Although central banks have pursued the same objectives throughout their existence, primarily price and financial stability, the interpretation of their role in doing so has varied. We identify three stable epochs, when such interpretations had stabilised, i.e. the Victorian era, 1840s–1914; the decades of government control, 1930s–60s; the triumph of the markets, 1980s–2007. Each epoch was followed by a confused interregnum, searching for a new consensual blueprint. The final such epoch concluded with a crisis, when it became apparent that macro-economic stability, the Great Moderation, plus (efficient) markets could not guarantee financial stability. So the search is now on for additional macro-prudential (counter-cyclical) instruments. The use of such instruments will need to be associated with controlled variations in systemic liquidity, and in the balance sheet of the central bank. Such control over its own balance sheet is the core, central function of any central bank, even more so than its role in setting short-term interest rates, which latter could be delegated. We end by surveying how relationships between central banks and governments may change over the next period.

Larry Neal, How it all began: the monetary and financial architecture of Europe during the first global capital markets, 1648–1815

The Treaty of Westphalia created the modern nation-state system of Europe and set the stage for the long-term success of financial capitalism. The new sovereign states experimented with competing monetary regimes during their wars over the next century and two-thirds while they extended and perfected the financial innovations in war finance developed during the Thirty Years War. The Dutch maintained fixed exchange rates, the French insisted on exercising monetary independence, while the English placed priority on free movement of international capital. In struggling with the trilemma of choosing among the goals of maintaining fixed exchange rates, monetary independence and free movement of capital, the governments of early modern Europe learned many valuable lessons. By the time of the Napoleonic wars, the innovations that emphasised reliance on financial markets rather than on financial institutions proved their superiority.

We have reconstructed a new blue chips (large caps) stock index for France from 1854 to 1998, based on a modern methodology. Our index differs profoundly from earlier indices, and is more consistent with French financial and economic history. We suggest this result casts some doubt on many historical stock indices, such as those used in Dimson, Marsh and Staunton's Triumph of the Optimists. Investment in French stocks provided a positive real return during the nineteenth century, but a negative one – because of inflation and wars – in the twentieth. Despite this secular negative real performance, stocks proved the best financial asset in the very long run, although with an equity premium lower than in the US.

This article examines how trading on two geographically separate financial markets reflected political events before and during World War II. Specifically, we compare sovereign debt prices on the Zurich and Stockholm stock exchanges and find considerable (but not complete) symmetry in the price responses across the two markets in relation to turning points in the war, which suggests that markets worked efficiently. The use of a quantitative methodology on historical financial market data represents a useful complement to traditional historical analysis, offering large-scale evidence of individuals acting in their own pecuniary interest without producing any lasting systematic biases.

This article analyses the pillar of modern central bank governance, i.e. central bank independence, from three perspectives. First, we provide a systematic review of the economics of central bank independence. Second, applying a principal agent model we design a political economy framework, which explains how politicians can shape central bank governance in addressing macroeconomic shocks, while taking into account both the wishes of the citizens and their own personal interests. This framework is then used to interpret the evolution of central bank independence from the Great Inflation (1970s), throughout the Great Moderation (1980s-2000s) and to the Great Recession (2007-14). We provide empirical evidence supporting this evolution using recently developed indices of dynamic central bank independence. Further, our findings stress the importance of macroeconomic shocks in shaping the evolution of central bank independence after the global financial crisis.

‘The market makes its money’, thought Hicks, and similar messages have been delivered by many other thinkers on money. However, while students of money have mostly been concerned with who could or should produce it, the market or the state, few have questioned whether the money itself should be single or not. Apparently it has been taken for granted that a single market and a single money should coincide. Nevertheless, contrary to the modern assumption that one single currency should operate in one country, the history of money has been full of plurality until recent times, as we will argue in this issue. It is no exaggeration to say that the majority of human beings through most of history dealt with concurrent currencies. It is important to recognise that, in most if not in all cases, the coexistence of monies was not incidental but functional, since they worked in a complementary relationship. That is, one money could do what another money could not, and vice versa. In other words, an assortment of monies could do what any single money could not, and supply what the market required. In the following articles we will show how this worked.

In the seventeenth century, Amsterdam and London developed distinctive innovations in finance through both banks and markets that facilitated the growth of trade in each city. In the eighteenth century, a symbiotic relation developed that led to bank-oriented finance in Amsterdam cooperating with market-oriented finance in London. The relationship that emerged allowed each to rise to unprecedented dominance in Europe, while the respective financial innovations in each city provided the means for the continued expansion of European trade, both within Europe and with the rest of the world. The increasing strains of war finance for the competing European powers over the course of the eighteenth century stimulated fresh financial innovations in each city that initially reinforced the symbiosis of the two centers. The external shocks arising from revolutionary movements in America and France, however, interrupted the relationship long enough to leave London as the supreme financial center.

