The Bank of England and the British Economy, 1890-1913

The paper examines the behavior of the British economy 1890-1913 by using a newly assembled quarterly data set. This provides a basis for estimating a small macroeconomic model, which can be used to explore the relationship between the policy responses of the Bank of England and the course of the economy. It is one of the few papers to make use of UK quarterly data and seeks to extend the earlier work of Goodhart (1972). The paper goes on to look into the determinants of external and internal gold flows and relates these to an extensive historical literature. The outcome is compared with the traditional representation of the working of the gold standard, as set out in the well-known Interim Report of the Cunliffe Committee (1918). It is found that operation of the model accords in general with the views of the Committee. The views of the Committee were applicable to the pre 1914 gold standard, but less so to the restored interwar gold standard. The next question to be considered is how far the Bank observed 'The Rules of the Game' in the sense of relating the reserves of the commercial banks to the gold reserves held at the Bank. It is shown that the relationship between the Bank's reserves and the reserves of the commercial banks was severely distorted by the massive gold movements of 1895-6. These flows were associated with US political conflicts over the monetization of silver. With the exception of this episode, the Bank is shown to have had a limited measure of discretion in operating the gold standard. The final question to be considered is whether a similar model can be estimated from US data and related to the views of Friedman and Schwartz.