MonetaryPolicyandExpectations:Market-ControlTechniques and theBank ofEngland, 1 925-1 931
JOHN R. GARRETT
TheBankof England depleted itsopen-market portfolio by secretly sterilizinglarge gold inflows. Thereafter interest rates wereinfluenced by manipulatingreported gold flows. Expectationsmanipulation as a monetary policy channel ismodeled and estimated. A gold flowfalsification wasovertwo-thirds as effectiveas anopen-market operation.Theseresults contradictacceptednew classicalmodelsandsuggest that credibility benefits from new classical policy are small,despite current popularity amongcentral bankers.Theepisode supportsPeterTemin'sviewof interwar centralbankersas nonstabilizers and enforcersofadysfunctionalclassicalorthodoxy.
arket controlrefersto"maintainingtheeffectivenessof BankRate:theproblemofforcingthemarkettokeepits ratesreason-ably closetoBank Rate'."'Inhis 1976 book,writtenas an officialhistorywithfull access to confidentialBankofEngland archives,R.S.Sayersclaimsthatmaintainingmarketcontrolwasamajor policyconcernduringthe interwargold
standard. Sayers's revelations,how-ever,havereceived scantattentionin thevoluminous literature oninterwarmonetary policy,perhapsbecause heattemptednoquantita-tiveanalysis of market-control problems nor proffered an explanation ofhowtheywere overcome. Forexample, Barry Eichengreenrefers tomarket control only briefly in hisextensive writingson interwarmonetary and exchange policies. Inamodelexplaining changesin BankRate, theBankof England'sdiscountrate,he writes: "sincethe BankofEngland apparentlywasconcerned with therelationshipof BankRateto market interestrates,we enter BR
ias aseparatevariable."2Thequalifier "apparently" serves notice thattheconcernis doubted-as
The Journal of Economic History,Vol. 55,No.3, (Sept., 1995). The Economic History
Association. All rights reserved. ISSN0022-0507.John R. Garrett is Associate Professor ofEconomics attheUniversityofTennessee atChattanooga, Chattanooga,TN37403.This work owes its existence to the lateLeonardA.Rapping, my doktorvater, who is sorelymissed. The author thanks ClaudiaDziobek, Charles Kindleberger, Martin Klein, Alan Rabin,Carl-Ludwig Holtfrerich, ManfredNeuman, Peter Lindert, and two anonymous referees of this
for insightful comments, withoutimplicating them for my errors. The Research SeminaratUTC and Das Institut fur InternationaleWirtschaftswissenschaft at Bonn University providedconstructive, stimulating environments. Financialsupportfrom theUniversityofTennessee, the
Fulbright Kommission of Germany, andthe UC Foundationisgratefully acknowledged.
'Sayers, Bank, p.297.
Eichengreen, Watson,andGrossman,"Bank RatePolicy," p.733.