Stefano Ugolini
email: stefano.ugolini@univ-tlse1.fr.

The Bank of England as the World Gold Market-Maker during the Classical Gold Standard Era, 1889-1910

Keywords: E58, G24, L11, L14, N23 Monetary policy, gold standard, gold market, market microstructure

This paper studies the microfoundations of the so-called "gold device" policy by analysing a new dataset on the Bank of England's operations in the gold market at the heyday of the classical gold standard. It explains that "gold devices" must be understood in connection to the Bank's role as gold market-maker in London and to the position of London as world gold market. Contrary to the literature, the paper shows that "gold devices" were sophisticated monetary policy tools intended to complement -not to substitute -interest rate policy and aimed at smoothing -not at hamperinginternational adjustment. These findings demonstrate the potential of adopting a microstructural approach to the study of monetary policy, and call for a reassessment of efficiency measurement for the gold standard.

Motivation

Although textbook accounts of the classical gold standard understandably simplify its illustration by arguing that it featured a fixed price of gold, connoisseurs know that such a claim is not completely accurate: albeit extremely narrowly, the price of gold did actually happen to vary under the aegis of this international monetary system. This was not only due to transaction costs: the practice of slightly modifying from time to time the official price of gold was in fact a rather common one, as it was followed by many central banks -including the Bank of England itself, i.e. the institution which stood at the very centre of the whole system (Sayers 1953(Sayers , 1976)). Because the effect of such practices was to change the "gold points" (i.e., the band within which the exchange rate was allowed to fluctuate without entailing international gold flows), they have generally been seen as violations of the (alleged) rules of the gold standard: hence, they have been dubbed with the pejorative name of "gold devices". How should we interpret the fact that central banks departed so considerably from the standard theory of the workings of a monometallic system, which was nonetheless already well established at the time (see e.g. Goschen 1864)? Scholars have generally answered that policymakers' unwillingness to comply with the "rules of the game" was a sort of relic of bullionist sentiments, tied to a certain reluctance to implement the "proper" strategy (i.e., moving interest rates: see e.g. Sayers 1953Sayers , 1976;;Scammell 1965;Contamin 2003), if not to a certain sympathy towards some forms of capital controls aimed at hindering international arbitrage (see e.g. Gallarotti 1995, pp. 47-9). Yet this macroeconomic approach does not provide completely satisfactory answers to the question. Raising the official gold price can hardly be assimilated to establishing capital controls, because it did not at any rate impede the physical transfer of gold abroad. Moreover, other strategies than paying premia on gold -and hence risking losses -were available to central bankers in order to avoid raising interest rates: for instance, foreign exchange policy was a viable -and potentially, much more profitablealternative (Ugolini 2012a). Why were "gold devices" preferred to seemingly more advantageous monetary policy implementation techniques, and why spectacularly so at the very core of the international monetary system -i.e. at the Bank of England, the institution which is generally seen as the custodian of 19 th -century monetary orthodoxy (Fetter 1965)? This paper is novel in the fact that it tries to answer this question by assuming a different, microeconomic perspective: it looks at the Bank of England's gold price policy from the viewpoint of the Bank itself. It does so by reassessing -in the light of previously unused archival data -the constraints to which central bankers were subjected. But there is more. By reconstructing the Bank's action, the paper also provides valuable insights on the structure and functioning of the London gold market at the time when this was the world's gold market par excellence. The reason why studying the Bank's policy and studying the gold market basically amount to the same thing is straightforward. Before the First World War, London was not only the most liquid exchange for refined gold; it also was the place to where most newly-minted gold ore headed directly. According to Van Helten (1982, pp. 539-40), there were at least four reasons why this was the case: 1) the United Kingdom's laissez-faire legislation concerning bullion flows; 2) the exporters' certainty to be able to sell gold -whatever the state of supply -at least at the Bank of England's legal minimum bid price; 3) the presence in London of considerable network facilities (insurance, brokerage, banking, securitized warehousing, etc.); 4) the presence in London of reputed mints and refineries, which gold-producing countries lacked2 . Of these four, the second condition in particular is relevant from our viewpoint. It shows that the Bank of England played a pivotal role in ensuring the centrality of the London gold market. Contrary to most other central banks (Contamin 2003; Ugolini 2012b), Threadneedle Street actually had a formal obligation to buy unlimited amounts of pure gold at a price fixed by the law (see section 2.l). Being certain about the minimum eventual yield of their shipments, gold exporters systematically preferred London to other financial centres as their final outlet. De facto, this circumstance made the Old Lady the market-maker of last resort of the world's most important gold market3 . In the light of what precedes, it is convenient to see the Bank of England's "gold devices" as the strategies put in place by the London gold market-maker in order to carry out the daily functioning of this market. This microstructural approach allows to better qualify both the rationale of the Bank's monetary policy and the workings of the London gold market at the time of their undisputed heyday. The remainder of the paper is organized as follows. Section 2 reviews the microstructural features of the London gold market and introduces the question of how to interpret its marketmaker's price policies. Section 3 analyses the Bank's operations in the light of the institutional constraints imposed on it, and thus reassesses the question of "gold devices" as monetary policy tools. Eventually, section 4 concludes.

The Bank and the Market: Institutional Features

2.1: The Microstructure of the London Gold Market

When in the 19 th century people talked about the "London gold market", they meant to refer to that particular subsection of the British financial system -composed by a well-defined group of intermediaries -which was specialized in dealing in a set of similar, but imperfectly substitutable goods: these included unrefined gold ore, refined gold bars, and a variety of gold coins produced by national or foreign mints. Because conversion of one kind of item into the other entailed a number of small but non-negligible costs (refining, melting, essay, minting, transportation, insurance, loss of interest...), the relative price of each item with respect to the others varied within a narrow but non-null band of fluctuation.

As far as its microstructure is concerned, the London gold market was a fairly concentrated one. It only featured four brokers4 , as well as one big dealer (the Bank of England) which set bid and ask prices to market participants5 . The dealer did not receive limit orders from its customers (only spot orders were allowed), and did not initiate trades on its own initiative (the Bank just offered the gold market a number of standing facilities). Microstructure theory suggests that the fixing of bid and ask prices by a dealer of this kind might be determined by two different factors. On the one hand, it might depend on market power: the dealer sets prices with the aim of maximising her profits on intermediation. On the other hand, it might depend on inventory costs: the dealer sets prices with the aim of preserving the optimality of her inventories6 . Which of the two possible determinants of bidask spreads highlighted by theory was actually predominant in the case of the London gold market-maker's price policy?

