11 - An analysis of Bank of England discount and advance behaviour 1870–1914

Summary

Introduction

This chapter sets out to throw light on the evolving role of the central bank in Britain in the late nineteenth century. The structure is as follows: first, there is a brief outline of the theoretical issues involved; second, a more specific discussion is provided of the historical period and the approach the study takes, and third, the empirical work carried out on a data set retrieved from the archives of the Bank of England is discussed.

The underlying aim is to determine whether the Bank of England, explicitly or implicitly, altered its behaviour with respect to the financial system in the latter portion of the nineteenth century. This may have come about as a result of a general acceptance of its duty to provide the system with liquidity in the event of need. If it did change its behaviour, how and why did this arise?

The question of the appropriate policies a central bank should take in the face of a financial crisis is one which has great significance in both an historical and current context. In the hundred years previous to 1870 financial crises occurred frequently, and thus there was much discussion as to the correct solution to the problem of the lack of stability apparent in the financial system. In the course of its evolution the Bank of England had taken on many of the characteristics associated with a Lender of Last Resort (LLR), although this process had been slow and uneven, and it is important to establish what the Bank felt was the extent of its responsibilities.