9 - The Bank’s Place in Central Bank History

Summary

This final chapter discusses the role of the Bank within a selective history of central banking. “Exchange bank” institutions such as the Bank became obsolete by the end of the eighteenth century. The new model for central banks was the Bank of England, which incorporated features such as private equity capital, large holdings of sovereign debt, a discount window, and the issue of circulating banknotes. It is argued that the Bank of England nonetheless gravitated to a two-bank structure following the 1844 passage of Peel’s Act, with many similarities to the eighteenth-century Bank of Amsterdam. Peel’s Act split the Bank of England into two banks, a passive bank (“Issue Department”) that issued notes against gold deposits and paid out gold coins, and an active bank (“Banking Department”) used its ledger money to commercial paper and engage in various types of open market operations. A concluding section argues that the active—passive dichotomy bears some relevance for modern financial markets, with active liquidity arising from traditional central bank open market operations, and passive liquidity arising from arrangements such as repo transactions. It is argued that recent crisis events have revealed the interconnectedness of these two forms of liquidity.