17. Körner, ‘Public Credit’, pp. 520, 524 f.; Muto, ‘Spanish System’, pp. 246–9; Gelabert, ‘Castile’, pp. 208 ff. See also Hart, ‘Seventeenth Century’, pp. 268 f.; Parker, ‘Emergence of Modern Finance’, pp. 568 f.
18. Bonney, ‘France, 1494–1815’, pp. 131 ff.
19. Velde and Weir, ‘Financial Market and Government Debt’, p. 8.
20. Ibid., pp. 8 f.
21. White, ‘France and the Failure to Modernize’, pp. 24 f.
22. Quoted in Eltis, ‘Debts, Deficits’, p. 117.
23. Parker, ‘Emergence of Modern Finance’, p. 579.
24. Brown, ‘Episodes in the Public Debt History’, pp. 232 f.
25. Körner, ‘Public Credit’, pp. 525, 527.
26. Hart, ‘United Provinces’, p. 313.
27. Buxton, Finance and Politics, vol. i, pp. 30 n., 34, 64, 116, 125 n, 127 f.; vol. ii, pp. 307 f. Cf. Kindleberger, Financial History, pp. 166 ff., 221.
28. Capie, Mills and Wood, ‘Debt Management’. I am grateful to Professor Forrest Capie for his assistance on this point.
29. Ibid., p. 1116.
30. Ferguson, World’s Banker, ch. 4.
31. Alesina, ‘End of Large Public Debts’, p. 64.
32. Williams (ed.), Money, pp. 16 ff.
33. Goldsmith, Premodern Financial Systems, pp. 36 f.
34. White, ‘France and the Failure to Modernize’, p. 20.
35. Bonney, ‘Revenues’, p. 467. Cf. Henneman, ‘France in the Middle Ages’, p. 105 f.
36. Goldsmith, Premodern Financial Systems, p. 178.
37. Bonney, ‘France, 1494–1815’, p. 142.
38. Isenmann, ‘Medieval and Renaissance Theories of State Finance’, p. 36.
39. Williams, Tudor Regime, pp. 67 f.
40. Bonney, ‘Early Modern Theories of State Finance’, p. 167.
41. Neal, ‘How It All Began’, p. 7; Goldsmith, Premodern Financial Systems, pp. 211 f.
42. Quin, ‘Gold, Silver and the Glorious Revolution’.
43. Kindleberger, Financial History, pp. 59 ff.; Cooper, ‘Gold Standard’, p. 3; Quin, ‘Gold, Silver and the Glorious Revolution’, p. 489. This was not the only way in which the Dutch and British systems diverged. The Bank of England did not develop the near-monopoly on domestic and international payments enjoyed by its counterpart in Amsterdam.
44. Bordo and Kydland, ‘Gold Standard as a Commitment Mechanism’, p. 71.
45. Sylla, ‘US Financial System’, p. 252. The 1690 Massachusetts bills of credit were the first Western paper currency; the Bank of England’s printed non-interest-bearing banknotes came later. The Bank of Stockholm had anticipated the innovation but had folded in 1663, just seven years after opening its doors: Körner, ‘Public Credit’, p. 531.
46. White, ‘France and the Failure to Modernize’, p. 21.
47. Bonney, ‘Revenues’, p. 470; Körner, ‘Public Credit’, p. 535.
48. Crouzet, ‘Politics and Banking’, p. 28.
49. Hellie, ‘Russia’, p. 500.
50. Gelabert, ‘Castile’, p. 233.
51. Bonney, ‘Struggle for Great Power Status’, pp. 361 f.
52. This pejorative phrase referred not only to venal offices, but also the outstanding debts to tax farmers, office-holders and the clergy, as well as the feudal dues which the National Assembly had abolished.