For most of its 600-year existence, the economic institutions and policies of the Ottoman Empire were shaped to a large degree by the priorities and interests of a central bureaucracy. The influence of landowners, merchants and moneychangers remained limited. The central bureaucracy managed to contain the many challenges it faced with pragmatism, flexibility and negotiation. This study examines long-term changes in Ottoman fiscal, monetary and financial institutions from this perspective of pragmatism, flexibility and adaptiveness. Ottoman institutions of private and public finance retained their Islamic lineage until the end of the seventeenth century. European financial institutions began to grow in influence during the eighteenth century. With the onset of the Ottoman reform movement and greater economic interaction with Europe during the nineteenth century, institutional change accelerated. Ultimately, however, Ottoman pragmatism and flexibility remained selective and was utilised for the defence of a traditional order led by the central bureaucracy. Many of the key institutions of the traditional order such as state ownership of land, urban guilds and restrictions on private capital accumulation remained intact until the nineteenth century.

This article explores the structure of the italian capitalist system by focusing on the relationships between financial firms – banks, insurance and holding companies – and industrial companies in italy during the period 1952–72 through the analysis of the interlocks that existed between them. By an interlock is meant the link created between two firms when an individual belongs to the board of directors of both. The analysis is based on a database – imita.db – containing data on over 30,000 directors of italian joint-stock companies for the years 1952, 1960 and 1972. After a descriptive statistical overview of the companies and the directors included in the database, the article develops a network connectivity analysis of the system. This is integrated with a prosopographic study of the big linkers, defined as those directors cumulating the highest number of offices in each benchmark year. The article confirms that italian capitalism maintained substantial peculiarities in the period investigated. in particular, it argues that interlocks played an important role in guaranteeing the stability of the positions of control of the major private companies and their connections with state-owned enterprises. In 1952 and 1960 the system, centred on the larger electrical companies, showed the highest degree of cohesion. That centre dissolved after nationalisation of the electricity industry in 1962 and was replaced by a less strong and cohesive one, hinged on banks, insurance and the major finance companies.

In 1865, France, Belgium, Italy and Switzerland signed a monetary convention (later known as the Latin Union), which provided for the intercirculation of specie between member states. Conventional analyses of the treaty (such as that by Willis) have portrayed this arrangement as a by-product of French power politics. This article seeks to reinterpret the economic nature of the Latin Union, focusing on the interrelations between trade, finance and money. I argue that the Latin Union did not foster trade integration and that, as a matter of fact, such was not its objective, according to archival evidence. Instead, I suggest that the Latin Union was the result of the growth of France as a major supplier of capital. The need to provide French investors with exchange-rate guarantees led borrowing countries to tie their respective monetary systems to that of France. This, in turn, created opportunities for international monetary action and the French franc became the ‘natural’ focal point of projects of monetary unification. This evolution, however, had structural limits which help to explain the downfall of the projects for expansion of the Latin Union.

Debasement has generally been condemned as a defect of premodern money, that was eventually amended by the institution of the gold standard. Building on monetary history and thought from the sixteenth to the eighteenth century, this article argues that debasement was instead an instrument designed to maintain the metal standard where it was needed, in the circuit of long-distance trade, while preserving the possibility of an autonomous distribution within local economies. The theoretical distinction between monetary functions (measure and means of exchange) was made effective by the articulation of ideal and real money (via debasement and enhancement), providing complementary economic areas with complementary currencies. Moreover, the distinction between monetary functions also appears as a constituent feature of money from the perspective of a reappraisal of the milestones of monetary thought, from Smith to Keynes.

The monetary powers embedded in the US Constitution were revolutionary and led to a watershed transformation in the nation's monetary structure. They included determining what monies could be legal tender, who could emit fiat paper money, and who could incorporate banks. How the debate at the 1787 constitutional convention over these powers evolved and led the founding fathers to the specific powers adopted is presented and deconstructed. Why they took this path rather than replicate the successful colonial system and why they codified such powers into supreme law rather than leaving them to legislative debate and enactment are addressed.

This article looks at the experience of management of technological innovation and mechanisation by British financial institutions. It highlights the indigenous assessment of technology, reflecting on local and American influences in two types of business organisations within the financial sector to demonstrate the nature of responses and the timing of the introduction of new methods and machinery. The adoption of Information Technology (IT) and computer applications in particular play a crucial role, though one that is intimately connected with a strategic expansion of corporate business, this growth being reflected in terms of size of business and also territorial expansion, as each of the institutions considered here constructed a national network of retail branch outlets. Discussion of established literature for the high street banks is combined with archivally informed analysis of similar, but previously undocumented, developments on the part of building societies. By taking a long-term view of these developments in the twentieth century, and by comparing the experiences of two different sets of institutions, the article highlights the strategic factors that influenced the decisions taken by senior managers in their transformation of British retail financial services.

