Central bank machinations

ZeroHedge today revealed the existence of research that describes how in the 1920’s the Bank of England misled the public in a major way.  The paper can be found here.  An important source for the paper can be found here. The key is that the central bank hid the true nature of its holdings in an attempt to avoid a market crash.

“The Bank of England depleted its open-market portfolio by secretly sterilizing large gold inflows. Thereafter interest rates were influenced by manipulating reported gold flows. Expectations manipulation as a monetary policy channel is modeled and estimated. A gold flow falsification was over two-thirds as effective as an open-market operation. These results contradict accepted new classical models and suggest that credibility benefits from new classical policy are small, despite current popularity among central bankers. The episode supports Peter Temin s view of interwar central bankers as nonstabilizers and enforcers of a dysfunctional classical orthodoxy.”

Zero Hedge eloquently summarized the implications:

“the main question remains: why did the Bank of England openly and flagrantly manipulate critical data? Why did it mislead the citizens of the country it was supposed to serve? And if this happened in the past is it happening now? Is this the reason why the Federal Reserve is so opposed to exposing itself to public scrutiny and audits? If the BOE was engaging in outright fraud in the 1925-1931 period, why would today be any different?”

These are not unreasonable questions to ask.


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