2.2: Bid-Ask Spreads and Market Power

Let us start from monopolistic power. To begin with, it must be acknowledged that the Bank of England's de facto monopoly of gold dealership was not the outcome of legal restrictions: had they wished to do so, competitors might have freely entered the business 7 . To all likelihood, the reason why the Old Lady stayed alone must have been related to the specificities of gold-dealing activities. On the one hand, fixed costs tied to safety issues (including managing and verification costs) made the business subject to increasing returns to scale. On the other hand, opportunity costs of holding inventories (tied to the fact that bullion is an unproductive investment) were much lower to the Bank of England than to any other British intermediary, because its money-issuing privilege already implied the obligation to hold statutory gold reserves. Therefore, on the whole, Threadneedle Street enjoyed a considerable vantage position which constituted an entry barrier to competitors. Such advantages, however, did not come for free: as a matter of fact, regulation of the Bank's overall business by the Act of 1844 had important implications for its gold-dealing activities as well. First, the requirement to hold statutory gold reserves meant that the Bank was unable to set freely the overall level of its inventories as an unregulated competitor might have done. Second, the requirement to convert banknotes into British full-bodied gold coins (the socalled "sovereigns") and vice-versa at a fixed exchange rate did not leave the Bank with any margin for manoeuvre concerning this particular quality of gold: while a private dealer might well have refused to sell sovereigns at the legal price, the Old Lady was forbidden to do so. Third, as already mentioned by section 1, the Bank was explicitly imposed a minimum bid price for gold bars -once more, a requirement a private dealer was free not to fulfil. Hence, the fixing of gold prices by the Bank was seriously constrained by law. In the light of this, it is difficult to conceive of intermediation profit maximisation as the major determinant of gold price policy.

2.3: Bid-Ask Spreads and Inventory Costs

The argument according to which the setting of bid and ask prices reflects the dealer's need to restore optimal inventories is conveniently illustrated by Stoll (1978). His model is designed to describe the behaviour of one dealer whose portfolio is made suboptimal (with respect to her own investment preferences) by the need to accommodate for the customers' desires to buy and sell the asset in which the dealer is specialized. In order to move back from a risky position that she does not wish to maintain, instead of trading on her own initiative the dealer sets new bid and ask quotations: by giving the appropriate incentives to the public, such change is supposed to help the dealer passively rebalance her portfolio. In this framework, the spread between bid and ask prices is dictated by three different kinds of costs faced by the dealer: 1) order-handling costs -i.e., the marginal cost of transactions; 2) information costsi.e., the premium compensating the dealer for the risks of trading with customers having superior information about the future value of the asset; 3) inventory costs -i.e., the premium compensating the dealer for the risks of holding an undesired position. Not all three determinants of bid-ask spreads proposed by Stoll (1978) were equally at play in the case of the London gold market-maker. First, available information suggests that no major change in order-handling costs must have occurred during the period of our concern (Officer 1996). Second, the main source of information costs -i.e., uncertainty about the future value of the traded asset -must have played a minor role in the dealer's price-setting strategies: as a matter of fact, uncertainty about the future value of gold was supposed to be nil under a credible gold standard system. As a result, varying inventory costs -or differently said, the costs associated by the dealer to the current level of suboptimality of its own gold portfolioemerge as the most plausible candidate as the determinant of price changes. Yet this prediction needs to be qualified in the light of the institutional constraints to which the dealer happened to be subjected. Taken together, the three dispositions of Peel's Act set serious constraints on the Bank's action as gold market-maker. A major breech of law would have resulted in case the Old Lady had failed to 1) keep adequate gold inventories, 2) buy and sell sovereigns at par in unlimited amounts, or 3) purchase gold bars at legal price: as a result, the Bank was legally bound to act as market-maker of last resort on the gold market. All this had serious implications for the determination of optimal inventories and prices. The Bank's optimal gold portfolio had to be a) sufficiently large to meet exogenously-determined reserve requirements, and b) sufficiently provisioned with British sovereigns to meet exogenously-determined demand for this item by the public. In order to adjust the size of the portfolio and to rebalance its composition, however, the Bank was allowed neither to change bid and ask prices for sovereigns, nor to lower the bid price for gold bars below a given threshold. As a result, control over the total size of gold inventories -and even more so, over the size of British coin inventories -could not possibly be maintained through changes in the prices of the gold bars and sovereigns. Faced with these constraints to its gold-dealing activities, the Old Lady started to look for new instruments allowing it to gain more flexibility in the rebalancing of the gold portfolio.

2.4: "Conventional" and "Unconventional" Gold Policy

To the authors of the Act of 1844, it seems to have been self-evident that the Bank's reserves should be basically made up of two "conventional" components (gold bars and sovereigns). As a result, the Act did not dictate any explicit constraint concerning the composition of such reserves, nor did it require the Bank to provide any detail about that. This is not surprising in view of the fact that before the "Gold Rush" of the 1850s, gold coinage was uncommon outside the United Kingdom (Ugolini 2012b). Since gold started to be increasingly minted abroad, however, the market for foreign gold specie turned increasingly liquid in London. At that point, the opportunity was open to the Bank to substantially complement its operations in "conventional" gold items with operations in "unconventional" ones (foreign full-bodied gold coins)8 . According to Sayers (1976, pp. 48-9), when the Bank first implemented these operations in 1852 it was driven by a "principle of indifference": foreign specie holdings were considered as occasional and as destined to imminent melting -and thus, they were priced accordingly. As the gold standard spread internationally, however, the Bank started to realize that "unconventional" gold assets gave room for some flexibility in the carrying out of its tasks as London gold market-maker. On the one hand, thanks to the Peelites' insouciance with respect to the definition of "gold", "unconventional" gold assets could well be accounted as legal reserves; on the other hand, however, no constraints were imposed on the Bank concerning the pricing of such assets. As a result, changes in bid and ask prices of "unconventional" gold items could be employed to restore the optimal size of the total portfolio in case of need. To sum up, since the Bank of England was dealing in a number of imperfectly substitutable gold items and was actively seeking to rebalance the size -and hence, the composition -of its gold portfolio, the Bank's price policy was very much diversified at a disaggregate level in order to make such rebalancing viable. In this framework, it is difficult to interpret bid-ask spreads as evidence of market power. Rather, it is plausible to interpret them as an indicator of inventory costs: the higher the dispersion of gold prices set by the dealer, the lower the degree of optimality of her gold portfolio. These conclusions will be discussed in the next section in the light of empirical evidence.

Gold Inventory Strategies and Monetary Policy

3.1: Gold Prices

As Sayers (1953, pp. 132-3) already pointed out, gold price policies had narrow limits: the Bank of England could set bid and ask prices for different gold assets only within a nonarbitrage band whose margins were determined by the costs of converting one asset into the other 9 . Still, "within this range the Bank could make a considerable difference to the foreign exchange markets by altering its prices". In order to analyse the Bank's gold price policy at the heyday of the classical gold standard, a new database has been reconstructed here on the basis of unpublished material from the Bank's archives. This is a considerable improvement with respect to Sayers's (1953) analysis, which -because of the unavailability of archival records -could only rely on market rumours reported by the financial press, and was therefore somewhat discontinuous. Figure 1 shows the range of all bid and ask prices for a kilogram of fine gold in different shapes (bars or coins) set by the Bank. The picture shows that bid and ask prices for different kinds of gold assets fluctuated very often, and that the gap between minimum and maximum prices changed over time. Bid-ask spreads for gold bars fluctuated from a minimum of 0.10% (in November 1890) to a maximum of 0.43% (from September 1906 on), but the range of variation of all gold prices was much wider (stabilizing at 0.82% from June 1900). As Sayers (1953, pp. 138-9) already remarked, bid-ask spreads for this period are very large compared to those allowed in the interwar by the Gold Standard Act of 1925, which imposed on the Bank a maximum bid-ask spread of 0.16% only. Most interestingly, bid-ask spreads tended to increase over time. In the light of the conclusions of section 2, this should be interpreted as evidence of increasing suboptimality of the Bank's gold portfolio. The impression is confirmed by figure 2, which compares the total size of the London gold market-maker's inventories with the width of the range of gold prices. The picture suggests that there was some negative relationship between the two factors. The bid-ask spread increased in the aftermath of the Baring crisis of 1890, when the Bank had an hard time securing adequate reserve levels; then it decreased in the central years of the decade, when substantial gold arrivals from South Africa refurbished the Bank's vaults; then it stabilized on a higher level since the eve of the Boer War, when reserves stabilized on a lower level than their mid-1890s peak 10 . Once more, the gold market-maker appears to have widened the range of prices according to varying inventory costs -associated to the degree of suboptimality of its total portfolio. This circumstance appears to be somewhat conflicting with Sayers's conclusion (1953, pp. 148-50) that towards the end of the period under scrutiny, the Bank was acquiring an increasingly firmer control on gold flows through interest rate policy.