53. Bosher, French Finances, p. 275.
54. Crouzet, ‘Politics and Banking’, pp. 23, 33.
55. Bonney, ‘Struggle for Great Power Status’, p. 383.
56. Crouzet, ‘Politics and Banking’, p. 47.
57. Bonney, ‘Struggle for Great Power Status’, pp. 364, 368; Bonney, ‘Revenues’, p. 464.
58. Thompson (ed.), Napoleon’s Letters, p. 215.
59. Bordo and White, ‘Tale of Two Currencies’.
60. Only about 10 per cent of the Confederacy’s expenditures were covered by taxes; some $2 billion was borrowed, most of it by money creation: Brown, ‘Episodes in the Public Debt History’, p. 233.
61. Brandt, ‘Public Finances of Neo-absolutism in Austria’, p. 100.
62. Good, Economic Rise of the Habsburg Empire, tables 12, 29.
63. Bordo and Rockoff, ‘Good Housekeeping’, p. 327. For a good overview, Bordo, ‘Gold as a Commitment Mechanism’, table 1.
64. Flandreau, Le Cacheux and Zumer, ‘Stability without a Pact’, pp. 146 f.
65. Canetti, Torch in My Ear, pp. 51 f.
66. Ferguson, Paper and Iron, p. 432.
67. ‘Kennst du das Land, wo die Devisen blühn, / in dunkler Nacht die Nepplokale glühn? Ein eis’ger Wind vom nahen Abgrund weht – / wo tief die Mark und hoch der Dollar steht’: quoted in Rowley, Hyperinflation, p. 182.
68. For the classic definition of a rate of inflation of 50 per cent per month or more, see Cagan, ‘Monetary Dynamics’.
69. Calculated from NBER series 04073.
70. Sargent, ‘Ends of Four Big Inflations’. See also id., ‘Stopping Moderate Inflations’.
71. Ferguson, Pity of War, p. 422.
72. The motto on the medal read: ‘Geld gab ich zu Wehr; Eisen nehme ich zu Ehre’.
73. Alesina, ‘End of Large Public Debts’, p. 49.
74. Capie, ‘Conditions in which Very Rapid Inflation has Occurred’, pp. 138 f. Capie suggests a link between hyperinflation and ‘civil war or revolution or at a minimum serious social unrest’: p. 144.
75. Broadberry and Howlett, ‘United Kingdom’, p. 50.
76. The classic monetarist account is Friedman and Schwartz, Monetary Trends.
77. Correlation coefficients between the inflation rate and monetary growth rates:
78. Though the theoretical argument for such a role had been made as early as 1802 by Henry Thornton: see Capie, ‘Lender of Last Resort’, p. 14.
79. See Bordo, ‘Traditional Approach’, pp. 27–67.
80. That is, the rate at which the Bank discounted commercial bills, which were the commonest credit instrument in the nineteenth-century City. This rate was usually referred to as ‘Bank rate’.
81. The 1844 ‘Act to regulate the Issue of Bank Notes, and for Giving to the Governor and Company of the Bank of England certain Privileges for a limited Period’ (7 & 8 Vict. c. 32) divided the Bank into Issue and Banking Departments: Clapham, Bank of England, vol. ii, pp. 183 f.
82. The reserve was that part of the Bank’s gold which was not needed to cover the difference between the notes outside the Bank and the statutory fiduciary issue.
83. Palgrave, Bank Rate, p. 218.
84. Eichengreen, Golden Fetters, p. 65. See also id., ‘Gold Standard since Alec Ford’, p. 66.
85. Sayers, Bank of England, vol. i, p. 29.
86. Palgrave, Bank Rate, p. 218.
87. Bagehot, Lombard Street, pp 56 f.
88. Between January 1880 and July 1914 Bank rate fell below the market discount rate in only ten months (May 1893, August and September and December 1899, April and December 1900, September and October 1906, September 1910 and August 1912). This was in marked contrast to the years 1845–7, 1857, 1865 and 1867–71, when Bank rate had tended to be below the market rate: Palgrave, Bank Rate, table 4. Significantly, the frequency of changes in Bank rate declined from its peak of 109 times in the 1870s to 65 times in the 1880s, 62 times in the 1890s and just 48 times between 1900 and 1909.
