The Bank of England as the World Gold Market Maker during the Classical Gold Standard Era, 1889–1910

Abstract

Although textbook accounts of the classical gold standard understandably simplify the illustration of it by arguing that it featured a fixed price of gold, connoisseurs know that such a claim is not completely accurate: under the aegis of this international monetary system the price of gold did actually happen to vary, albeit extremely narrowly. This was not only due to transaction costs: the practice of slightly modifying the official price of gold from time to time was in fact a rather common one, as it was followed by many central banks — including the Bank of England itself, the institution that stood at the very centre of the whole system (Sayers 1953, 1976). Because the effect of such practices was to change the ‘gold points’ (the band within which the exchange rate was allowed to fluctuate without entailing international gold flows), they have generally been seen as violations of the (alleged) rules of the gold standard: hence, they have been dubbed with the pejorative name of gold devices. How should we interpret the fact that central banks departed so far from the standard theory of the workings of a monometallic system, which was nonetheless already well established at the time (see, for example, Goschen 1864)? Scholars have generally answered that policymakers’ unwillingness to comply with the ‘rules of the game’ was a sort of relic of bullionist sentiments tied to a certain reluctance to implement the ‘proper’ strategy (that is, moving interest rates: see e.g. Sayers 1953, 1976; Scammell 1965; Contamin 2003), if not to a certain sympathy towards some forms of capital controls aimed at hindering international arbitrage (see e.g. Gallarotti 1995, pp. 47–9).