Figures 1 and 2 about here

3.2: Gold Reserve Composition

The aggregate picture of the Bank's gold policies is therefore consistent with the idea that the market-maker's main aim was to restore the optimality of its gold portfolio. Does this 9 "There was nothing to regulate the prices at which it would deal in foreign gold coin, save that it would be futile to offer a price lower than that at which it would pay dealers to have foreign coin converted into bars, and equally futile to charge so much that it would pay them to take gold from the Bank in sovereigns. […] These limits were recognized by the Bank, which would generally prefer to part with foreign coin within the limits set" (Sayers 1953, p. 133). 10 It might be objected that the adequate level of gold reserves should not be inferred from their absolute amount, but from the coverage ratio of banknote circulation. Yet, as Ugolini (2012c) has pointed out, under the provisions of Peel's Act the adequacy of the Bank's reserve could not be inferred automatically from the coverage ratio. At any rate, the overall volume of the Bank's note circulation remained basically flat throughout the concerned period. conclusion still hold once we look at the data at a more disaggregated level? Figure 3 provides previously unavailable archival data on the actual composition of the "gold reserve" item. A number of interesting features emerge from the picture. First and foremost, the composition of reserves changed very considerably over time. For instance, bars varied from a minimum of 5.75% (July 1891) to a maximum of 69.43% (October 1906) of total gold holdings, while sovereigns varied from 22.85% (June 1910) to 62.06% (March 1894). Taken together, the two "conventional" reserve assets varied from a minimum of 43.97% (October 1910) to a maximum of 96.84% (October 1906) of total holdings. This confirms that in order to restore the optimal size of its gold portfolio, the Bank complemented "conventional" assets by recourse to "unconventional" ones -basically, foreign gold specie. The amount of foreign coins might fall as low as 0.06% of the Bank's total gold holdings (September 1906) and rise to as much as 52.91% (October 1910). Then there were two minor assets: British divisionary silver coins, whose amount was small but non-negligible (averaging 3.77% of reserves), and British worn coins, whose amount was fractional (averaging 0.43%) and only exceeded 1% in two occasions (in 1890 and in 1891) probably in connection with a general recoinage (Clapham 1944, p. 349). The latter is a relevant finding: whereas the literature has traditionally ascribed "paying in light coins" as a typical "gold device" ordinarily deployed during crises (see e.g. Sayers 1953; Officer 1996), the systematic paucity of the Bank's holdings of worn specie throughout the period suggest that the practice must have been confined to some minor episodes only. Figure 3 has shown that foreign specie were a very important -and occasionally, even a majority -component of total reserves. But what kinds of foreign specie were actually held in the Bank's vaults? Sayers (1953) reported evidence of transactions in a variety of different items (including American, German, and Japanese coins), but unavailability of archival sources forced him to leave open the question of their actual relevance within the Bank's portfolio. The answer to this question is provided by figure 4. While an important role was occasionally played by French napoleons (in 1889 and 1898-1900), German marks (in 1898-1904 and 1907-10), and Russian imperials (in 1889-93), the lion's share was kept by United States eagles (averaging 77.40% of total foreign specie reserves throughout the period). Despite featuring a large variety of items (including Dutch, Spanish, Japanese, Scandinavian, and Austrian coins), holdings of other foreign-minted specie always remained fractional (averaging 0.33% of total foreign specie reserves throughout the period). Figure 4 also shows that -unlike what was the case for bars and sovereigns -changes in the amounts of each sort of foreign coins were concentrated at some particular moments. This suggests that their acquisition and dismissal must have been tied to some specific market conditions, rather than being a business regularly run by the Bank. Such a circumstance corroborates the impression that "unconventional" gold operations were performed by the Bank only when resorting to "conventional" ones was impossible. The picture emerging from figures 3 and 4 is important under at least three respects. First, it confirms that the Bank's recourse to "unconventional" gold policy was not actually decreasing towards the end of the period -purchases of foreign specie being maximum in late 1910. Second, it suggests that the deployment of "gold devices" was connected to the degree of suboptimality of the Bank's inventories with respect to the public's utilization of the gold standing facilities. Last but not least, it shows that the composition of reserves varied extremely fast, so that an optimal position could be very quickly overturned. All this implies that the Bank's gold policies need to be studied at a disaggregated level in order to be properly understood.

Figures 3 and4 about here 3.3: Inventory Strategies, I: Quantity Policies Before studying the Bank of England's gold price policies into detail, it is expedient to start from another kind of gold inventory strategy -i.e., a quantity policy: the conversion of bars into British coins through minting at Tower Hill. This is interesting, as it confirms that the Bank's need to restore the optimality of its portfolio was a major driver of gold policies. The duty of providing unlimited amounts of sovereigns on demand was rather onerous to the Bank. Because the London Mint was unwilling to precommit to precise delivery dates, customers were unable to compute precisely the loss of interest they might have to face. This circumstance made selling gold bars at the Bank's minimum bid price constantly more convenient than selling them to the Mint: therefore, the only purveyor of gold to Tower Hill happened to be Threadneedle Street itself (Ugolini 2012b). The result was that the Bank was the only supplier of sovereigns in the country, and had thus to sustain the whole pressure of demand for this item. Figure 5 compares the net amounts of gold bars and sovereigns purchased by the Bank on demand of the public, as well as the amount of bars sent to the Mint. It shows that the Bank's position with respect to the public was very much asymmetric: the Old Lady systematically bought many more bars than it sold to the market, while at the same time it systematically sold many more British coins than it bought at its counters. The Bank earned a tiny profit on the operation (its bid price for bars never exceeded the Mint's bid price of £136.567 per kilogram of pure gold), but it also run the whole risk of being unable to match demand (by the public) with supply (by the Mint). As a result, the Bank was obliged to actively adjust to changes in the conditions of the gold market. The Bank's minting policy strengthens the point that a crucial determinant of its gold policy was the necessity of keeping balanced inventories in order to meet its statutory obligations. Minting was a quantity policy, and as such it does not belong to the category of "gold devices". As the following section will be showing, however, price policies that are commonly dubbed as "devices" did actually respond to the same rationale.

