Newton Abbot: David & Charles. − Archer, David, and Paul Moser-Boehm (2013), “Central Bank Finances”, BIS Paper 71. − Bagehot, Walter (1873), Lombard Street: A Description of the Money Market, London: King. − Bank of England (1967), “Bank of England Liabilities and Assets: 1696 to 1966”, Bank of England Quarterly Bulletin, June 1967, appendix. − Bignon, Vincent, Marc Flandreau, and Stefano Ugolini (2012), “Bagehot for Beginners: The Making of Lending-of-Last-Resort Operations in the Mid-19th Century”, Economic History Review, 65:2, pp. 580-608. − Bindseil, Ulrich (2004), Monetary Policy Implementation: Theory, Past, Present, Oxford: Oxford University Press. − Bindseil, Ulrich, and Juliusz Jabłecki (2011), “The Optimal Width of the Central Bank Standing Facility Corridor and Banks’ Day-to-Day Liquidity Management”, ECB Working Paper 1350. − Bindseil, Ulrich, Andres Manzanares, and Benedict Weller (2004), “The Role of Central Bank Capital Revisited”, ECB Working Paper 392. − Bloomfield, Arthur I. (1959), Monetary Policy under the International Gold Standard 1880-1914, New York: Federal Reserve Bank of New York. − Borio, Claudio, and Piti Disyatat (2010), “Unconventional Monetary Policies: An Appraisal”, The Manchester School, 78:S1, pp. 53-89. 30 A recent illustration has been provided by the Swiss National Bank, which in January 2015 defaulted on its commitment to prevent an excessive appreciation of the franc against the euro because this was no longer consistent with the Bank’s other commitment to generate revenues for its shareholders (i.e. cantonal governments). 21 − Bouwman, Christa H.S. (2014), “Liquidity: How Banks Create It and How It Should Be Regulated”, in Allen N. Berger, Philip Molyneux, and John O.S. Wilson (eds), The Oxford Handbook of Banking, 2nd ed. − Braggion, Fabio, Narly Dwarkasing, and Lyndon Moore (2012), “From Competition to Cartel: Bank Mergers in the U.K. 1885 to 1925”, working paper. − Capie, Forrest, and Alan Webber (1985), A Monetary History of the United Kingdom 1870-1982, vol. I, London: Allen & Unwin. − Cassis, Youssef (2006), Capitals of Capital: A History of International Financial Centres 1780-2005, Cambridge: Cambridge University Press. − Clapham, John (1944), The Bank of England: A History, vol. II, Cambridge: Cambridge University Press. − Cunliffe Committee on Currency and Foreign Exchange after the War (1997 [1918]), “First Interim Report”, in Barry Eichengreen and Marc Flandreau (eds.), The Gold Standard in Theory and History, 2nd ed., London: Routledge, pp. 166-76. − Davutyan, Nurhan, and William R. Parke (1995), “The Operations of the Bank of England 1890-1908: A Dynamic Probit Approach”, Journal of Money Credit and Banking, 27:4, pp. 1099-112. − De Cecco, Marcello (1974), Money and Empire: The International Gold Standard, Oxford: Blackwell. − Disyatat, Piti (2008), “Monetary Policy Implementation: Misconceptions and Their Consequences”, BIS Working Paper 269. − Dutton, John (1984), “The Bank of England and the Rules of the Game under the International Gold Standard: New Evidence”, in Michael D. Bordo and Anna J. Schwartz (eds.), A Retrospective on the Classical Gold Standard 1821-1931, Cambridge (Mass.): NBER, pp. 173-95. − Eichengreen, Barry (1987), “Conducting the International Orchestra: Bank of England Leadership under the Classical Gold Standard”, Journal of International Money and Finance, 6:1, pp. 5-29. − Eichengreen, Barry, and Marc Flandreau (1997), “Editors’ Introduction”, in id. (eds.), The Gold Standard in Theory and History, 2nd ed., London: Routledge, pp. 1-21. − Estrella, Arturo, and Frederic S. Mishkin (1998), “Predicting U.S. Recessions: Financial Variables as Leading Indicators”, Review of Economics and Statistics, 80:1, pp. 45-61. − Flanders, M. June (1993), “A Model of Discretion: The Gold Standard in Fact and in Fiction”, The World Economy, 16:2, pp. 213-35. − Flandreau, Marc (2008), “Pillars of Globalization: A History of Monetary Policy Targets, 1797-1997”, in Andreas Beyer and Lucrezia Reichlin (eds.), The Role of Money: Money and Monetary Policy in the 21st Century, Frankfurt-am-Main: European Central Bank, pp. 208-43. − Flandreau, Marc, and Stefano Ugolini (2014), “The Crisis of 1866”, in Nicholas Dimsdale and Anthony Hotson (eds.), British Financial Crises since 1825, Oxford: Oxford University Press, pp. 76-93. 