Seventeenth century London formed a network of credit and information, necessary for the City to become a hub of international finance. Lacking a central exchange bank, London-based finance involved bankers and merchants monitoring overseas agents and enforcing international claims. Using archival sources, we show how London bankers employed merchants to channel funds around Europe. As merchants became stakeholders in the payments system, they developed incentives to monitor foreign agents and spread information of defaults. The resulting web of information flows encouraged market integration by facilitating arbitrage. Finally, the availability of instruments for formal legal enforcement assisted informal enforcement.

This article explores the development of the closed-end investment trust in both the UK and the US, in the context of the investment management strategies adopted and whether they provided value-added services for investors. Although US investment trusts of the 1920s boom years were heavily influenced by their earlier UK counterparts, they differed from British investment trusts in a number of key ways, in particular, size, capital structure, tax and accounting practices, management, and costs. These differences led to their relatively much worse performance in the stock market crash of the late 1920s and early 1930s. This poor US trust performance led directly to the creation of the US open-ended ‘fixed trust’, marketed as an antidote to the generally poor management of conventional closed-end investment trusts. As confidence in mutual funds slowly returned in the United States, open-ended funds were gradually given more flexibility, but US investment trust companies, with share prices at a steep discount to liquidation value, and partly blamed for the crash, were encouraged to convert to mutual fund status by the 1936 Revenue Act. By 1944, open-end funds had overtaken investment trusts in terms of asset size, a phenomenon that did not occur in Britain for another 30 years.

The coexistence of a number of monies with fluctuating exchange rates in modern China and other Asian regions appeared chaotic to foreign observers. However, behind this apparently confused situation lay a multiplicity of currency circuits, each of which consisted of pairing a trade zone with a particular currency. Their concurrence resulted from the difference of temporality and space in monetary usage. The difficulty of matching heterogeneous demands for money to uneven supplies of currencies made for multiple currency circulation. Such a multiplicity caused some merchants to make use of imaginary units which were alive only in account books. Though complementary relationships between incompatible monies prevailed in China, India and other regions, a combination of a remittance system and local credit supply in some societies happened to synchronise currency streams to make a compatible monetary system. This comparative study suggests that currency streams often had to pass through multiple market layers, and that some friction in the streams meant that the market required plural monies.

Many commentators have contended that British banking lacked competition for much of the twentieth century. This article examines a range of evidence relating to English clearing banks in the middle decades of the century, when the banking ‘cartel’ was believed to be at its strongest. Data on interest rates charged and paid, rate spreads, profitability and expenses ratios, including new evidence from archival sources, are considered. Some propositions about cartels are supported, others contradicted, and some left unresolved. We conclude that the banking ‘cartel’ can be described as ‘soft’, rather than ‘hard’ – that is, one which agreed strict output quotas and profits shares among its members.

Stefano Battilossi, Financial innovation and the golden ages of international banking: 1890–1931 and 1958–81

Throughout the twentieth century, the internationalisation of banking was both a factor for, and an ensuing aspect of, rising globalisation. During the period 1890–1931, commercial banks of industrialised countries promoted organisational and process innovations that successfully challenged the dominance of merchant banks in international financial intermediation. International banking re-emerged from interwar nationalistic retrenchment during the late 1950s, when banks exploited regulatory asymmetries to foster the emergence of Eurocurrency markets. Eurobanks provided not only global liquidity redistribution but also portfolio transformation services to corporate and sovereign customers. Financial innovations related to Eurobanking mark a secular discontinuity as they proved to be vehicles of a banking revolution, based on competition, deregulation and wholesale-market funding.

Utilising a new sample of interwar initial public offerings (IPOs), I consider the effectiveness of the interwar stock market for firms going public. Consistent with the pecking order theory, IPO proceeds contributed only modestly to domestic industry's capital expenditure needs. IPOs of capital-hungry new manufacturing industries raised no more finance than did the rest of manufacturing. This was in part attributable to the detrimental effect of weak financial regulation on investor appetite for newer, riskier enterprises. In terms of the quality of firms allowed onto the market, IPO survival rates of the early and late 1920s were shockingly low, just as earlier research has shown. However, survival rates rebounded strongly in the following decade due not only to the economic recovery but also to tougher scrutiny of listing applications by the London Stock Exchange.