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April 1984, 
Vol. 66, No. 4
Posted 1984-04-01

A Private Central Bank: Some Olde English Lessons

by G.J. Santoni

G. J. Santoni investigates the proposition that central bankers respond systematically and predictably when faced with different incentives relating to monetary control. The author focuses on the actions of the Bank of England from 1694 to 1930. The Bank of England provides both an interesting and an apt case study for two reasons. First, in contrast to modern central banks, England’s central bank was a privately-owned, for-profit institution from its founding in 1694 until the early 1930s. Further, the bank was structured such that the wealth of the Bank’s owners was inversely related to the rate of inflation. Second, the government seized the monetary control function from the private owners of the bank from 1793 to 1821. This period is important because it demonstrates clearly how different incentives produce different policy consequences, holding other important institutional factors roughly constant. Santoni concludes that the incentives confronting England’s private central bankers led them to choose relatively low rates of monetary growth and inflation; in contrast, the government chose significantly faster rates of monetary growth and inflation when it controlled the Bank of England.