3.4: Inventory Strategies, II: Price Policies

Figure 6 compares the Bank's bid and ask prices for gold bars with its holdings of this item. It shows that the two prices were set independently of each other. The Bank adjusted the bid price when it wanted to impact the public's recourse to its "gold-buying standing facility", while it adjusted the ask price when it wanted to impact the public's recourse to its "goldselling standing facility". The two eventualities were not bound to happen at the same time. In order to encourage the public to sell bars to it, the Bank raised its bid price three times over the period of our concern (November 1890, May 1891, and November 1906); yet, these moves did not coincide with the moments when the Bank raised its ask price in order to stop the public buying bars from it (August and October 1893, January and February 1896, September 1896, October 1897, and September 1906). For instance, after bar holdings collapsed to a record low in May 1891, the Bank attempted in vain to encourage use of its "gold-buying standing facility" (by raising the bar bid price), yet it did not need to discourage use of its "gold-selling standing facility" (by raising the bar ask price) as the public was not making use of it. It is interesting to notice that, in spite of its failure to make its bar bid price attractive to sellers, the Bank did not dare push it higher than £136.421, and preferred purchasing "unconventional" gold assets (see below). On the contrary, the Bank did not hesitate to push ask prices to much higher levels than the traditional ones on other occasions. The Bank's behaviour with respect to "unconventional" gold assets is consistent with what has been observed so far. Figures 7,8, and 9 compare the Bank's bid and ask prices and its holdings of (respectively) Russian imperials, French napoleons, and German marks. In all cases, the Bank changed rather vigorously bid and ask prices according to its needs to reshuffle gold inventories. In the above-mentioned episode of May 1891, the Bank reacted to a drain of "conventional" reserves by raising its bid price for foreign coins to very high levels (£136.715 for a kilogram of pure gold in foreign specie), which allowed it to refurbish its reserves with "unconventional" assets. At the same time, however, ask prices remained untouched. Ask prices were moved in other moments: raised when the Bank attempted to defend its inventories, lowered when it considered getting rid of them -see e.g. Russian imperial ask prices (figure 7), repeatedly increased in 1892 in order to protect the stock, and subsequently lowered in late 1894 in order to dismiss it. The case of the Bank's German mark policy in 1899-1900 -when "conventional" reserves were again being eroded -is illustrative (see figure 9). In late 1899, the Bank raised the mark bid price in order to attract sellers, while leaving its ask price untouched: as a result, the bid-ask spread shrank. When in early 1900 German specie started to flow in copiously, the Bank lowered its bid price in order to stop purchasing them at high price, but it also started raising its ask price in order to avoid losing its newly-acquired stock: as a result, the bid-ask spread widened considerably. This suggests that bid-ask spreads are not necessarily representative per se, and should henceforth handled with care. Evidence provided in this section has confirmed that the Bank's need to manage its gold portfolio -by attracting "unconventional" assets when "conventional" ones were unavailable at viable prices, or by dismissing the former when the latter were plentiful -was at the root of its gold price policies. Recourse to "unconventional" gold items was had because the Bank faced serious constraints in setting its prices for "conventional" ones. As a matter of fact, the bid price for British coins could not be changed: the fact that their ask price was fixed by law impeded the Bank to set a higher bid price, because arbitrage opportunity would otherwise be created for the public. Similarly, the bid price for gold bars could not be raised above the Mint bid price, as this would have annihilated the -already meagre -profitability margins the Bank derived from its copious minting operations. As a result, if Threadneedle Street was willing to refurbish its total reserves coeteris paribus (i.e., without changing its monetary stance), it was obliged to rely on purchases of foreign specie -whose bid prices it could vary much more aggressively; the Bank would then dismiss these "unconventional" reserves by playing on ask prices when general conditions would have turned more favourable. On the whole, recourse to "unconventional" assets allowed the Bank to avoid losses in the conduct of its business as gold dealer.

Figures 6,7,8, and 9 about here

3.5: From Inventory Strategies to Monetary Policy

In what precedes, gold inventory strategies have been studied under the assumption of no changes to the monetary stance. Yet the attractiveness of the Bank of England's "gold standing facilities" to foreign agents depended on exchange rates, which -in turn -were influenced by the Bank's discount rate. By replacing gold inventory strategies into the context of monetary policy, this section will connect the microeconomic analysis conducted so far to the macroeconomic literature. This will be done by focusing on the Bank's action on the most important "unconventional" reserve asset -i.e., United States gold eagles. As the previous section has pointed out, when the Bank changed its bid or ask prices for a given sort of foreign coins, it did so with the aim of impacting recourse to its two "standing facilities" for that particular quality of gold. By raising/lowering the bid price, the Bank made its facility more/less attractive to foreign holders of that asset: in other words, the Bank lowered/raised the gold specie import point with respect to the issuing country of that coin (i.e., the upper bound of the exchange rate band, beyond which taking coins out of that country's circulation and selling them to Threadneedle Street would become a profitable operation). In an analogous way, by raising/lowering its ask price for that item, the Bank lowered/raised the gold specie export point with respect to that country (i.e., the lower bound of the exchange rate band, beyond which buying coins from the Bank and putting them in that country's circulation would become a profitable operation) 11 . Thanks to Officer's (1996, pp. 124-30) dataset on the costs of gold shipments between London and New York12 , it is possible to reconstruct precisely the margins of the exchange rate band beyond which arbitrage between the Bank of England's vaults and United States circulation was supposed to become profitable -and hence flows of American coins were supposed to occur between the two places. This is done in figure 10, which also gives the size of the Bank's gold eagle holdings. The picture shows that the Bank actively -and effectively -implemented price policies in order to rebalance its inventory of this "unconventional" reserve asset. For instance, in the aftermath of the Baring crisis (spring 1891), the Bank aggressively lowered the eagle import point in order to have American coins sold to its buying facility; when in August sterling depreciated substantially and the selling facility became active, the Bank lowered the eagle export point to avoid further drains. But price policies did not always have a "bullionist" aim. For instance, in September 1896 the Bank raised the export point up to the exchange rate level in order to dismiss some of its eagle inventories; and in April 1900, it raised the import point beyond the exchange rate level precisely to avoid attracting further American coins. On the whole, the Bank played with gold points not in order to subvert the "rules of the game", but in order to facilitate the working of the world gold market. This is confirmed by another important finding emerging from figure 10: the Bank implemented gold price policies in order to take profit from the exchange rate's proximity to one of the gold points, not in order to influence its path. As a matter of fact, the position of the exchange rate was supposed to be influenced by the Bank's monetary stance; by contrast, "gold devices" were supposed to be "surgical" interventions enacted on the very margin of the band. This finding is corroborated by figure 11, which puts the number of gold price changes vis-à-vis the number of official discount rate changes implemented by the Bank. The picture shows that gold price policy was mostly implemented in concurrence with modifications of the monetary stance: while the policy became decidedly more focused in the 1900s with respect to the 1890s -hence, probably, Sayers's (1953) impression that it was losing importance towards the end of the period -, it actually continued to be deployed quite actively in times of disturbances. This allows to conclude that "gold devices" were not a substitute, but a complement to orthodox interest rate policy. On the one hand, changes in the official discount rate had the task to drive the exchange rate in the region surrounding the gold points; on the other hand, marginal interventions on gold prices had the task to make the move fully effective -and that, without additional negative externalities having to be engendered by the adoption of a more extreme monetary stance. Under this respect, "gold devices" may be seen as the very refined tools of a mature central bank's policymaking, rather than as the relics of an archaic monetary era.

