We have been concerned in the preceding chapter with the various methods by which a central bank can control the amount of the reserve resources of its member banks. We there concentrated on the regulation of the amount of the ‘advances’ and ‘investments’ of the central bank, arguing that, if these were under effective control, the aggregate reserve resources of the member banks, resulting from the aggregate ‘gold’, ‘advances’ and ‘investments’ held by the central bank minus the notes held by the public, could also be controlled. In this chapter we must deal with a matter which might have been, and perhaps ought to be, non-existent, namely, the regulations to which the central bank is itself subject, and within the limitations of which it has to perform its functions.

One might have supposed that in any well-contrived monetary system the member banks, who operate in isolation and without special regard to the general interests, would be put under the discipline of the central bank, and that the element of discretion in the system would mainly inhere in the management of the latter. Nor would one expect that the rules of wise behaviour by a central bank could be conveniently laid down—having regard to the immense complexity of its problems and their varying character in varying circumstances-by Act of Parliament. But for historical reasons-reasons which were never very good and are now obsolete in their application-we find that in most modern monetary systems exactly the opposite is the case.