Central banks want to learn from history. They can do so by drawing on decades of work by economic historians, as well as their own archives which manifest layers of institutional memory. But the path from page to policy can be difficult to find. Central banks need therefore to invest in the capacity of their own staff to think historically. This will help them use evidence from the past to make better decisions in the future. In practice, this means producing historical research as well as consuming it. Institutions like central banks need to be fluent participants in the conversations which bridge the distance between past and present.
The idea that history can help policy makers make better decisions is intuitively appealing and often stated. Since the world’s central banks responded to the global financial crisis of 2007 to 2008 by consciously trying to avoid the mistakes of the 1930s, it has been suggested that a better acquaintance with the past can help central bankers avoid calamity in the future. In that spirit the Parliamentary Commission on Banking Standards recommended in 2013 that banking supervisors in the UK should have “a good understanding of the causes of past financial crises, so that lessons can be learnt from them”. Shortly afterwards, Kevin Warsh argued in his 2014 review of “Transparency and the Bank of England’s Monetary Policy Committee” that “economic history can teach more than economic theory about the practice of policy and the consequences of decisions”.
Central banks – including the Bank of England – have not ignored this call to history. At the Bank of England, recent publications by staff include estimates of real interest rates since the fourteenth century, an account of the small banks crisis in the early 1990s, and analysis of the Bank’s activities as a lender of last resort in the nineteenth century. Internally, more than one hundred staff take part in a seminar series presenting research on historical topics relevant to the Bank’s objectives. Over the last few years, this has covered two dozen subjects ranging from the collapse of Overend and Gurney in 1866 to the (second) failure of Barings Bank in 1995, with plenty of excitement in between. Other central banks are at least as active. For example, the Norwegian central bank held a conference on ‘The Uses of Central Banks: Lesson from History’ in 2014, and the Spanish central bank jointly organizes annual seminars on economic history.
Learning from history requires careful investment in research capabilities because historical analysis uses skills that extend beyond an ability to do quantitative work with data from the past. Historical analysis matches close attention to the specific contexts of historical episode with an awareness of how those contexts differ from those we face now, why those changes have happened, and what implications these changing contexts have for making policy. This is difficult, and central banks sometimes struggle to articulate exactly what they need from historical research.
Figure 1: The Roman god Janus, looking simultaneously backwards and forward, as represented in a mosaic in the Bank of England. Bank of England Archive, reference 15A13/1/1/60/11
The first step is clear. It is to acknowledge that the aims of historical research in central banks are the same as any other form of research carried out there: better tools and better decisions in pursuit of policy objectives.
Our predecessors can hand us better tools if we know how to draw on the accumulated experience of people who have faced similar problems in the past. If we know what they did, and can assess what worked and what did not, we can consider applying their solutions to the challenges which confront us today. This is why decisions in central banks are often shaped with past experience in mind. Over the last few months central banks (just like other organizations) have turned to historical precedents like the 1918 influenza pandemic to help make decisions about Covid-19. Over a longer period many policies, regulations, and supervisory tools have been designed after considering past failures and what would be required to prevent their recurrence.
This is not simply a case of taking ready-made solutions off the shelf. If we are searching for tools, then the problem we are facing is probably new, unexpected, or different in its details to what we have faced before. Otherwise it would be met using day-to-day processes. But whilst old solutions to old problems might need adapting to meet present circumstances, it is easier to review the ideas people have had in the past than to start from scratch. For example lifeboat operations to rescue troubled firms or “bad banks” to take the troubled assets of failing ones are ideas which a supervisor might only need to consider once in their career. They will be a better equipped supervisor if they have historical precedents to hand when crisis hits rather than having to devise solutions anew.
Better decision making is perhaps harder to cultivate. How do we judge which tools are appropriate in which circumstances, and how do we judge when we need to change old ways of doing things to meet the unique circumstances of a present challenge? Here, historical inquiry can make an especially powerful contribution by equipping decision makers with a sophisticated understanding of how change over time happens.
This is important for two reasons.
First there is a genealogical argument. The economy we have today is a consequence of its own history. As the motto of the London School of Economics reminds us (channelling Virgil), it’s good “to know the causes of things”. Knowing why the economy is the way it is makes it easier to see how it behaves. As evolutionary biology helps us understand the functioning of organisms, economic history helps us understand the functioning of economies.
Second there is a prudential argument. Prudence (as political scientists of the renaissance used the term) is an art of responding to events and turning them to advantage. This is an art central banks must master because change confronts them everywhere. Consequently, since the crisis of 2007-08, financial regulators have recognized that regulation must be dynamic. An unchanging, static regulatory system will be left behind as economies change around it (including change which happens in response to the regulations themselves). Responsive policy makers need to understand how the financial system is changing and how they should act to safeguard their objectives. Knowing how change has happened in the past sharpens their perception of changes which are happening now, helps them to judge what their consequences are likely to be, and helps them to decide what action is needed to redirect change towards the ends at which they aim. It gives them an intellectual flexibility which David Kynaston calls “imagination” in his own reflections on the Bank’s history. This historical imagination is an essential skill for policy makers. Because change is endemic, understanding it must be second-nature.
The past is not enough. Economic history is a complement, not a substitute, for unhistoricised, theoretical and empirical approaches. But is distinct from them because it does different things. Quantitative research can reap important insights from historical data but, where relationships are not stable and patterns in the data changeable, the data must be approached with an historical mindset. Otherwise it will be forced into a straight-jacket which might be quantitatively robust, but which ignores the movement over time and the specificity of all historical moments which gives the past meaning. These are the details which cannot be assumed away, but must be carefully attended to if the past is to speak to the present.
What is the future of the past? If central banks are to benefit from the lesson of history, then they need to develop research expertise alongside a sophisticated theory of history which, like all the best theories, will be manifested more in practice than in statement. Staff at central banks (both those with and without formal historical training) should therefore have opportunities to pursue historically informed research projects. Doing is always the best way of learning, and thinking through historical problems which are relevant to contemporary objectives is the best way for supervisors, analysts, and researchers to acquire an historical mindset. For the same reasons, it is desirable that training programmes and curricula for qualifications include exercises in historical analysis.
Meanwhile senior policy makers need to know when they should be thinking about problems historically by analysing parallel, contrasting, and connected episodes from the past. These might mean formally incorporating historical analysis into decision making processes. Most importantly, policy makers should know what questions to ask of those who bring them historically informed insights. No-one charged with setting interest rates would ignore the quantitative analysis of the current state of the economy they were offered. But nor would they accept it unquestioningly. They would probe and question and form their own judgements. The same should be true of historical analysis.
In time, central banks should learn to think about doing history in the same way that they think of their other research: an ambiguous but essential guide to the future.
Austen Saunders works in the Bank’s Prudential Policy Division.
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