89. Capie, ‘Lender of Last Resort’, pp. 4–6.
90. Ferguson, World’s Banker, appendix 3.
91. Capie, Goodhart and Schnadt, ‘Development of Central Banking’, p. 13.
92. Palgrave, Bank Rate, p. 104.
93. Clapham, quoted in Sayers, Bank of England, vol. i, p. 9. Between 1880 and 1913 the ratio of the monetary gold stock to the monetary base was just 17 per cent. It was higher in 1922–39 (27 per cent), 1948–58 (34 per cent) and 1959–71 (22 per cent), and only slightly lower in the post-gold period 1972–90: Bordo and Schwartz, ‘Changing Relationship’, table 2, p. 39.
94. Sayers, Bank of England, vo
l. i, pp. 38 ff. Cf. Drummond, Gold Standard, pp. 21 f.; Capie, Goodhart and Schnadt, ‘Development of Central Banking’, p. 13.
95. Dutton, ‘Bank of England’, p. 191.
96. Pippenger, ‘Bank of England Operations’, pp. 216 f.
97. Capie, ‘Lender of Last Resort’, pp. 8 f. Cf. Schwartz, ‘Real and Pseudo-financial Crises’.
98. Indeed, the term ‘lender of last resort’ was coined by Francis Baring as early as 1797, though Capie traces it back to the French dernier resort, meaning the ultimate legal authority: Capie, ‘Lender of Last Resort’, p. 17.
99. There is a parallel here with the rescue of Long Term Capital Management in New York in 1998. For a full discussion of the Barings Crisis, see Ferguson, World’s Banker, ch. 27.
100. Capie, Goodhart and Schnadt, ‘Development of Central Banking’, pp. 16 f. See also Capie, ‘Lender of Last Resort’, pp. 11 f.
101. The distinction which is frequently drawn between bailing out one institution, and providing liquidity to the financial system as a whole, is somewhat artificial. As Bagehot recognized, the failure of one big institution would be very likely to cause a general liquidity crisis: Capie, ‘Lender of Last Resort’, pp. 16, 18.
102. Bordo and Schwartz, ‘Changing Relationship’, pp. 11, 36.
103. Borchardt, ‘Währung und Wirtschaft’, p. 17.
104. Bordo and Schwartz, ‘Monetary Policy Regimes’, p. 26.
105. Capie, Goodhart and Schnadt, ‘Development of Central Banking’, p. 53.
106. James, Globalization and its Sins, p. 37.
107. Holtfrerich, ‘Reichsbankpolitik’.
108. On Schacht see esp. James, Reichsbank.
109. See in general Eichengreen, Golden Fetters.
110. The classic account is Friedman and Schwartz, Monetary History. For a critical assessment see Romer and Romer, ‘Does Monetary Policy Matter?’, pp. 32–5. Cf. Bordo and Schwartz, ‘Monetary Policy Regimes’, pp. 30 ff., 44, 64 f.
111. Bordo and Schwartz, ‘Monetary Policy Regimes’, p. 45.
112. Capie, Goodhart and Schnadt, ‘Development of Central Banking’, pp. 22 f.
113. The Federal Reserve is owned by the member banks of the System; only 10 per cent of the Greek central bank’s shares and 25 per cent of its Turkish counter-part’s are in state hands. The Swiss central bank is majority-owned by the cantons: Capie, Goodhart and Schnadt, ‘Development of Central Banking’, p. 56.
114. Ibid., p. 54.
115. Ibid., pp. 25 f.
116. Romer and Romer, ‘Does Monetary Policy Matter?’.
117. Between 1963 and 1974 the average annual federal deficit was just 0.6 per cent of GDP: Masson and Mussa, ‘Long-term Tendencies’.
