ABSTRACT
A case in point is the Bank of England. It is often asserted, as Keynes put it, that 'During the latter half of the nineteenth century the influence of London on credit conditions throughout the world was so predominant that the Bank of England could almost have claimed to be the conductor of the international orchestra. By modifying the terms on which she was prepared to lend, aided by her own readiness to vary the volume of her gold reserves and the unreadiness of other central banks to vary the volumes of theirs, she could to a large extent determine the credit conditions prevailing elsewhere.'2 When this musical metaphor is examined in the light of the monetary theory it loses much of its charm. If it is supposed, as in the monetary theory, that the world's economy was unified by arbitrage, and if it is supposed further that the level of prices in the world market was determined, other things equal, by the amount of money existing in the world, it follows that the Bank's potential influence on prices (and perhaps through prices on interest rates) depended simply on its power to accumulate or disburse gold and other reserves available to support the world's supply of money. By raising the interest rate (the bank rate) at which it would lend to brokers of commercial bills, the Bank could induce the brokers or whoever else in the British capital market was caught short of funds to seek loans abroad, bringing gold into the country and eventually into the vaults of the Bank. If it merely issued bank notes to pay for the gold the reserves available to support the supply of money would be unchanged, for Bank of England notes were used both at home and abroad as reserves. Only by decreasing the securities and increasing the gold, it held - an automatic result when it discouraged brokers from selling more bills to the Bank and allowed the bills it already held to come to maturity - could the Bank exert a net effect on the world's reserves. In other words, a rise in the bank rate was effective only to the extent that it was accompanied by an open market operation, that is, by a shift in the assets of the Bank of England out of securities and into gold. The amounts of these two assets held by the Bank, then, provide extreme limits on the influence of the Bank on the world's money supply. Had the Bank in 1913 sold off all the securities held in its banking department it would have decreased world reserves by only 0*6 percent; had it sold off all the gold in its issue department, it would have increased world reserves by only 0*5 percent.3 Apparently the
Bank was no more than the second violinist, not to say the triangle player, in the world's orchestra. The result hinges on the assumption of the monetary theory that the world's economy was unified, much as each nation's economy is assumed to be in any theory of the gold standard. If the assumption is correct the historical inference is that the Bank of England had no more independent influence over the prices and interest rates it faced than, say, the First National Bank of Chicago has over the prices and interest rates it faces, and for the same reason.
