Search

We review developments in the history of money, banking, and financial intermediation over the last twenty years. We focus on studies of financial development, including the role of regulation and the history of central banking. We also review the literature of banking and financial crises. This area has been largely unaffected by the so-called new econometric methods that seek to prove causality in reduced form settings. We discuss why historical macroeconomics is less amenable to such methods, discuss the underlying concepts of causality, and emphasize that models remain the backbone of our historical narratives. Keywords: historical macroeconomics, money, banking, financial intermediation.

Bis vor rund 150 Jahren war die Verwendung von Notengeld in der Schweiz noch die Ausnahme. Dass eine Gesellschaft einem vom Materialwert her nahezu wertlosen Schein vertraut, ist nicht selbstverständlich. Der Vertrauensaufbau war ein langer Prozess. Ebenso war es mit dem Vertrauen in das Bankensystem. Die Erfahrungen im Laufe der Geschichte zeigen aber, dass das Vertrauen in (Papier-)Geld und in Banken schneller verspielt als aufgebaut ist.

Tommaso Padoa-Schioppa was one of the great architects of the euro. He is remembered in particular as co-rapporteur for the Delors Committee and as a founding member of the European Central Bank's Executive Board. For Padoa-Schioppa, becoming Director-General of the European Commission's DG II (from 1979 to 1983), was a defining moment in his career and life. This period is the main focus of this paper. At the Commission, Padoa-Schioppa's main priority was the European Monetary System, which was launched in March 1979. He was closely involved in several projects to strengthen the EMS, to improve economic policy convergence and the position of the ECU. The other main objective for Padoa-Schioppa was the strengthening of DG II's analytical capacity, especially its model-building capacity and its links with the academic world. As such, he played a crucial role in the professionalisation of economics at the Commission and in preparing DG II for the important role it would play in the EMU process. At the Commission, Padoa-Schioppa became also immersed in several European networks. Of crucial importance here were his contacts with Jacques Delors. This would be of major importance for his further career, becoming one of the architects of the single currency.

The emergence of the gold standard has for a long time been viewed as inevitable. Fluctuations of the gold-silver exchange rate in world markets were accused to lead to brutal and unsustainable switches of bimetallic countries' money supplies. However, more recent work has shown that the option character of bimetallism provided a stabilizing feedback loop. Using original data, this paper provides support to the new view. Using quotation prices for Indian Government bonds, we analyze agents' expectations between 1860 and 1890. The intuition is that the spread between gold and silver bonds issued by the same entity (India) and backed by a credible agent (Britain) is a "pure" measure of the silver risk. The analysis shows that up until 1874 markets were expecting bimetallism to last. It is only after this date that markets gradually started requiring a premium to hold silver bonds indicating their belief that gold would eventually become the only metallic standard.

During the turbulent 1970s and 1980s the Bundesbank established an outstanding reputation in the world of central banking. Germany achieved a high degree of domestic stability and provided safe haven for investors in times of turmoil in the international financial system. Eventually the Bundesbank provided the role model for the European Central Bank. Hence, we examine an episode of lasting importance in European monetary history. The purpose of this paper is to highlight how the Bundesbank monetary policy strategy contributed to this success. We analyze the strategy as it was conceived, communicated and refined by the Bundesbank itself. We propose a theoretical framework (following Söderström, 2005) where monetary targeting is interpreted, first and foremost, as a commitment device. In our setting, a monetary target helps anchoring inflation and inflation expectations. We derive an interest rate rule and show empirically that it approximates the way the Bundesbank conducted monetary policy over the period 1975-1998. We compare the Bundesbank's monetary policy rule with those of the FED and of the Bank of England. We find that the Bundesbank's policy reaction function was characterized by strong persistence of policy rates as well as a strong response to deviations of inflation from target and to the activity growth gap. In contrast, the response to the level of the output gap was not significant. In our empirical analysis we use real-time data, as available to policymakers at the time.

Though checks' popularity is now waning in favor of electronic payments, checks were, for much of the twentieth century, the most widely used noncash payment method in the United States. How did such a relatively inefficient form of payment become so dominant? This article traces the historical evolution of the check, focusing on its relation to complementary and competing payment technologies. ; Originating in the eastern Mediterranean during the first millennium as a convenient form of payment between local merchants, checks became more versatile through the development of negotiability in sixteenth-century Europe. The suppression of banknotes in eighteenth-century England further promoted the use of checks. In the United States, nineteenth-century legislation discouraged other payment methods and eventually led to a nationwide check payment system. In the twentieth century, under the Federal Reserve's leadership, checks expanded rapidly and became the nation's default payment method. ; The authors discuss some persistent historical themes surrounding checks: checks' ease of use, which provides advantages over other payment methods but creates risk to businesses and banks; checks' sophistication, which evolved through centuries of legal precedent and operational experimentation; and checks' high costs relative to other forms of payment. ; Checks' traditional dominance of the U.S. payment system, the authors conclude, resulted from historical happenstances. These events gave the check relative advantages that are only now being overcome by electronic payment technologies.

