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By Barry J. Eichengreen

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34; the second is from Bloomfield 1959, p. 83. 50 The practice was known, for obvious reasons, as sterilization (neutralisation in France). It was impossible, of course, in the extreme case in which perfect international capital mobility and asset substitutability tightly linked domestic and foreign interest rates. 57 This is John Pippinger's (1984) characterization of Bank of England discount policy in this period, for which he provides econometric evidence. 58 Again, the analogy with the recent literature on exchange rate target zones is direct (see Krugman 1991).

47 When the Bank's discounts were reduced to only a fraction of those of its competitors, a rise in its discount rate (Bank rate) had less impact on market rates. Raising Bank rate widened the gap between it and market rates, depriving the Bank of England of business. If the gap grew too large, Bank rate might cease to be "effective"-it might lose its influence over market rates. Only with time did the Bank of England learn how to restore Bank rate's effectiveness by selling bills (in conjunction with repurchase agreements) in order to drive down their price, pushing market rates up toward Bank rate.

Belies the notion that the gold standard was an atomistic system. Rather, its survival depended on collaboration among central banks and governments. THE GOLD STANDARD AND THE LENDER OF LAST RESORT The operation of the gold-standard system rested, as we have seen, on the overriding commitment of central banks. to the maintenance of external convertibility. As long as there did not exist a fully articulated theory linking discount policy and interest rates generally to the business cycle, there was, at most, limited pressure for the monetary authorities to direct their instruments toward other targets.

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