Conclusions

This paper has proposed a reassessment of the traditional literature on "gold devices" under the classical gold standard. By focusing on the microfoundations of the Bank of England's gold price policies in the period 1889-1910, it has shown that such policies were the natural outcome of the Bank's role as world gold market-maker. At a time when the international monetary system was consolidating as a full gold coinage standard -to borrow Scammell's (1965, pp. 32-3) expression -, the Bank became more and more involved in dealing in "unconventional" gold assets (as foreign coins used to be) in order to gain more flexibility in the carrying-out of its duties 13 . As a result, the Bank's price policies may be interpreted as the inventory strategies put in place by the gold market-maker in order to rebalance its gold portfolio. The analysis illustrates the potential of adopting a microstructural approach to the study of monetary policy implementation: central banks can be suitably seen as money market-makers, and the price of accessing their standing facilities can be conveniently interpreted as bid and ask prices. This useful approach -which has only recently started to gain some ground (see e.g. Mehrling 2010) -appears to be a promising avenue for future research.

Contrary to what the literature has unanimously maintained following Sayers (1953), this paper has shown that "gold devices" were not implemented by the Bank as a substitute, but as a complement to interest rate policy. The term "gold devices" is hence a somewhat misleading wording: gold price policy was not a violation of some alleged gold standard rule, but a way for smoothing international adjustment (via gold arbitrage) without extreme interest rate and exchange rate volatility being engendered within the system. These findings imply that we should perhaps rethink the way to measure efficiency under the gold standard. For decades, scholars have assumed that lack of gold flows was the indicator of central banks' success in smoothing international adjustment within the system (see e.g. Morgenstern 1959;Officer 1996;Canjels et al. 2004). The evidence presented here points to a different direction: the Bank of England actually smoothed international adjustment by provoking, not by avoiding the occurrence of gold flows. The textbook adjustment mechanism under the gold standard implied the continuous melting and re-minting of gold coins; the transaction costs implied by such operations widened the gold points. By buying and selling foreign coins without requiring their conversion into other gold items, the Bank shrank the gold points: as a result, foreign exchange volatility -as well as interest rate volatility -were actually reduced by the Bank's inducement of gold flows. How to re-evaluate the system's actual efficiency in the light of these findings is a question left open for future research. This paper has also provided evidence on the structure of the London gold market at the time of its international heyday. It has unveiled the existence of a sort of "consubstantiality" between the market and the Bank: the former prospered thanks to the availability of the latter's facilities, while the latter's action was considerably eased by the centrality of the former. The ensuing virtuous circle -which made the London gold market's world primacy unassailable by competitors -must have played a considerable role in securing sterling's unrivalled pre-eminence among international currencies under the classical gold standard. Not everything was rosy, though, in the decades leading to the First World War. The substantial increase in the Bank's ask prices for all gold items since the Boer War is evidence of mounting difficulties in the management of the market. The ensuing rise in the costs of accessing the Bank's facility started to threaten the position of the Old Lady as the only gold market-maker in London: maybe in view of the rising profitability margins of the golddealing business, plans were made by commercial banks for the creation of an alternative source of bullion than the Bank (the "Gold Pool"). These were signs of increasing fragility of the system as the final crisis of 1914 was approaching. This was no mystery to contemporary observers: after all, everybody knew that the system was growing less and less manageable behind the veil of a -maybe too much -"thin film of gold" (De Cecco 1974).

-Scammell, William M. (1965), "The Working of the Gold Standard", Bulletin of Economic Research, 17, pp. 32-45. -Seyd, Ernest (1868), Bullion andForeign Exchanges, Theoretically andPractically Considered, London: Effingham Wilson. -Stoll, Hans R. (1978), "The Supply of Dealer Services in Securities Markets", Journal of Finance, 33:4, pp. 1133-51. -The Economist, 1889-1910. -Ugolini, Stefano (2012a) 1889-1900 1901-1910

Figure

  Figure 5 about here

Figures

  Figures 10 and 11 about here

FiguresFigure 1 :

 1 Figures

  Figure 1: Range of prices fixed by the Bank of England for one kilogram of pure gold (in pounds). Source: author's database.

Figure 2 :

 2 Figure 2: Width of the range of all gold prices (in percentage, left scale) and total gold reserves (in million pounds, right scale). Source: author's database.

  Spread between Maximum and Minimum Gold Prices (All Items) Bid-Ask Spread for Gold

Figure 5 :

 5 Figure 5: Bank of England's net purchases of gold bars and British coins to the public, and gold minted by the Bank (in million pounds). Source: author's database.

Figure 6 :

 6 Figure 6: Bank of England's holdings of gold bars (in million pounds, right scale) and Bank bid-ask prices for a kilogram of fine gold in the shape of bars (in pounds, left scale). Source: author's database.

Figure 7 :

 7 Figure 7: Bank of England's holdings of Russian imperials (in million pounds, right scale) and Bank bid-ask prices for a kilogram of fine gold in the shape of Russian imperials (in pounds, left scale). Source: author's database.

Figure 8 :

 8 Figure 8: Bank of England's holdings of French napoleons (in million pounds, right scale) and Bank bid-ask prices for a kilogram of fine gold in the shape of French napoleons (in pounds, left scale). Source: author's database.

Figure 9 :

 9 Figure 9: Bank of England's holdings of German gold marks (in million pounds, right scale) and Bank bid-ask prices for a kilogram of fine gold in the shape of German marks (in pounds, left scale). Source: author's database.

Range of Gold Prices and Total Reserves

	0,9% 1,0% Figure 4: Composition of Bank of England's foreign gold coin reserves (in million pounds). Source: author's database.	American Coins French Coins German Coins Russian Coins Others	06/1909 12/1909 06/1910 12/1910 01/1889 07/1889 01/1890 07/1890 12/1890 07/1891 12/1891 06/1892 12/1892 06/1893 12/1893 06/1894 12/1894 06/1895 12/1895 06/1896 12/1896 06/1897 12/1897 06/1898 12/1898 06/1899 12/1899 06/1900 12/1900 06/1901 12/1901 06/1902 12/1902 06/1903 12/1903 06/1904 12/1904 06/1905 12/1905 06/1906 12/1906 06/1907 12/1907 06/1908 12/1908	0	2	4		6	8	10	12	14	16	Maximum Ask Price for a Gold Item Ask Price for Gold Bars Bid Price for Gold Bars Minimum Bid Price for a Gold Item Figure 3: Composition of Bank of England gold reserves, by kind of asset (in percentage). Source: author's database. 18 20 Bars British Full Gold Coins Foreign Full Gold Coins British Worn Gold Coins British Divisionary Silver Coins Composition of Foreign Coin Reserves	0%	10%	20%	30%	40%	50%	60%	70%	80%	90%	100%	Bank of England Bullion Reserve
	01/1889	07/1889 01/1890	07/1890	12/1890 07/1891	12/1891	06/1892 12/1892	06/1893	12/1893 06/1894	12/1894	06/1895	12/1895 06/1896	12/1896	06/1897 12/1897	06/1898	12/1898 06/1899	12/1899	06/1900 12/1900	06/1901	12/1901 06/1902	12/1902	06/1903 12/1903	06/1904	12/1904 06/1905	12/1905	06/1906 12/1906	06/1907	12/1907 06/1908	12/1908	06/1909 12/1909	06/1910	12/1910
								BoE Total Gold Reserve			Width of the Range of All Gold Prices

of Changes in the Discount Rate Number of Changes in Gold Prices Gold Policy vs. Interest Rate Policy

  Figure 10: Dollar/sterling exchange rate and gold eagle import/export points (in U.S. dollars, left scale) vis-à-vis the Bank of England's holdings of American eagles (in million pounds, right scale). Sources: exchange rate from The Economist (1889-1910); transaction costs from Officer (1996, pp. 124-30); Bank's eagle bid and ask prices and eagle holdings from author's database.Figure11: Yearly changes in the Bank's gold prices (horizontal axis) vis-à-vis yearly changes in the Bank's official discount rate (vertical axis). Sources: Bank rate fromClapham (1944, pp. 429-32); gold price changes from author's database.

