So this is a choice, a policy choice. And the bank can do that because it's sitting at the top, okay? But the bank itself, that's, so this is the issue of internal drain and the art of central banking. [SOUND] So if notes are draining out of the banking system into, into the arms of firms. Okay. So the banks don't have enough reserves or so forth, that's an internal drain. And the Bank of England, can can ease the internal drain by letting loose of it's own notes, and by creating good substance for them. Okay, in both cases. Or it, or it doesn't, it can choose, what it thinks is best, for the economy. But it certainly is able to do this, there's no problem. The problem comes with an external drain. Of notes and ultimately gold. Okay. If it's foreigners. Who want notes. If it's foreigners, they want gold. Then the Bank of England has to give them gold. And when the bank, the Bank of England faces discipline, above it. The Bank of England may be the, the, the money market in London may be the center of the world money market. Okay? But the Bank of England ultimately is one central bank, and there are others. And if those central banks are unwilling to accept deposits at, at the Bank of England as the equivalent of notes and they demand gold. Then the Bank of England has to give in gold, this is the gold standard and this is the other reason. So, so this thing here, looking up in the hierarchy, the central bank faces this same constraint that other banks do, which is to say, if it's losing gold. If it's cash, it's measuring cash flow, gold in, gold out. Right? And remember, it's this is the center of the world financial system, so you're discounting all the bills in the world and you're getting repaid from all the bills in the world. So, there's a gold in gold out thing that's going on at the, at the level of the country as a whole and the Bank of England is where that happens. And the Bank of England can raise its discount rate when it wants to discourage discount. What does that do? Just like a bank's lower below. It says, please don't come to me. You know, to discount and then take the gold out of my country. Go to France. You know, go, go to the bank of, go to another bank, right? Just like the banks below, say don't come to me, go to, you know, go, go down the road. So the Bank of England can do this and, and, one, one of the, it could, it could orient. And it has to focus on this, it has to pay attention to this. There's a discipline here in the system that the Bank of England itself faces. Because if it doesn't, what happens? Bank of France. Oh, I, I took down the slide there. it can lose all its gold. It can, and, and will have to go, will have to suspend payments. And say, you know, I promised you this note was convertible into gold. And it will be. Later, just not now, okay, and occasionally, every now and then, the Bank of England has to do things like that. So this tension, this stress in the system, this flow, cash inflow, cash outflow. I'm trying to tell you a story here about how it's managed, how it's managed in a decentralized way. By individual banks attending to the in, outflow and inflow of notes on their own balance sheet. Individual banks, moving the discount rate up and down, deciding to rediscount, you know, all of those things, but they're watching the cashflow. That leads to a market rate of interest. And then above them, you have central banks doing the same thing, moving discount rates up and down. Okay. The Bank of England used to say, there used to be a saying. I think it was, was it 3% or was it 6%? you could draw gold from the moon, okay, if you, if you if you pay a high enough rate of interest. What is the Bank of England doing when it's drawing gold from the moon? It's saying, I'm going to charge an awful lot for discounts. Okay. So, people don't come. And so they repay their bills. Because [UNKNOWN] don't come in, there's a, there's a shift toward repayment of, of maturing bills and all of those are repaid in gold. And there are no new bills, so there's no gold that flows out again. Okay, they drawing of gold from the moon involves a contraction of credit, that's what that is, okay. Its a contraction of credit that the bank of England can use in order to secure its position here. And to maintain par in the gold market. So the central bank, the Bank of England, Badgett's world. Okay? Is, is a source of potential elasticity looking down. Okay? But it faces its own constraint looking up. Okay? In the, in the, in the gold standard. Okay? Looking down, looking up, at, at its position in the world. Young makes a very, you know? This, have a look at that chapter again. Makes a very big point that the whole word monetary system is being run on very little gold. Okay, because the gold that's actually being used, okay, is the gold in the banking department, okay. The rest of the gold is sort of locked up, just back in the notes, you know, it's not flowing anywhere. The gold that flows, is the gold that's in the banking department, and there's not very much of it. Why are they able to do this? Because of the sophistication of the money market. Okay. That if you need gold. You can borrow, you can borrow it from other central banks. There's realtions between central banks. And this is the point looking up now. Just as when, when this bank ran into trouble, okay, he could borrow from other banks, the same is true of central banks. If central banks were all willing to borrow and lend reserves, gold to each other okay, they could jointly relax this constraint. Right. Just as banks that are willing to borrow and lend in the Fed funds market right can, can relax the survival constraint that's facing them. But will they? And what are the institutional mechanisms to enforce that, and to encourage that? Okay? Monetary economists always speak about central bank cooperation, but central bank cooperation also involves sort of national interests, and the, and the interference of politicians and finance ministers, and that sort of thing. It's easier said than done. This cooperation among, among central banks that's required and if you don't get cooperation with the central banks, what do you get? You get the survival constraint binding on the sub central banks. The central banks, and a central bank that has a binding survival constraint on its own balance sheet has no choice but to raise, raise interest rates. Has no choice but to raise interest rates even if the consequence of that is to crunch all the banks underneath it. So, if the central bank itself is facing discipline it's going to, it's going to transmit that discipline down, down. Does this sound familiar to you? Things like this happening in the world? Yeah. So, the central bank is in, is in an interesting position, it's, it's, it's in between. It's in, it's, it's, it's, it's not at the absolute top, it faces it's own survival constraint which it can relax if it can deal with other, other central banks. It can impose discipline on the banking system below it. It doesn't have to unless it, it, it has discipline imposed on itself. Okay. These are matters of, of policy. This is the world that Badgett knew. Okay. And it's not so different from our own world, actually. Okay. But it's a quite a different way of thinking about what central banks do. We're used in monetary you know we, we do macro or something. You have ISLM, you're thinking about moving the interest rate in order to encourage aggregate demand, or something like this. This is where it all started. Where it all started was this. Thinking about the role of, of the central bank. Bank rate, market rate and dealing with the survival constraint. this decentralized way of sending messages about where you are and what is the state of the system. When the market, money market rate gets bigger, gets higher okay, that means there's strasses in the system somewhere. This is like a A reliable indicator of the state of the economy is, is the, is the money rate of interest. That's what people watched all the time. You know, because everyone was in this business. These firms are, are watching this. They're, they're trying to decide. Maybe I should hold some notes, okay, or maybe things, maybe I should own earn hold earnings assets, you know. Am I going to need to safeguard my liquidity, you know what what, they are watching this very, very closely. and that what's coordinating the economy as a whole, and that is what's coordinating the world as a whole. Because the lending money market is the world money market, at that time. It's enough to make you think the money market is God, and want to really watch it closely. Hence, Lombard's book. People bought this book. It was a best seller. It was a best seller. the money market was very present in everyone's life in the 19th century. In 19th century Britain.