22 − Giovannini, Alberto (1986), “‘Rules of the Game’ during the International Gold Standard: England and Germany”, Journal of International Money and Finance, 5:4, pp. 467-83. − Goodhart, Charles A. E. (1986 [1972]), The Business of Banking 1891-1914, 2nd ed., London: Gower. − Hannah, Leslie (2007), “The ‘Divorce’ of Ownership from Control from 1900 Onwards: Re-calibrating Imagined Global Trends”, Business History, 49:4, pp. 40438. − Hawtrey, Ralph G. (1934), The Art of Central Banking, London: Longmans Green & Co. − Jeanne, Olivier (1995), “Monetary Policy in England 1893-1914: A Structural VAR Analysis”, Explorations in Economic History, 32:3, pp. 302-26. − Jobst, Clemens, and Stefano Ugolini (2016), “The Coevolution of Money Markets and Monetary Policy 1815-2008”, in Michael D. Bordo, Øyvind Eitrheim, Marc Flandreau and Jan F. Qvigstad (eds.), Central Banks at a Crossroads: What Can We Learn from History?, Cambridge: Cambridge University Press, pp. 145-94. − Keynes, John M. (1914), “War and the Financial System, August 1914”, Economic Journal, 24:95, pp. 460-86. − Klovland, Jan T. (1994), “Pitfalls in the Estimation of the Yield on British Consols 1850-1914”, Journal of Economic History, 54:1, pp. 164-87. − Klüh, Ulrich, and Peter Stella (2008), “Central Bank Financial Strength and Policy Performance: An Econometric Evaluation”, IMF Working Paper 08/176. − Lévy, Raphaël-Georges (1911), Banques d’émission et Trésors publics, Paris: Hachette. − Mitchell, Brian R. (2003), International Historical Statistics: Europe 1750-2000, Basingstoke: Palgrave Macmillan. − Moggridge, Donald E. (1984), “Comment on Dutton”, in Michael D. Bordo and Anna J. Schwartz (eds.), A Retrospective on the Classical Gold Standard 1821-1931, Cambridge (Mass.): NBER, pp. 195-8. − Morys, Matthias (2013), “Discount Rate Policy under the Classical Gold Standard: Core versus Periphery (1870s-1914)”, Explorations in Economic History, 50, pp. 20526. − Officer, Lawrence H. (1996), Between the Dollar-Sterling Points: Exchange Rates, Parity, and Market Behavior, Cambridge: Cambridge University Press. − Palgrave, R. H. Inglis (1903), The Bank Rate and the Money Market in England, France, Germany, Holland, and Belgium 1844-1900, London: Murray. − Peake, Edward G. (1923), An Academic Study of Some Money Market and Other Statistics, London: King. − Perera, Anil, Deborah Ralston, and Jayasinghe Wickramanayake (2013), “Central Bank Financial Strength and Inflation: Is There a Robust Link?”, Journal of Financial Stability, 9, pp. 399-414. 29 Figure 5: Total assets of the world’s top 20 commercial banks and of their national central banks (1913) (million pounds). Source: Lévy (1911); Cassis (2006); Bank of England Archive C1/61. Note: In view of the fact that the Bank of England’s balance sheet were on average much larger at year’s end than in the rest of the year, data for mid-December are also provided. 0 50 100 150 200 250 300 Bank of England (31/12/1913) Midland Bank Lloyds Bank Westminster Bank Bank of England (17/12/1913) National Provincial Bank Barclays Bank Parr's Bank Union of London and Smiths Bank Capital and Counties Bank London Joint Stock Bank Banque de France (1909) Crédit Lyonnais Société Générale Comptoir National d'Escompte de Paris Reichsbank (1909) Deutsche Bank Dresdner Bank Disconto-Gesellschaft Bank für Handel und Industrie Société Générale de Belgique Banque Nationale de Belgique (1909) Oesterreichische-Ungarische Nationalbank (1909) Credit-Anstalt National City Bank