The Massachusetts currency of 1690 was the first inconvertible paper money to be supported solely by a legal tender law. The circumstances that led to its creation exceed the typical story of wartime specie shortage. Due to temporary political constraints of that turbulent period, the currency could be neither backed by land nor granted a full legal tender status, as was then standard. Instead, it had to be disguised from England as a simple, private-like IOU. By pleasing both its pay-demanding troops and England, the government maximized its probability of survival subject to the constraints.

Complementarity of money mean that two or more kinds of monies together fulfil the demand of the users better than they would without the existence of the other(-s). In this paper we study complementarity between paper monies in Sweden. We address four questions: 1) What was used as money on a macro level (money supply) and on a micro level (monetary remittances)? 2) What was the relative value of different monies in parallel circulation? 3) Was there seasonal variations in use and/or value? 4) Was there geographical variations in use and value? What we find is that the complementarity helped to solve the problem of providing sufficient liquidity domestically over time and space and thus and to keep a stable value of the currency.

This paper examines the questions of whether and how feudal rulers were able to credibly commit to preserving monetary stability, and of which consequences their decisions had for the efficiency of financial markets. The study reveals that princes were usually only able to commit to issuing a stable coinage in gold, but not in silver. As for silver currencies, the hypothesis is that transferring the right of coinage to an autonomous city was the functional equivalent to establishing an independent central bank. An analysis of market performance indicates that financial markets between cities that were autonomous with regard to their monetary policies were significantly better integrated and more efficient than markets between cities whose currencies were supplied by a feudal ruler.

The paper analyses the development in inflation in Denmark during the last century. New annual input-output based time-series data for the underlying domestic inflation in Denmark 1903-2002 is constructed by stripping the development in the private consumption deflator for price increases caused by the direct and indirect content of imports, indirect taxes and gross rents. The analysis seems to suggest that an input-output based underlying inflation measure paints a fundamentally different picture of the inflationary development than the private consumption deflator in periods with large structural movements in the relative prices or periods with high inflation volatility. The most marked example is the period 1973-1986 characterised by large increases in indirect taxes and gross rents as well as a high and volatile element of imported inflation due to large oil price movements as well as large and frequent devaluations of the Danish krone. A low level of input-output based underlying inflation does not necessary imply a low future level of inflation. The input-output based measure of underlying domestic inflation reflects the development in wages and gross profit per produced unit in domestic goods and services delivered for private consumption. A temporary drop in the level of underlying inflation, e.g. around the second oil-price shock, may therefore partly reflect a temporary squeeze of profit margins that later gets restored. An input-output based underlying inflation measure may however provide insights into the inflation process that can not be easily uncovered from other economic indicators. An inputoutput based measure of the underlying inflation can be a useful supplement to other types of information (e.g. the development in wages, output gap etc.) in relation to both an interpretation of the historical inflation development and as an input into a broad assessment of the current inflationary environment. Despite the relatively comprehensive calculation procedure input-output based measures of underlying inflation may therefore add value to the arsenal of other core-inflation indicators used within the central-banking community.

This paper outlines a model of the first true central bank, the Bank of Amsterdam, founded in 1609. Employing a variant of the Freeman (1996) model of money and payments, we first analyze the problematic monetary situation in the Netherlands prior to the founding of the Bank. We then use the model to describe how the Bank could remedy this situation by creating a stable medium for the settlement of commercial obligations.

On January 1,1999 euro became the currency for 11 member states of the European Union. Since then the dollar-euro exchange rate has completed a full turning. Three years of depreciation of the euro followed by three years of appreciation without wild fluctuations asks for an explanation which would adequately account for the position of the euro as an emerging international currency. In this paper, first we present a concise summary of the theory of world money. Then we apply the theory to explain the development of the exchange rat of euro versus dollar in the subperiods 1999-2002 and 2002-2004.

During the Civil War the Arkansas legislature funded their expenditures primarily through interest-bearing warrants and war bonds. After these issues were made legal tender in November 1861, the discount attributed to them disappeared immediately and they began to circulate widely. By mid- 1862 they appeared to be preferred to Confederate notes - which were also made legal tender in November 1861 but required military intervention to support their acceptance. The widespread circulation and potential dominance of legal tender interest-bearing currency is consistent with legal restrictions theory. Confederate notes supplanted the Arkansas issues only after the legislature suspended interest payments in November 1862.

During the Civil War the Arkansas legislature funded their expenditures primarily through interest-bearing warrants and war bonds. After these issues were made legal tender in November 1861, the discount attributed to them disappeared immediately and they began to circulate widely. By mid- 1862 they appeared to be preferred to Confederate notes - which were also made legal tender in November 1861 but required military intervention to support their acceptance. The widespread circulation and potential dominance of legal tender interest-bearing currency is consistent with legal restrictions theory. Confederate notes supplanted the Arkansas issues only after the legislature suspended interest payments in November 1862.

Im Laufe des letzten halben Jahrhunderts ist die Deutsche Mark zu einem Symbol für Stabilität geworden. Was läßt sich aus ihrer Geschichte für ihren Nachfolger, den Euro, lernen? Welche Chancen und Risiken sind mit der Ablösung der D-Mark verbunden? Welche Voraussetzungen müssen für eine stabile Entwicklung des Euro erfüllt sein?