The Bank of England has announced plans to open its central-bank-money settlement system (RTGS) to non-bank payment service providers. This, it hopes, will promote competition, innovation, and financial stability by creating more diverse payment arrangements.
In the FT, Martin Arnold reports about a new cross-border payment method tested by the Bank of England. The “interledger” program transfers money “near-instantaneously and without settlement risk.” The Bank of England
set up two simulated RTGS systems on a cloud computing platform, using the Ripple interledger to simultaneously process “a successful cross-border payment”.
This is not necessarily good news for the blockchain community. The Bank of England’s proof of concept is
“about connectivity between central bank systems rather than replacing the central bank systems with the blockchain,” [according to] Daniel Aranda, head of Europe at Ripple.
In the Journal of Economic Literature, William Roberds reviews Christine Desan’s “Making Money: Coin, Currency, and the Coming of Capitalism” and he provides his own perspective on European monetary history.
… the transition of the Bank of England’s notes from the status of experimental debt securities (in 1694) to “as good as gold” (1833) required more than a century of legal accommodation and business comfort with their use.
Desan emphasizes England’s traditions of nominalism (as opposed to metallism) and monetary restraint as well as early experiments in monetary substitution in laying the foundations for the Bank of England’s success. Lobbying played its role, too.
Roberds discusses the experience of note issuing institutions in other countries.
At the time of the Bank’s founding, there were about twenty-five publicly owned or sponsored banks operating in Europe. These institutions are largely forgotten today; most were dissolved by the early nineteenth century and only one continues in existence, Sweden’s Riksbank. …
These banks were run by and for the merchant communities in their respective cities [Amsterdam, Genoa, Hamburg, and Venice] … The existence of the early municipal banks depended on a form of nominalism more extreme than what prevailed in contemporary England. Merchants in these “banking cities” were required by law and by custom to settle all bills of exchange (the dominant form of commercial credit) with transfers of money on the ledgers of the local public bank. The practical advantage of such a restriction was that it reduced or eliminated the possibility of settlement in the debased coins … the municipal banks’ ledger money was often seen as more reliable than the typical coin in circulation …
Most of these banks failed after getting involved in speculative episodes, hyperinflation, or political turmoil. The Bank of England was lucky.
A progress update by the Bank of England describes the Bank’s intention, over time,
to extend direct access to RTGS to non-bank Payment Service Providers (firms granted the status of E-Money Institutions or Payment Institutions in the UK), collectively known as PSPs. By extending RTGS access, our objective is to increase competition and innovation in the market for payment services.
The Economist reviews the history of finance and financial regulation, arguing that
institutions that enhance people’s economic lives, such as central banks, deposit insurance and stock exchanges, are not the products of careful design in calm times, but are cobbled together at the bottom of financial cliffs. Often what starts out as a post-crisis sticking plaster becomes a permanent feature of the system. … The response to a crisis follows a familiar pattern. It starts with blame. New parts of the financial system are vilified: a new type of bank, investor or asset is identified as the culprit and is then banned or regulated out of existence. It ends by entrenching public backing for private markets: other parts of finance deemed essential are given more state support.
The Economist identifies five major events that shaped modern finance:
- Hamilton’s bank bailout in 1792.
- The creation of joint-stock banks in England after the “emerging markets” crisis of 1825.
- The railroad crash of 1857, global panic and the Bank of England’s stricter requirements for discount houses to hold cash.
- Financial fraud and low cash holdings, the 1907 panic, the National Monetary Commission’s demand for a lender of last resort and the 1913 Federal Reserve Act establishing the (third) central bank in the US.
- Recession and financial meltdown in 1929, the bank holiday of 1933, publicly funded bank recapitalization, Glass-Steagall and the FDIC.