Guaranty Trust Co of New York World's Top Commercial and Central Banks UK FR DE BE AT US 30 Figure 6: Central bank and market interest rate average level (horizontal axis) and volatility (vertical axis) in a number of European countries (weekly data). Source: author’s computation on The Economist (1889-1910). Britain - Bank Britain - Market Germany - Bank Germany - Market France - Bank France - Market Netherlands - Bank Netherlands - Market Belgium - Bank Belgium - Market Austria - Bank Austria - Market Italy - Bank Italy - Market 0,30 0,40 0,50 0,60 0,70 0,80 0,90 1,00 1,10 1,20 1,30 2,00 2,50 3,00 3,50 4,00 4,50 5,00 5,50 Standard Deviation Average Level 1889-1910 31 Figure 7.1: Effect on the yield curve of the Bank’s open market sales of Consols. Figure 7.2: Effect on the yield curve of the Bank’s “borrowings in the market”. i t 3m i t 3m 32 Figure 8: Interest rates in London and Bank of England’s “borrowings” periods (weekly data, 1889-1910). Source: The Economist (1889-1910); Bank of England Archive C40/736. 0% 1% 2% 3% 4% 5% 6% 7% 8% 02/01/1889 29/05/1889 23/10/1889 19/03/1890 13/08/1890 07/01/1891 03/06/1891 28/10/1891 23/03/1892 17/08/1892 11/01/1893 07/06/1893 01/11/1893 28/03/1894 22/08/1894 16/01/1895 12/06/1895 06/11/1895 01/04/1896 26/08/1896 20/01/1897 16/06/1897 10/11/1897 06/04/1898 31/08/1898 25/01/1899 21/06/1899 15/11/1899 11/04/1900 05/09/1900 30/01/1901 26/06/1901 20/11/1901 16/04/1902 10/09/1902 04/02/1903 01/07/1903 25/11/1903 20/04/1904 14/09/1904 08/02/1905 05/07/1905 29/11/1905 25/04/1906 19/09/1906 13/02/1907 10/07/1907 04/12/1907 29/04/1908 23/09/1908 17/02/1909 14/07/1909 08/12/1909 The Interest Rate Corridor in London OMOs Bank Rate Market Rate (3 Months) Commercial Banks' Deposit Rate 33 Figure 9: Maximum amount of Bank’s “borrowings” (thousand pounds, horizontal axis) and maximum variation of interest rates (vertical axis) for all intervention episodes (weekly data, 1889-1910). Source: The Economist (1889-1910); Bank of England Archive C40/736. -6,00% -4,00% -2,00% 0,00% 2,00% 4,00% 6,00% -15000 -10000 -5000 05000 10000 15000 Maximum Variation of the Interest Rate Maximum Amount of Bank of England Intervention Overnight Rate -6,00% -4,00% -2,00% 0,00% 2,00% 4,00% 6,00% -15000 -10000 -5000 05000 10000 15000 Maximum Variation of the Interest Rate Maximum Amount of Bank of England Intervention Three-Month Rate 34 Figure 10: Daily variation of Bank’s “borrowings” (thousand pounds, horizontal axis) and one-week variation of interest rates (vertical axis) for all intervention days (daily data, 1905-1910). Source: The Economist (1905-1910); Bank of England Archive C1/53-58. -3,00% -2,00% -1,00% 0,00% 1,00% 2,00% 3,00% -4000 -2000 02000 4000 6000 One-Week Change in the Interest Rate Daily Variation of Bank's Borrowings Overnight Rate -3,00% -2,00% -1,00% 0,00% 1,00% 2,00% 3,00% -4000 -2000 02000 4000 6000 One-Week Change in the Interest Rate Daily Variation of Bank's Borrowing Three-Month Rate 35 Figure 11: Effects of Bank’s “borrowings” on the assets side (positive numbers) and liabilities sides (negative numbers) of the Bank of England’s balance sheet (selected items; thousand pounds; daily data, 1905-1910). Source: Bank of England Archive C1/53-58. -80 000 -60 000 -40 000 -20 000 0 20 000 40 000 60 000 80 000 06.09.1905 20.09.1905 04.10.1905 18.10.1905 01.11.1905 15.11.1905 29.11.1905 13.12.1905 29.12.1905 12.01.1906 26.01.1906 09.02.1906 23.02.1906 09.03.1906 23.03.1906 06.04.1906 30.05.1906 14.06.1906 28.06.1906 21.08.1906 04.09.1906 18.09.1906 02.10.1906 16.10.1906 30.10.1906 13.11.1906 27.11.1906 11.12.1906 27.12.1906 10.01.1907 24.01.1907 07.02.1907 21.02.1907 22.10.1907 05.11.1907 16.10.1909 30.10.1909 13.11.1909 27.11.1909 11.12.1909 28.12.1909 11.01.1910 Balance Sheet Effects of Bank Borrowings Private Deposits Bankers Deposits Advances Discounts Banking Department's Government Securities Other Private Securities Bank Borrowings