From Risk-Free Interest to Interest-Free Risk
In 1694, the Bank of England (“BOE”) was created and given the responsibility to print notes and back them with gold, becoming the first effort toward independent monetary policy. The BOE was designed to maintain the nation’s peg to the gold standard and to trade in a narrow band with other gold-backed currencies.
Over time, other central banks were created and expanded their responsibilities to become the lender of last resort to banks during liquidity crises. The metallic currency system evolved to incorporate paper money as a convenient form of legal tender, but always within the bounds of the gold standard, which provided a ...