Market leader: the Austro-Hungarian Bank and the making of foreign exchange intervention, 1896-1913

Abstract

This article challenges the conventional view that the gold standard was stabilized by quasi-automatic central bank intervention and/or private arbitrage whenever the spot exchange rate reached the ‘gold points’. New archival evidence on the central bank of Austria–Hungary between 1896 and 1913 documents the use of sophisticated instruments such as foreign exchange forward and repo (sale-repurchase) contracts and a quest for market dominance both with respect to reserves held and the share in market turnover. The resulting change in the working of the foreign exchange market is shown to have supported the conduct of monetary policy, underlining the importance of market micro structure in the design and conduct of monetary policy. The picture that emerges is that of a much more ‘modern’ approach to exchange rate stabilization during the classical gold standard than is traditionally recognized.