Development of monetary policy: five periods before the Bank of England

The history of monetary policy is closely aligned with the history of banking and of central banking, particularly the history of the Bank of England. As you know, the Bank of England was formed in 1694, and it gradually transmuted into a CB. It is the oldest CB in the world in the sense that it was the first bank ".. .of issue to assume the position of a central bank and to develop what are now generally recognized as the fundamentals of the art of central banking."

Before central banking emerged in the late seventeenth century in the form of some of the functions of the Bank of England, there were five periods that can be identified on which something can be said about "primitive" monetary policy. The first is the barter period: monetary policy was non-existent because there was no money. The second was the days of primitive money, when the amount of money in circulation could increase only if more of the generally accepted means of payment were found or produced, for example, cowrie shells, maize, cattle; however, no institution was charged with the task of monetary control.

The third period: the days just before precious metal coins, i.e. the brief time of gold and silver nuggets in Lydia, which were used by weight. There was a natural shortage of the metals, so excess money creation and inflation were not issues. The same applied in the fourth period, the precious metal coinage age, except when the kings debased the coins or large amounts of the metals or coins were plundered from enemies or deposits were discovered, as in the case of Spain mentioned earlier. During these stages no institution / body was charged with the task of controlling the volumes of precious metals coins.

However, in the case of debasement, the public had a monetary policy role - in the form or protests against debasement. Later (in England) parliament had a role to play, and it is safe to say that this was the first flicker of monetary policy. As stated by Morgan, in these times "...the only issues which could possibly be called monetary policy concerned the maintenance of the standard, the enforcement of the state prerogative of coinage and the relative values of the precious metals. It was generally held to be an important duty of a ruler to maintain a coinage of fixed weight and fineness though...impecunious governments were often forced into debasement."

During these times an important function was to endeavour to keep the precious metal coins from being lost to the country. Morgan informs us that because coins were in short supply, ".from the end of the thirteenth century the nations of Western Europe were competing vigorously for bullion by prohibiting its export, attempting to compel its import, controlling the foreign exchanges, and trying to secure a favorable balance of trade." It will be evident that the problem then was not excessive money but a shortage of money, prohibiting trade. Numerous laws were passed to curb expenditure on foreign goods, and thus to protect the balance of trade (and thereby the loss of gold to the country).

The fifth period was the goldsmith-banker period in which the creation of bank notes and deposits emerged. Generally this was welcomed because it increased the amount of money in circulation to ease the shortage of gold and silver coins. Monetary policy in respect of the goldsmiths' creation of these new forms of money was non-existent until the formation of the Bank of England and its emerging monetary policy functions. However, there was a natural brake on excessive money creation in the form of convertibility of bank notes and deposits into gold. As we know, despite this, many goldsmith-bankers and country banks failed as a result of indiscriminate lending and not being able to repay depositors (aided, as we saw, by the government reneging on its debt).

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