The 1997 system, which appeared to have been functioning so smoothly and satisfactorily, was severely tested after 2007–2008, in what became known as the Global Financial Crisis. Both elements of the new approach to economic governance – the operational independence of the Bank on monetary policy, and the separation of financial supervision – stood as subjects of controversial debate, and a new wave of institutional upheaval set in. There was - and there is - no obvious and easy solution to the question of designing monetary management as part of a broader economic policy-making framework. What is involved in being the very model of a modern central bank is today no longer quite as obvious as it had been at the end of the twentieth century.

This chapter introduces an analytical framework suitable for studying ancient and premodern economies in a comparative perspective. It defines the economy in objective terms, discusses difficulties that must be addressed in developing a comparative understanding of ancient economies, and summarizes the general organization of the volume.

After 1985, the UK first assigned a ‘greater importance‘ to exchange rate objectives, without specifying any rule; then followed between early 1987 and March 1988, an unannounced policy of linking the pound to the deutschemark at the rate of 3 DM/£ was pursued. That policy, undertaken without the knowledge of the Prime Minister, eventually led to a sharp political conflict between Thatcher and Lawson. Subsequently, the exchange target was abandoned. All three phases of the new exchange rate regime were conceptually incoherent, and the lack of monetary control in the second half of the 1980s eventually produced not only rapid growth (that looked like a policy success and was termed the ‘Lawson boom‘) but also a new upsurge of inflation that increasingly concerned the Bank. Eddie George emerged not only as a key architect of Bank strategy but also as a favoured interlocutor of Margaret Thatcher. A background to the policy debates was the increased attraction, to the Treasury and to some figures in the Bank, of the European Monetary System as a way of securing the deutschemark as an anchor, and international coordination on exchange rates became more central to monetary policy management; Thatcher and George were critical of that vision.

This chapter examines four forces that fostered the development of centralized leadership in early complex societies: the development of resource-holding groups, the intensification of production, the need for mutual protection, and the necessity of regulating interaction with neighboring groups. The palace was an important institution in many early societies, and the Bronze Age kingdoms of Old Kingdom Egypt and Canaanite Ugarit are examined for how they were organized.

The Bank of England was heavily involved in the management of Hong Kong’s banking and currency arrangements. The shadow that continually hung over both was the prospect of the termination of the lease on the ‘Crown Colony’ in 1997. In the late summer of 1983, a property boom collapsed and brought major financial strain and an exchange rate crisis. The Bank sent experts who backed schemes to create a currency peg, managed by currency board arrangements, with a link to the British pound. That had implications for the positions of the large banks, which issued bank notes. There was also a question about the position of the large Hong Kong banks, and the largest, HSBC, wanted to acquire, or merge with, a UK bank: eventually HSBC took over Midland.

The concept of an overall regulatory approach to financial stability only emerged in the 1980s, when the word macro-prudential appears for the first time. The Bank’s attention was largely focused at this time on the problems of particular institutions: the exposure of large UK banks to Latin American debt in the run-up to the 1982 debt crisis; and then the collapse of Johnson Matthey Bankers in 1984. The Bank bought JMB for £1, and then injected £100 m into JMB. The manner of the rescue, and its justification as needed to save the credibility of the London bullion market, looked very much like the old-style City at work. It brought a great deal of political and media criticism of the Bank, and set the stage for new banking legislation in 1987. Financial supervision was trapped on the one hand between obsession with scandal and inability to confront systemic issues, and on the other between a need for international coordination and its practical and political impossibility. The Bank began to believe that it needed to give up on its old self-perception that it was a part of a City protective network.

The 1987 Banking Act established a new framework for bank regulation in the UK, but the Act did not require the Bank of England to prevent bank failures, and the Bank indeed went out of its way to emphasize that it rejected the view that all bank failures are supervisory failures. The Bank was severely embarrassed by its handling of the collapse of BCCI (Bank of Credit and Commerce International) in 1991 and of the failure of Barings after a foreign exchange trading scandal in 1995. The relative success of its handling of the ‘small banks crisis‘ that followed the recession of the early 1990s, and the very discreet managerial restructuring of Midland with a great deal of Bank intervention went unnoticed. In banking supervision, there is an inevitable tendency for public and political attention to focus on failures: a development that led the Labour Party to separate practical supervision from the Bank in 1997 with the creation of a Financial Services Authority. At the same time, the Bank devoted a great deal of attention to securing the provision of an adequate, stable and sustainable platform for trading, payment and settlement operations.

Institutions were also financed through economic transfers that drew resources from the individuals that institutions were intended to serve. Two different types of transfers are discussed: euergetistic, or voluntary, contributions made by wealthy patrons in Greco-Roman societies, and involuntary forms of taxation found in many ancient societies. The chapter also discusses forms of tax collection and the use of rents in order to fund institutions.

Monetarism was at the core of the ideological and policy wars of the 1980s, and of the strategy of the Conservative government headed by Margaret Thatcher. The UK had the highest rate of inflation in the industrialized world. By the 1970s, inflation was tearing the British social fabric apart: especially in its interactions with a government-imposed prices and wages policy. The British policy-making community could not agree whether money should be an overall objective of policy, or simply a target for an indicator that might be a temporary expression of how far the objective was being met, or an instrument for the conduct of policy in pursuit of the target. The Bank was initially quite sceptical about monetary targeting and hostile to monetarism. It believed that proposals for monetary base control ignored the structure of the British banking system, the knowledge of whose complexities and intricacies formed the core of the Bank of England’s professional competence. The keystone of the UK government’s approach was to target a range for £M3 growth as part of a Medium Term Financial Strategy. Meanwhile the Bank felt that it was shut out of policy formulation.

A central bank is expected to produce results that are generally beneficial to the people to whom (through parliament) it is accountable. In the late twentieth century, the belief that monetary policy was a tool in fighting short-run economic problems gave way to thinking about monetary stability as providing a framework within which better informed judgements about long-run decisions could be made. The period is punctuated by two traumatic recessions. The early 1980s collapse in large part was the intentional result of a radical change in macro-economic strategy; the second was a product of the aftermath of a loose money period with excessive credit growth and then a collapse of a housing bubble. Both occurred in a wider international economic setting: in the early 1980s in the wake of the second oil price shock and of the 1979 anti-inflationary turn in US monetary policy; in the early 1990s the responses to the fiscal and monetary shock of German unification, a US slowdown and a new oil price spike after the first Gulf War. In both cases, the UK output performance was significantly poorer than that of other major industrial countries.