Liquidity Policy and
Central Banks in
Historical Perspective
Harold James
Princeton and EUI
First Central Banks
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Swedish Riksbank (1668)
Bank of England (1694)
Management of Public Debt
Bank of England

1825: “we lent it by every possible means and in
modes we had never adopted before; we took in
stock on security, we purchased Exchequer bills,
we not only discounted outright, but we made
advances on the deposit of bills of exchange to
an immense amount, in short by every means
consistent with the safety of the Bank, and we
were not on some occasions over-nice.”
Walter Bagehot: Lombard Street

1866 Economist article: “The Bank agrees, in fact,
if not in name, to make unlimited advances on
proper security to anyone who applies for it…..
the evident and intended implication is that
under like circumstances the Bank would act
again as it has now acted.”
…. to 2008
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ECB, October 12, 2008: ``We need new steps if
we can't face the situation with the
instruments we have.”
“We imagine being even more open in the
question of what's legitimate.''
The Reichsbank
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1871 German Unification
1873 Financial panic (Gruenderkrach)
1875 Reichsbank
Liquidity Management in Crisis


1901: failure of Dresdner Kreditanstalt and
Leipziger Bank
Moral hazard problem: 1890-1910 cash reserves
fell as proportion of liabilities from 15 to 7.6
percent
… in other extreme
circumstances


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1923/4 stabilization
1924 credit stop
1929 and 1931 credit rationing (under gold
standard constraint)
… in more extreme
circumstances



Weimar hyper-inflation
Rudolf von Havenstein appointed after panic of
1907
Viewed as liquidity problem: “It is not disputed that
central bank credit increases the circulation of
paper; but to the extent to which it gives
economically desirable and needed credits, which
help production and the sale of goods, it does not
create artificial purchasing power.”
Federal Reserve



1907 Panic
National Monetary Commission
1914 establishment of Federal Reserve
Swiss National Bank

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Real bills doctrine
Main task “to regulate the monetary circulation
in the country and to facilitate payments.”
During WWI redefined: “to support work and
create jobs.”