118. Feldstein, ‘Costs and Benefits’.
119. Solow and Taylor, Inflation, Unemployment and Monetary Policy.
120. Bruno and Easterly, ‘Inflation Crises and Long-run Growth’, esp. pp. 4–6, 20–22; Sarel, ‘Non-linear Effects of Inflation’.
121. Briault, ‘Costs of Inflation’.
122. Bordo and Schwartz, ‘Monetary Policy Regimes’, p. 56.
123. Millard, ‘Examination of the Monetary Transmission Mechanism’. Cf. Lawson, View from No. 11.
124. Economist, 25 September 1999.
125. See e.g. Luttwak, Turbo-Capitalism, pp. 191–6.
126. Capie, Goodhart and Schnadt, ‘Development of Central Banking’, p. 6; King, ‘Challenges for Monetary Policy’, p. 1.
127. Marsh, Bundesbank.
128. Independence is defined by Capie, Goodhart and Schnadt, ‘Development of Central Banking’, p. 50 as ‘the right to change the key operational instrument without consultation or challenge from government’.
129. See e.g. Cukierman et al., ‘Central Bank Independence’; Alesina and Summers, ‘Central Bank Independence’.
130. Wood, ‘Central Bank Independence’, pp. 10 f.
131. For a critique of this reform, see Gowland, ‘Banking on Change’.
132. Posen, ‘Why Central Bank Independence Does Not Cause Low Inflation’.
133. King, ‘Challenges for Monetary Policy’, pp. 29 f. For evidence of the European Central Bank’s concern on this score, see its Report on Electronic Money, August 1998. I am grateful to Martin Thomas for this reference.
134. Friedman, ‘Future of Monetary Policy’.
135. Capie, Goodhart and Schnadt, ‘Development of Central Banking’, p. 35.
136. These are Charles Goodhart’s arguments, as summarized in The Economist, 22 July 2000.
137. Capie, Goodhart and Schnadt, ‘Development of Central Banking’, pp. 85–91.
6. Of Interest
1. Homer and Sylla, Interest Rates, pp. 118–21.
2. Shakespeare, Merchant of Venice, Act I, scene 3.
3. Benjamin and Kochin, ‘War, Prices and Interest Rates’.
4. Correlation coefficients between the yield on consols and other monetary and financial indicators:
5. Barro, ‘Government Spending’, p. 228. As we shall see, these two factors are more historically plausible explanations for yield fluctuations. Note that with inflation close to zero over the long run nominal consol yields can be regarded as more or less the same as real interest rates. Regressions of annual yield data against debt/GDP ratios for six countries in the period 1880–1913 also produce mainly negative or spurious results: Ferguson and Batley, ‘Event Risk’. Only the French data bear out the relationship we would expect, namely a positive relationship between debt and yield levels, although this is not evident at a significant level.
6. See e.g. Charles Davenant’s Discourses on the Public Revenues and on the Trade of England (1698): Bonney, ‘Early Modern Theories of State Finance’, pp. 181 f.
7. Only Argentina had an extremely strong (0.98) positive correlation between the debt burden and bond yields: I am grateful to Richard Batley for his assistance on this point.
8. Figures from OECD.
9. Bordo and Dewald, ‘Historical Bond Market Inflation Credibility’.
10. Keynes, General Theory, pp. 167 f.
11. Musgrave and Musgrave, Public Finance in Theory and Practice, pp. 544–64; Buckle and Thompson, UK Financial System, pp. 180–99.
12. Masson and Mussa, ‘Long-term Tendencies’, p. 28.
13. Ibid., pp. 28 f. The question then becomes: which falls further in response to a fiscal tightening: the real interest rate or growth? Cf. Eltis, ‘Debts, Deficits’, pp. 126–9.
14. In fact, there are two quite different real interest rates: the ex ante rate, which is the difference between the nominal rate of interest and the expected rate of inflation (usually inferred from survey evidence); and the ex post rate, the nominal rate less the actual inflation rate: Mishkin, ‘Real Rate of Interest’, p. 152. Perhaps not surprisingly, negative real interest rates are more frequent ex post than ex ante: King, ‘Challenges for Monetary Policy’, pp. 8 f.
