Introduction

On the occasion of the 300th anniversary of the Bank of England there is a natural tendency to look back at the historical record of central banks, to examine their development to the present time, and, more daringly, to speculate about their future. Although it is hard to depart from a chronologically ordered narrative (particularly since two of the authors are economic historians), we have tried to structure our paper by concentrating on the key functions undertaken by the central bank.

The main objective of central banks, over the centuries, has been the maintenance of the (internal and external) value of the currency, and we, therefore, turn in section 1.2 to an historical account of central bank macroeconomic policy. While the maintenance of the value of the currency has, historically, almost always been achieved via the same instrument, varying the central bank's discount rate, this objective has not always meant the same thing. Under the classical gold standard the objective was cast in terms of metal convertibility: that is, the value of central bank notes was expressed in terms of their metal (gold) ‘content’, which central banks attempted to maintain at stated levels over time. The purchasing power of currency relative to goods in general (i.e. to a price index) was thus only indirectly an objective of central banks, with gold acting as the true nominal anchor. With the gradual erosion of the gold standard throughout the first half of the twentieth century, and its replacement everywhere by a pure fiat standard, the objective of central bank policy has now been recast in terms of price stability.