Now we turn to monetary policies.  A good approach to this issue is to look at central banks’ balance sheet in the two crises: we shall look at the US Federal Reserve and the Bank of England; then, at the cost of forcing our comparison, we shall take the balance sheet of the Bank of Italy for the 1930s crisis, while for the recent crisis we shall consider the Eurosystem’s, because this is now the relevant aggregate for monetary policy purposes.

Fig 1. Balance sheets of the Federal Reserve, the Bank of England, the Bank of Italy, the Eurosystem (starting year=100)

FedReserve 1929-35	FedReserve 2007-12

Sources: FedReserve Bulletins; FedReserve Flow of funds

Bank of England 1929-35	Bank of England 2007-12

Sources: Federal Reserve: Banking and Monetary statistics 1914-1941; Bank of England Annual Reports

Bank of Italy 1929-35	Eurosystem 2007-12

Sources: Banca d’Italia (1993); ECB Bulletins

It is noticeable how differently central banks reacted in the two crises. It’s immediately evident how flat is the curve of balance sheet’s total in the 1930s. In the 2000s, we see an enormous expansion both in the Fed’s and still more in the BoE’s balance sheet. More subdued has been the Eurosystem’s growth.
Given the strikingly different reaction of central banks in the two crises, we may raise two related questions:
a) How has the “art of central banking” evolved?
b) Is central banking an “art”, governed by discretion, or a “science”, governed by “rules”?             In other terms, can central bank activity be rigorously defined by regulation, which embodies what “economic science” says, or should it rely mostly on the banker’s judgment? (an extreme view of discretion – or a joke? – is Montague Norman’s[4] position: he allegedly said to his chief economist: “your job is not to tell me what to do, but to explain me why I did that”).

^Note

4.  The Bank of England governor in the 1930s. ↑

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