	137,2 137,4 4,92				14																		German Gold Marks American Gold Eagles	16
	137,0 4,90				12																																								14
	136,8
	4,88 136,6				10																																								12
	136,4					8																																								10
	136,0 136,2 4,86					6																																								8
	135,6 135,8 4,82 4,84	01/1889	07/1889 Number 01/1890 0 07/1890 2 4	12/1890	07/1891	12/1891	06/1892	12/1892	06/1893	12/1893	06/1894	12/1894	06/1895	12/1895	06/1896	12/1896	06/1897	12/1897	06/1898	12/1898	06/1899	12/1899	06/1900	12/1900	06/1901	12/1901	06/1902	12/1902	06/1903	12/1903	06/1904	12/1904	06/1905	12/1905	06/1906	12/1906	06/1907	12/1907	06/1908	12/1908	06/1909	12/1909	06/1910	12/1910	4 6
	4,80							0							5							10					Bank Mark Holdings (right scale) Bank Mark Bid Price (left scale) 15 20 25 30	35	2
																																Bank Mark Ask Price (left scale)
	4,78																																													0
		01/1889	07/1889	01/1890	07/1890	12/1890	07/1891	12/1891	06/1892	12/1892	06/1893	12/1893	06/1894	12/1894	06/1895	12/1895	06/1896	12/1896	06/1897	12/1897	06/1898	12/1898	06/1899	12/1899	06/1900	12/1900	06/1901	12/1901	06/1902	12/1902	06/1903	12/1903	06/1904	12/1904	06/1905	12/1905	06/1906	12/1906	06/1907	12/1907	06/1908	12/1908	06/1909	12/1909	06/1910	12/1910
						BoE Gold Eagle Holdings (right scale)						Exchange Rate (left scale)
						Gold Eagle Import Point (left scale)										Gold Eagle Export Point (left scale)

Van Helten (1982, pp. 540-2) reports that in the 1890s, tentative efforts by German carriers and refiners to secure the output of South African goldmines were outcompeted by London-based agents: although transportation, brokerage and refining costs were lower in Hamburg, loss of interest and foreign exchange risk still made London a more convenient outlet to South African producers.

Other central banks (e.g. the Bank of France) usually purchased gold bars to the public, but they were not required to precommit to fixed bid prices: contrary to the Bank of England, therefore, they failed to be marketmakers of last resort on their domestic gold markets.

The four London bullion brokers were: Mocatta & Goldsmid, Sharps Wilkins, Pixley & Abell, and Samuel Montagu & Co (Green 1968). Note that brokers differ from dealers in the fact that they "act strictly as agents for investors and do not assume risk"(Stoll 1978(Stoll , p. 1133)).

A nice description of the London gold market and of the Bank of England's Bullion Office as seen by coeval observers can be found inSeyd (1868, pp. 242-58).

For of a survey of microstructure theories, seeBiais et al. (2005).

Actually, it seems that an attempt to break the Bank's monopoly was indeed planned by some competitors towards the end of the period (see section 4).

Albeit "unconventional" from the viewpoint of textbook gold standard policy, the practice of keeping foreign coins within bullion reserves was not at any rate "unconventional" by international standards. As a matter of fact, a number of central banks adopted this practice with the aim of smoothing international transactions (see e.g. the case of the Austro-Hungarian National Bank: Jobst 2007, pp. 43-7). Nonetheless, the Bank of England was unique in the scale and scope of its gold-dealing operations.

This description implies that the pound is the base currency and the foreign country's monetary unit is the term currency -which is consistent with coeval habits, as well as with the way figure 10 is constructed.

In using Officer's (1996) data, his own assumption that transaction costs were the same for bars and coins is also taken as valid.

In the light of this, the dissimilarities between the workings of the prewar gold standard that of the and interwar ones -in which gold coins were no longer in circulation -cannot be overemphasized: as a matter of fact, the two systems were built on completely different microfoundations. Future research might want to investigate what role this may have played in determining the higher degree of dysfunctionality displayed by the "restored" gold standard with respect to the "original" one.

of England (Sarah Millard, Lara Webb, and Ben White) is gratefully acknowledged. The usual disclaimers apply.

136,8 137,0 137,2 137,4 01/1889 07/1889 01/1890 07/1890 12/1890 07/1891 12/1891 06/1892 12/1892 06/1893 12/1893 06/1894 12/1894 06/1895 12/1895 06/1896 12/1896 06/1897 12/1897 06/1898 12/1898 06/1899 12/1899 06/1900 12/1900 06/1901 12/1901 06/1902 12/1902 06/1903 12/1903 06/1904 12/1904 06/1905 12/1905 06/1906 12/1906 06/1907 12/1907 06/1908 12/1908 06/1909 12/1909 06/1910 12/1910 01/1889 07/1889 01/1890 07/1890 12/1890 07/1891 12/1891 06/1892 12/1892 06/1893 12/1893 06/1894 12/1894 06/1895 12/1895 06/1896 12/1896 06/1897 12/1897 06/1898 12/1898 06/1899 12/1899 06/1900 12/1900 06/1901 12/1901 06/1902 12/1902 06/1903 12/1903 06/1904 12/1904 06/1905 12/1905 06/1906 12/1906 06/1907 12/1907 06/1908 12/1908 06/1909 12/1909 06/1910 12/1910

Archival Sources

Bank of England Archive C1/37-58 (Daily Accounts of the Deputy Governor, 1889Governor, -1910)).

-Biais, Bruno, Larry Glosten, and Chester Spatt (2005), "Market Microstructure: A Survey of Microfoundations, Empirical Results, and Policy Implications", Journal of Financial Markets, 8:2, pp. 217-64.

-Canjels, Eugene, Gauri Prakash-Canjels, and Alan M. Taylor (2004), "Measuring Market Integration: Foreign Exchange Arbitrage and the Gold Standard 1879-1913", Review of Economics and Statistics, 86:4, pp. 868-82. -Clapham, John (1944)


Denis Vidal

Max Muller

Embarrassing readers

, the West's initial infatuation with Indian culture, in the eighteenth and then in the early decades of the nineteenth century, was often due to rather fanciful readings of texts that were themselves inaccurate and incomplete. And when this infatuation gave way to denigration -as was the case in England in the nineteenth century -the works of sanskrititists were used once again. Macaulay, for instance, whose certain but questionable gifts as a polemist led him to improvise judgments on Indian culture for which he was never forgiven, never claimed any first-hand knowledge in the matter. On the contrary, he declared that he had based his opinions entirely on extensive reading of the work of orientalists.