15. Alesina, ‘End of Large Public Debts’, p. 57.
16. Tanzi and Lutz, ‘Interest Rates’, pp. 233 ff. But cf. Dornbusch, ‘Debt and Monetary Policy’, p. 18.
17. Shigehara, ‘Commentary’, p. 87 n.
18. See Barro and Sala-i-Martin, ‘World Real Interest Rates’.
19. Brown, ‘Episodes in the Public Debt History’, table 8.8.
20. Goodhart, ‘Monetary Policy’, p. 5.
21. Sargent and Wallace, ‘Unpleasant Monetarist Arithmetic’. See also Woodford, ‘Control of the Public Debt’; Taylor, ‘Monetary Policy Implications’.
22. King, ‘Commentary’, pp. 176 f.; Dornbusch, ‘Debt and Monetary Policy’, p. 14. A further complication is that if bondholders are numerous, higher interest rates may boost their incomes and hence have a perverse expansionary effect: Taylor, ‘Monetary Policy Implications’.
23. Sargent, ‘Stopping Moderate Inflations’, p. 121.
24. Barro, ‘Optimal Funding Policy’, p. 77; Alesina, ‘End of Large Public Debts’.
25. Goodhart, ‘Monetary Policy’, p. 43.<
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26. Statistical Abstract of the United States 2000, table 552.
27. Financial Times, 13 October 1999.
28. Brown and Easton, ‘Weak-form Efficiency’, p. 61.
29. Körner, ‘Public Credit’, p. 515.
30. Goldsmith, Premodern Financial Systems, p. 170.
31. Körner, ‘Public Credit’, p. 520. However, it is worth noting that the asientos were short-term debt instruments. By comparison, Naples long-term juros tended to pay more like 10 per cent; while yields on Spanish juros fell from 10 to 5 per cent in the course of the sixteenth century.
32. Hart, ‘United Provinces’, pp. 311 ff.; Parker, ‘Emergence of Modern Finance’, p. 573.
33. Körner, ‘Public Credit’, p. 523.
34. Velde and Weir, ‘Financial Market and Government Debt Policy in France’, p. 23.
35. The phrase is James Riley’s, quoted in Velde and Weir, ‘Financial Market and Government Debt Policy in France’, p. 37.
36. White, ‘France and the Failure to Modernize’, pp. 31 f.
37. Velde and Weir, ‘Financial Market and Government Debt Policy in France’, pp. 20 f. See also p. 23.
38. Ibid., pp. 18, 28. There was no differential in private rates of return. See also White, ‘France and the Failure to Modernize’.
39. Kennedy, Rise and Fall of the Great Powers, pp. 103 ff.
40. Quoted in Bonney, ‘France, 1494–1815’, p. 136; id., ‘Early Modern Theories of State Finance’, p. 204.
41. North and Weingast, ‘Constitutions and Commitment’.
42. Wells and Wills, ‘Revolution, Restoration and Debt Repudiation’.
43. Velde and Weir, ‘Financial Market and Government Debt Policy in France’, p. 25.
44. Ibid., p. 37. The authors argue, ingeniously, that Louis XVI could have avoided the Revolution by opting for default.
45. Bordo and White, ‘Tale of Two Currencies’, p. 371.
46. White, ‘Making the French Pay’, pp. 11 f.
47. See Balderston, German Economic Crisis, pp. 250–265.
48. Borchardt, ‘Gewicht der Inflationsangst’; Schulz, ‘Inflationstrauma’. See most recently Voth, ‘True Cost of Inflation’.
49. Abelshauser, ‘Germany’, pp. 139 ff. The Metallurgische Forschungsgesellschaft mbH (Mefo) issued bills to pay the major arms concerns for contracts which were in fact from the government. By 1937/8 they had reached a circulation of 12 billion reichsmarks.
The Cash Nexus: Money and Politics in Modern History, 1700-2000 Page 60