For better or worse, forecasting has become part of economists’ repertoires. But, given the delays involved in collecting and summarizing data into regular reports on the economy’s health, using more frequently compiled or even real-time data is an art in itself. Trying to make sense of the overall economy by looking at minute-by-minute movements in interest rates and asset prices might seem a bit arcane and even misguided, so reports on things that have obvious links to the real economy may be more appreciated.
A popular such indicator in the US is the Institute of Supply Management’s Purchasing Managers Index (PMI). It compiles results from a monthly survey of corporate purchasing managers and is among the first news releases on the economy each month. The economic advisors to Presidents sing its praises for this reason; so too have central bankers. Alan Greenspan, longtime chairman of the Federal Reserve, once called the PMI his “Desert Island Indicator,” the economic indicator he would most prefer to rely on if he had to pick one.
Though they may seem like recent creations, rapidly collected and even real-time indicators of near-term economic health aren’t new. It may surprise you to find out a weathervane was among the tools used by the early 19th century’s equivalents of Greenspan. In London in 1805, the wind was among the economy’s near-term drivers.
For over 200 years, a weathervane has stood on top of the Bank of England’s building on Threadneedle Street in London. Back then, the weathervane was connected to a wind dial in the Bank’s Court Room; the dial still exists but is electronically controlled today. It was from the Court Room, that the Bank’s Court of Directors, its governing body, met; and so the wind dial was always close at hand when it deliberated.
Why does the direction of the wind matter to the Bank of England though? The answer lies most directly in shipping. London in the early 19th century was home to a large and growing port. Shipping volumes were increasing and the docks that called the Isle of Dogs home (what is today London’s commercial center of Canary Wharf) were rapidly expanding. In 1805, when the wind dial was installed, the West India Docks and the adjacent East India Docks were nearing their completion and the London Docks, slightly upriver at Wapping were under construction.
The weathervane, by pointing out the direction of the wind, could predict the entry of ships into the port. If the winds were unfavorable for a day or two, ships would be held up just beyond the Thames Estuary, then they could all come in at once when conditions improved. The commercial activity tied to the shipping industry followed in lockstep. Thus, a weathervane could help predict short run swings in the economy.
Shipping and Money
To understand the story more fully, it is useful to examine just how shipping shaped the economy and financial sector in London specifically. When a ship entered the Port of London, it drove economic activity and the demand and supply of money, depending on what it carried. A ship carrying commodities would spur demand for money as merchants withdrew on their lines of credit to purchase the imported goods: tea, tobacco, cotton, you name it. If the ship returned laden with gold, it increased the supply of money.
The Bank of England could then predict the need for cash on the basis, at least in part, of the conditions allowing ships to sail up the Thames. The weathervane showed how connected the Bank was to the Port of London and one way in which the Bank’s role as a supplier of banknotes served the economy. Given how credit conditions are so tied to the supply and demand of money through interest rates, fine tuning the supply of money by use of a weathervane also enabled the controlling of credit, the role of central banks today.
The Bank of England
So, there appear to be similarities between the weathervane and today’s near-term economic indicators. But what about the Bank of England; what resemblance does it have to a modern central bank? The history of the Bank around this period can be broken up into a pre-1797 and post-1797 era. Prior to that year, the Bank of England’s banknotes were backed by gold; Britain operated on a gold standard and paper banknotes were mostly confined to financing trade in London. During the French Revolutionary Wars, Britain went off the gold standard, not to return until 1821, an era called the Restriction Period. In this era, paper money flourished and began to become an accepted medium of exchange throughout the country.
For those of you who like numbers as much as history, stick around; otherwise feel free to skip a paragraph. Around 1790, the Bank of England had around £8 million in banknotes outstanding; liabilities to the Bank which could be converted into gold at any moment. However, by this time, gold reserves at the bank accounted for only around 40% of this amount. The remainder of the Bank’s assets was composed mainly of government debt securities. As the French Revolutionary Wars of this era wore on, fear driven by the war caused many to redeem their notes for gold. Gold reserves at the bank, which once totaled £16 million, fell to only £2 million.
When gold left the Bank, public debt securities were left making up a larger share of its assets at the expense of the precious metal, making the gold standard more difficult to maintain. This spurred even more redemptions of notes into gold. Fearing it had become untenable, the government of Prime Minister William Pitt the Younger ordered the Bank to halt conversion of the banknotes into gold. Post-1797, Britain operated outside the gold standard just as it does today.
Of course, no longer being tied to gold meant the Bank was free to print money as it was needed, and the wind helped determine when that was. During this period, that meant supplying money and credit liberally. In the very early 1800s, the period of our weathervane, the amount of banknotes outstanding increased rapidly. The money was largely backed by government debt securities which were in plentiful supply due the borrowing need caused by the war.
This brings us to our last point about the Bank. It was in those days a private bank in business to serve the British government. As such, its primary responsibilities were to its shareholders and its client, the state. However, keeping interest rates low and stable so that client can finance its war meant engaging in the kind of economic management of a modern central bank.
In contrast to the pre-1797 period, a shortage of coins in circulation meant that the Bank’s paper banknotes were an increasingly important form of money. The banknotes were also to be found nationwide and not just financing trade in London; they formed an important part of the reserves of banks in the counties far outside the City. The supply of banknotes was now affecting the supply of credit in the entire country. The Bank’s weathervane was not just a feedback tool, establishing what the demand for banknotes might be in the next day or two, but also was helping determine the lives of people far outside the Port of London.
Whether or not the conditions picked up by an indicator affect someone’s life personally, the economic decisions taken because of that indicator certainly do. The Bank of England itself had nothing to do, directly, with the shipping industry; it was concerned with saving the government a percent or two on its financing costs and maintaining its own financial health. However, doing this meant keeping an eye on when someone might come up asking for his banknotes to be converted to gold, or in the post-1797 period, checking to see if it was a good time to issue more notes which in turn could help the Bank finance more of the government’s debt burden. The importance and the very existence of such near-term indicators go back a very long time.
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2. “Inside the Bank of England.” Bank of England, Bank of England.
3. King, Mervyn A. The End of Alchemy: Money, Banking, and the Future of the Global Economy. W.W. Norton & Company, 2017.
4. Murphy, Anne. “Money and Power: The Bank of England and London in the 18th Century.” History of Capitalism lecture series. History of Capitalism lecture series.
5. O’Brien, Patrick Karl, and Nuno Palma. “Danger to the Old Lady of Threadneedle Street? The Bank Restriction Act and the Regime Shift to Paper Money, 1797-1821.” SSRN Electronic Journal, July 2016, doi:10.2139/ssrn.2814876.
6. “Our History.” Bank of England, 27 Sept. 2018.