to recognize a bubble when everyone else was still thinking that prices were driven up by technological progress or increased future earnings. second, and this is the point he makes in the quote i have just given, the central bank ’ s policy tool, the short term interest rate, is very blunt : an increase in the interest rate is either too small to affect the targeted asset prices, or so large that it harms the entire economy. so what central banks should do instead of using the interest rate preemptively is to mop up the mess after the crisis, which is in fact what the fed did after 2000 / 2001 by keeping the interest rate at very low levels for quite some time. the point made in the second quote sounds very much like greenspan ’ s : again it is argued that central banks cannot ( and should not ) prevent bubbles from arising. instead they should throw their weight behind a swift restoration of stable conditions after the outbreak of a financial crisis. however, this quote is not from greenspan. you might have suspected from the somewhat archaic wording – like for instance the “ strength of the solidly governed central bank ” or the “ climate of general unsteadiness ” – that it is older. this is true. in fact, it dates from 1870 and is drawn from a testimony of the then secretary general of the austrohungarian national bank, wilhelm von lucam, to the hungarian parliament. lucam was a widely regarded expert in economic and monetary matters. in late 1869, the hungarian parliament called for a parliamentary commission on monetary reform. one of the subjects to be discussed was the hungarian stock market crash of 1869. following the “ ausgleich ” – a compromise that saw the creation of a largely autonomous hungary within the dual monarchy of austria - hungary – the newly gained political “ die ansicht, daß notenbanken krisen entgegenwirken, muß ich unbedingt als eine unrichtige bezeichnen, wenn darunter die verhutung von krisen gemeint ist. [ … ] dagegen konnen große und solide geleitete notenbanken, namentlich auch in handels - und creditkrisen, zu einer milderen abwicklung der krisen wesentlich beitragen, indem ihre kraft und ihr unbezweifelter credit in dem allgemeinen sc

( silver, gold, or both ) in terms of the domestic currency. when talking about price stability today, we look at a broader set of goods : in the euro area, for instance, the basket of goods used for the harmonised consumer price index ( hcpi ). however, both then and now has monetary policy principally aimed at achieving monetary stability, and the questions about the implications of monetary policy actions and their interaction with financial stability resemble each other quite a bit. is monetary stability a necessary precondition for financial stability? that is, do we need an environment of stable prices for a healthy financial sector? or to put it even stronger : is monetary stability sufficient for ensuring financial stability? in other words, is a monetary policy that successfully keeps prices stable by itself already a guarantee for stability in the financial system? or is the contrary true : that monetary stability, instead of ensuring financial stability, could lead to financial instability ( a point made by bis economists not too long ago )? at first, it might seem paradoxical that something good ( stable prices ) could bring about something bad ( financial instability ). the idea here is that policies that narrowly focus on price stability might fail to consider arising imbalances in the financial area or even set in motion processes that put financial stability at risk. for instance, for the recent crisis, some have argued that low inflation rates, low interest rates and a general sense of confidence in the central banks ’ ability to deal effectively with any shock to the economy that might come – all positive things, i would argue – have led economic agents to underestimate risks and to take positions that in the end turned out to be unsustainable. how were these questions answered in 19th century england? in the 1820s and 1830s, the english economy was rocked by several financial crises. in 1844, the bank of england received new statutes, the famous peel ’ s act, that put severe constraints on the bank of england ’ s ability to issue banknotes. in particular, all notes issued in excess of a fixed amount had to be backed 1 : 1 in gold. compared to earlier practice, this rule was extremely strict. the authors of the law were hoping that the monetary stability brought about by strict limits on the amount of banknotes in circulation would also prevent speculation in financial assets. this hope was disappointed only four years after the peel ’ s act was signed into law, when the severe financial crisis of 1848 triggered a run on the bank of england and forced