Mention must be made, of course, of the particularly harmful interpretations that were based on the analysis of Aryan or Indo-European themes, especially in Germany.

But we should also take into account the manner in which the texts of the orientalists contributed to the undeniable wave of popularity of Indian mysticism and spiritualism.

A complete anthology could be put together with quotes from unfortunate erudites, specialists in Indian literature or religion, who desperately tried to draw a dividing line between their scholarly books and all sorts of other books, dealing with oriental themes, that bookstores perversely insist on stacking on the same shelf.

It is probably difficult to find a single Sanskritist who hasn't faced the same dilemma as Max Muller. He thought that the only readers who could really understand 1 When I stopped for the first time in front of books of theosophy in the Nehru Memorial Library (they are just near by the works of Max Muller) , it was not, I suspect, because of any mysterious astral forces; it was, more simply because of the unsurpassed gift of Shiv Vishvanathan for provoking curiosity about whatever topic he may feel like talking about.

his work were the researchers working in the same field. They alone were in a position to realise, for example, that all the contemporary translations of the Vedas were fairly provisional and vastly speculative. He even regretted at times the Middle Ages when he could have quenched his thirst for knowledge, while remaining a mere transcriber of texts.

Still, Muller, perhaps more than anyone else in the nineteenth century, made accessible works that were then only known through oral traditions, scattered manuscripts or rare scholarly studies. We will later see how Max Muller, thinking of himself more in terms of a new Erasmus than of a medieval transcriber, liked to imagine his new readers. One thing is nevertheless clear: they were not the people who came to be most influenced by his works. Raymond Schwabb's only remark on the subject would still be considered as ample commentary by most sanskritists: "The other new fact, on which I will not have to dwell, is the appearance, also in 1875, of the Theosophical Society with Madame Blavatsky" (Schwabb, 1950, pg. 17) And yet, in the West, two very different types of people embody orientalism during the Victorian age which is also the heyday of British Imperialism in India.

The first group is well known; it is composed of people who created the academic tradition of orientalism in Europe. I will confine the present study to the works of a single man, who could legitimately be considered the most exemplary, if not always the most innovative, representative of these scholars: Max Muller, Professor at Oxford, editor and promoter of a monumental series of fifty one volumes entitled: "The Sacred Books of the East". He was also the author of the first critical edition of the Vedas and wrote more than fifty other books devoted, on the whole, to Indian culture and civilisation. He had the 'honour' to be made, towards the end of his life, Privy Counsellor to Queen Victoria .

The second group that I will examine, though it is undoubtedly as important as the first, is absent from most debates on orientalism: it is exemplified by the theosophist movement and especially by two fascinating people, be it for very different reasons: Helena Petrovska Blavatsky (H.P.B. for those in the know), author of works whose merits Jorge Luis Borge would certainly have appreciated (Isis Unveiled and The Secret Doctrine), and Annie Besant, perhaps the most exceptional radical militant of the entire Victorian age.

The two sides of orientalism

It has become commonplace to consider orientalism as a particularly spectacular form of cultural imperialism. Edward Said's work dealt more specifically with the Middle East (Said, 1978) but his theses were extended to India, especially by Ronald [START_REF] Inden | Imagining India[END_REF]. However, as David Ludden recently remarked, we must first clarify the meaning and the scope of the term "orientalism" (LUDDEN, 1994, pg. 252). This question is particularly important for the period I'm dealing with. Indeed, one of the remarkable features of Indian orientalism in the nineteenth and the early decades of the twentieth century is that Edward Said's definitions cannot account for it.

Let us use a simple example: when he mentions the forms taken by orientalism in India in the nineteenth century, Said tends to refer to the famous texts by Macaulay where he denigrates Indian culture. It is fairly ironic to see how Edward Said quotes him. Whereas the Englishman undoubtedly voiced the theses of Western cultural imperialism in the most perfect rhetorical form, one can wonder whether his stand can really be defined as a form of orientalism. It is well known, on the contrary, that he tried to suppress all forms of orientalist influence on colonial ideology.

If we examine the meaning that the terms had at the time, one thing at least is certain: not only did Macaulay have nothing in common with orientalists, but he was their fiercest enemy, as well as, perhaps, the man who did most to prevent the identification of orientalism with colonial ideology. Indeed, from 1835 onwards, when Bentinck, then Governor-General of India, decided to ratify the recommendations contained in his famous Minute on education, an ever-widening gap was created between orientalism -in the sense that this term had at the time -and the kind of cultural imperialism defended in a sophisticated manner by authors like Mill, Macaulay or Trevelyan. This form of imperialism was echoed by the entire colonial ideology of the time, but in a cruder manner2 .

We are therefore first faced with a terminological problem: depending on whether we use the term orientalism with its nineteenth century meaning or whether we give it all the connotations that it carries today with Said or Inden, we will in fact be referring to two entirely different things. And if we agree at first to think in nineneteenth century terms, we can see that the form of cultural imperialism which dominated colonial ideology had practically nothing in common with what was then referred to as orientalism. It was practically the opposite. Does this mean that we should exonerate orientalism from the charge of imperialism? Certainly not, but I think that the problem must be stated differently.

Let us consider Max Muller: it is indeed difficult to find a more peaceful defender of all forms of imperialism existing at the time, in Europe as well as in the rest of the world. In political debates, he was invariably taking sides with the advocates of imperial policies (Austria and Prussia during the war over Schleswig-Holstein in 1865, and then against France in 1870. Or even Great Britain in South Africa, and finally in India as well3 ).

Strange as it may seem, Max Muller's political courage and the difficulties that he was occasionally faced with, were never due to reservations that he might have expressed about imperialism. They were almost always linked, on the contrary, to the fact that he was in favour of imperial policies as well as a supporter of at least two (English and German) imperial powers and that he never really accepted to defend one rather than the other. Max Muller's imperialism made him translate "God save the Queen" into Sanskrit. It did not however lead him to identify political imperialism and cultural imperialism. Of course we find in his works all the cultural stereotypes that orientalism has associated with India: a so-called "real India", that of Vedic antiquity and high Brahmanic culture to which he refers through his own experience as a Sanskritist; an India of the villages as well which he opposed, like many others, to the reality of large Indian cities. Nor did he fail to succumb to the common stereotypes about a contemplative and meditative India opposed to a more action-driven Western world.

Was this then despite his orientalism or more probably because of it? We could give a multitude of examples showing that Max Muller took a firm stand against the forms of cultural imperialism of his time. He was, for instance, no less severe than Ronald Inden when he denounced the ethnocentric and extremely contemptuous nature of Mill's history. Likewise, he never hesitated to denounce the racial and cultural stereotyping rampant amongst the British in India.

The same remark applies to his vast contribution to Indo-European studies. It would be equally difficult to accuse him of having used his erudition to try and widen the gap between the East and the West. The same thing could be said of the distinction between Semitic and Indo-European cultures: Max Muller always regretted, for example, that the Bible was not included in his collection of "Sacred Books of the East"4 .

We could add other examples: his defence of Tilak (as an orientalist, of course, and as an orientalist only) or his increasing skepticism towards racial theories. The same goes for his defence of Indian culture, which included respect of, and real concern for, the movements of religious reform that were then emerging. In all these cases, although Max Muller's orientalism voiced some cultural prejudices, it was nonetheless turned against the most blatant ones of his time.

