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analyze the equation about the international economics — reading the Bank of England Operations, 1893-1913analyze equations for 4.2 long run and 4.3 short run

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This PDF is a selection from an out-of-print volume from the National Bureau
of Economic Research
Volume Title: A Retrospective on the Classical Gold Standard, 1821-1931
Volume Author/Editor: Michael D. Bordo and Anna J. Schwartz, editors
Volume Publisher: University of Chicago Press
Volume ISBN: 0-226-06590-1
Volume URL:
Publication Date: 1984
Chapter Title: Bank of England Operations, 1893-1913
Chapter Author: John Pippenger
Chapter URL:
Chapter pages in book: (p. 203 – 232)
Bank of England
Operations, 1893-1913
John Pippenger
The Bank of England did not publish figures for bankers’ deposits until
1967. The first economist to use that information was Goodhart (1972).
This study builds on and reexamines the work of Goodhart, whose
conclusions conflict with the conventional wisdom about the Bank and
the gold standard.
Section 4.1 reviews some of Goodhart’s results, section 4.2 examines
the long-run operations of the Bank, section 4.3 analyzes short-run
behavior, and the final section 4.4 presents the conclusions. An appendix
provides spectral estimates of key variables examined in this study.
Goodhart’s Results
Goodhart (1972) analyzed the operations of the Bank of England and
British commercial banks and their roles in the functioning of the gold
standard from 1891 to 1914. His conclusions about the role of the Bank in
the operation of the gold standard challenge the conventional wisdom.
The strongest link in the causal chain of the classical analysis of the
working of the gold standard mechanism is generally considered to be
that connecting changes in the reserve base of the commercial banks
with fluctuations in the (gold) reserve, or liquidity, position of the
central bank. Yet in this study of the working of the system in the UK
this is the link which shatters .
. . . there is no simple direct relationship between the variations in
the levels of bankers’ balances at the Bank and in the level of the
reserve in the Bank. (Goodhart 1972, p. 209)
This conclusion rests primarily on two regressions. In the first, monthly
data on bankers’ balances at the head office of the Bank of England are
John Pippenger is professor of economics at the University of California, Santa Barbara.
John Pippenger
regressed against time, reserves in the Banking Department, and seasonal factors. There is no link between bankers’ balances and reserves.
= 7913.5 + 37.74 time
Bankers’ balances
(967.4) (1.97)
– 1.29 reserves + seasonals.
With seasonals R2
= 0.64, D.W. = 1.07.
Without seasonals R2 = 0.56.
The numbers in parentheses are the standard errors.
The second equation is in logs and adds railway freight receipts as a
proxy for nominal income.
Log bankers’ balances = 4.843 + 0.0006 time
(1.142) (0.0003)
+ 0.707 log freight receipts
+ 0.092 log reserves.
= 0.679, D.W. = 0.96.
Without seasonals R = 0.579.
With Seasonals
Now a positive relation between bankers’ balances and reserves emerges,
but the estimated response to income is several times larger than the
response to reserves.
Goodhart also estimates two other relationships that are relevant for
the operations of the Bank of England. One attempts to explain the ratio
of reserves in the Banking Department to total liabilities of that department—-otherwise known as the proportion.
= 7.39 + 0.0006 time
Log proportion
(0.78) (0.0002)
– 0.79 log freight receipts
+ 0.53 log reserves + seasonals.
= 0.765, D.W. = 0.90.
Without seasonals R2 = 0.584.
With seasonals
The standard errors are in parentheses. Goodhart (1972, p. 206) interprets this result as follows: “It suggests that the Bank must have regularly
accommodated, to some large extent, variations in the demand for cash
Bank of England Operations, 1893-1913
caused by changes in the level of domestic activity by varying its holdings
of other assets, independently of the level of gold reserves.”
The final relationship attempts to explain Bank rate in terms of trend
and the liquidity position of the Bank of England, first using the proportion and then the reserves as a measure of liquidity:
= 4.48 + 0.0012 time
Bank rate
(0.89) (0.0004)
– 1.09 log proportion
+ 0.746 Bank rate (t – 1) + seasonals.
“R 2
= 0.795.
Without seasonals “R = 0.736.
Bank rate
= 2.49 + 0.0021 time
With seasonals
(0.55) (0.0005)
– 0.714 log reserves
+ 0.756 Bank rate (t -1) + seasonals.
With seasonals
“R 2
Without seasonals
= 0.791.
The numbers in parentheses are the standard errors. The results show the
expected inverse relation between Bank rate and the liquidity position of
the Banking Department.
The next two sections reexamine the operations of the Bank of England, employing as much as possible the data used by Goodhart.2 The
first section concentrates on the long-run and the second looks at the
short-run behavior of the Bank.
Long-Run Operations
This section concentrates on long-run behavior by using annual averages of monthly data.3 The next section, in order to emphasize short-run
operations, uses monthly changes.
Sayers (1976, p. 8) points out that the governor of the Bank of England
had three primary objectives.
He had a statutory duty to maintain the convertibility of the note into
gold coin; he had a political duty to look after the financial needs of
government; and he had a commercial duty to maintain an income for
John Pippenger
the stockholders. Whenever possible, he was running all three horses
at once, but if there was a conflict, he knew which he had to put first. He
would think of his primary duty as the maintenance of the gold standard.
Although a variety of special situations probably influenced the short-run
operations of the Bank, the duties cited by Sayers, particularly the
statutory and commercial duties, appear to dominate long-run behavior
of the Bank.
Bankers’ Deposits and Reserves
Goodhart’s most challenging discovery is the weak relationship between reserves in the Banking Department and bankers’ deposits at the
Bank of England. His results threaten a crucial link in the conventional
interpretation of the gold standard.
Consider a very simple model of Bank-portfolio behavior in which
desired reserves R depend on deposits and interest rates.

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