The following is an excerpt of an article by Will Roberds, a research economist and senior adviser in the Atlanta Fed’s Research Department
On May 21 and May 22, the Atlanta Fed hosted a virtual workshop on monetary and financial history. The workshop was organized by Michael Bordo (Rutgers University), William Roberds (the Federal Reserve Bank of Atlanta), and Warren Weber (formerly of the Federal Reserve Bank of Minneapolis and currently a visiting scholar at the Federal Reserve Bank of Atlanta). The workshop featured presentations on the history of money, banking, finance, and central banking. Six papers were presented along with two invited lectures. Both days of the workshop concluded with a panel discussion of contemporary policy issues from a historical perspective.
In this post, I’ll discuss events from the workshop’s first day, and in another post tomorrow I’ll discuss day two of the workshop.
The workshop opened with a paper presentation by Ryland Thomas of the Bank of England and discussion by Clemens Jobst of the University of Vienna. The paper was titled “What You Owe or Who You Know? The Recipients of Central Bank Liquidity during the English Crisis of 1847,” and its authors were Mike Anson (Bank of England), David Bholat (Bank of England), and Kilian Rieder (the Austrian National Bank). It focused on the Bank of England’s responses to an 1847 financial panic. This episode is of interest to central bank historians because it was the first panic in which the Bank of England was subject to legislation (the Bank Charter Act of 1844, also known as Peel’s Act) that limited its ability to extend credit in crisis situations. The paper analyzes the actions of the Bank during the panic, using a data set of credit actions (discounts and advances) hand-collected from the Bank’s archives. The presentation emphasized that the constrained bank was able to provide emergency liquidity by rationing credit along several dimensions. In particular, the bank’s credit actions discriminated against parties such as bill brokers, firms dealing in agricultural commodities, and firms located outside London, while favoring banks, London firms, and firms associated with bank directors. Ultimately these actions proved insufficient to stem the panic, however, and constraints on the Bank had to be eased by a government decree (“Chancellor’s letter”).
In his discussion, Jobst noted that the paper’s results go against a traditional view of the 19th-century Bank of England as an arms-length (“frosted glass”) lender. He also suggested that the paper’s data set could uncover to what extent the structure of the London bill market shifted during the 1847 panic, with traditional dealers in bills (“bill brokers”) apparently becoming disintermediated during the panic. Finally, Jobst noted that the 19th-century Bank used its interactions with the bill market in a quasi-macroprudential fashion, to maintain a sense of risk preference in the market as well as to exert control over the market. The paper’s data set could thus be used to reveal the information available to the bank in its policy decisions as well as its resulting policy actions.
The second paper of the workshop was presented by Marc Flandreau of the University of Pennsylvania and discussed by William Goetzmann of Yale University. The paper (“How Vulture Investors Draft Constitutions: North and Weingast 30 Years Later”) focuses on sovereign debt negotiations following a default by Portugal in 1828. The paper describes how a contender for the Portuguese throne was then able to obtain new loans from Portugal’s London creditors during 1830–33, despite Portugal’s recent default. In his presentation, Flandreau showed that a key aspect of the loan renegotiation was an 1827 British law that allowed a creditors’ committee to control a defaulter’s access to the London market, strengthening the creditors’ bargaining position. The presentation also described how such control then allowed “vulture” investors in Portugal’s defaulted debt to later earn large returns on their investment, and how the repayment of the renegotiated debt imposed high costs on Portuguese taxpayers.
In the discussion, Goetzmann observed that the 1827 law effectively inserted collective action clauses into the original Portuguese debt issue, even though the debt did not contain such clauses. Goetzmann also displayed a copy of a later (1855) lending agreement between the Portuguese crown and London creditors, which contained similar clauses to the contracts described in the paper, indicating that patterns documented by Flandreau persisted. Goetzmann then noted that cooperation between sovereign creditors was not unique to London, and he described how early (1790s) loans from Amsterdam creditors to the United States were subject to similar types of collective agreements. He further noted that many sovereign debt issues previously negotiated in Amsterdam were defaulted on during the Napoleonic period, creating a debt overhang problem and increasing the attractiveness of London as an alternative market for sovereign loans. International competition between sovereign lenders must therefore be considered as a constraining factor in the structure of sovereign loans.
To read the rest of the article by Will Roberds, please click here.
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