Thus, the work of Max Muller, despite all the recognition that it may have enjoyed in his time, does not testify to the importance of orientalism in imperial ideology. Max Muller didn't oppose a hypothetical use of his science to imperial ends.

On the contrary, he often regretted that it was so little used and that he wasn't offered the opportunity, for instance, to train the elites of the Empire more decisively.

Max Muller was certainly proud to hear that when the Prince of Wales embarked on his voyage to India in 1875, his baggage contained several copies of Muller's critical edition of the Vedas which he was taking as gifts for the Hindu sovereigns that he was to meet (Cohn, 1987, pg. 652). It is hardly likely though that the future King would have taken so gracious a part in the diffusion of the works of Annie Besant though her book certainly played, in India, a role as important as that of Max Muller's. Besides, at the time, Annie Besant, who had not yet joined the theosophists, was very busy collecting tens of thousands of signatures on a petition that she wished to present to Parliament. Its objective was to oppose the voyage of the Prince of Wales and to denounce British imperialism in India.

There is something singular about the life of Annie Besant. Before turning into a convinced theosophist, and then succeeding H.P. Blavatsky, the founder of the movement, as its leader, she had been the young wife of a pastor. She then changed for the first time. Having lost faith in Christianity, she became one of the most famous radical militants of her time in Great Britain. To this day, it is difficult to find a single "progressist" theme -from women suffrage, access to contraception to the defence of free love, from anti-racism and anti-imperialism, not forgetting atheism, to socialism and the union movement -whose cause was not thrust forward by Annie Besant, often in a decisive manner, at one period or the other of her life. And it would be difficult to find Annie Besant or most theosophists, making the slightest ideological concession to discriminations based on sex, race, religion or any imagined superiority of the West5 .

It would also seem that historians encountered particular difficulties in assessing the exact role played by theosophists in the Indian nationalist movement. A. O. Hume, for instance, was greatly influenced by this movement when he took part in the launching of the Congress Party; he was also considered by some to be an unofficial agent of the English, whose aim would have been to impede the nationalist movement rather than help its cause. Annie Besant too was never forgiven for having more or less condoned the Amritsar massacre; besides, this signalled the end of her political influence in India.

Nonetheless, it is a fact that before Gandhi assumed the leading role in the nationalist movement, Annie Besant and the theosophical movement played a very active catalyst role. Not only were a large number of those who were to become the leaders of the Congress influenced by theosophy and the theosophists, but on at least three occasions (creation of the Congress, formation of the Home Rule Leagues, establishment of the Hindu College), they played a central role in the establishment of organisational and institutional structures that were going to be rapidly appropriated, consolidated and fully utilised by the nationalist movement.

There is, of course, another dimension to the theosophist movement which must be analysed. No one perhaps, contributed more than the theosophists -and Annie Besant, here too, played a decisive role -to the spreading, towards the end of the nineteenth century, of an extravagant imagery of the East and of India in particular.

They thus reinforced, as perhaps never before, all the stereotypes available on oriental spirituality as opposed to the materialism of the West. What more can be asked to support such a point of view than the wild theories contained in H.P. Blavatsky's Secret Doctrine, the beginnings of Krishnamurti -the new Messiah -if not the flourishing of imaginary Mahatmas and great masters of all sorts who started to blossom then, all over India and the world. Even the most serious Marxist historians, having read a little too much of Kipling in their youth, saw there, for more than a century, the irrefutable proof of the all-powerful imperial order (cf. Bipin Chandra, 1988). If we really need to identify what sort of orientalism it was that corresponded most effectively at the time to the type of discursive formation defined by Edward Said, there is little doubt that one of the most outstanding manifestations can be found with the theosophists.

Let us now take stock: Macaulay was certainly a partisan of cultural imperialism but was he really an orientalist? Max Muller and Annie Besant were, without doubt, orientalists, each in their own way, but were they also advocates of cultural imperialism? If Max Muller was definitely an ideologist of imperialism, in the political sense of the term, can one say as much in the case of Annie Besant? All these questions certainly call for complex answers. From a methodological point of view, the real problem lies in establishing the importance of such complexities.

If we take the notion of "hegemonic discourse" too seriously, it is clear that we will underestimate the nuances of the various types of discourse. We can see clearly that if we take all manifestations of orientalism to be simple variations of a single form of discourse, we run several risks: firstly, as Jayant Lele (1994) demonstrated, that of giving not only a monolithic but a deeply reduced vision of the subject. Thus, when he excludes all references to the theosophist movement in his analysis, following a firmly established tradition, Ronald Inden not only clouds the understanding of an essential side of orientalism. He also does exactly what modern historians reproach colonial historiography with doing, i.e., only taking into account the elitist forms (academic or governmental) of a social and cultural phenomenon, without examining their links with manifestations of more marginal appearance but of no less real influence.

There is a further risk -if we do not take into account the ambivalence as well as the diversity of orientalist discourse, we will distort, almost as deeply as orientalism itself could, the historical reality to which this discourse belongs. Let us consider for example this comment of Edward Said one of Macaulay's most often quoted pronouncements: "Macaulay's was an ethnocentric opinion with ascertainable results.

He was speaking from a position of power where he could translate his opinions into the decision to make an entire subcontinent of natives submit to studying a language not their own. This is in fact what happened." (Said,1984, P.13). As Bruno Latour remarked, even though he was thinking of the supremacy of scientific method: "To imperialism that is only too real, we do not need to grant total imperialism."

The risk does not lie solely in perpetuating the idea of a total malleability of colonised populations or even that of their complete absence from participation in the fashioning of the culture of an epoch. It lies perhaps more in giving forms of governmental rhetoric that were often extreme and provocative (even if we judge them by the criteria of the time) a sort of omnipotence that the authors themselves did not claim, and that these forms have never of course acquired to this day.

By endeavouring, on the contrary, to differentiate between the various forms assumed by orientalism during the Victorian age, we do not only uncover the very distinct modes of knowledge, positions of power and social or ideological commitments, all things that we could finally reduce to a "field" of common interest, in the sense that Bourdieu gives to this term. We are also forced to follow a network of extremely heterogeneous actors whose interactions make it necessary to shift the analysis continually along lines of research that are oftenunexpected.

Missing links

long time in the name of the East India Company : "But no matter what Wilson says in his preface, his work is less a translation of the Rgveda than a translation of Sayana" 8 .

Several Sanskritists have a tendency to consider the deciphering of the Vedas as an Western speciality. They deny nearly all relevance of the Hindu tradition, only conceding that it was instrumental in the literal preservation of texts or in the most ancient exegetic traditions, but wrote off its recent or contemporary manifestations with a few brief lines. Even Max Muller, who was perhaps the Sanskritist most open to Indian religious reformers of his time, said about Dayanand Sarasvati, the founder of the Arya Samaj, that "his ignorance of English deprived him of much that would have been helpful to him, and would have kept him from some of his wild ideas about the Vedas" (Muller, 1982, pg. 96). This is why there is a certain irony in drawing a parallel between the work of Sanskritists and that of theosophists of the Victorian age. H.P. Blavatsky, founder of the theosophist movement, was rightly reproached with having written her most famous books (Isis unveiled and The secret doctrine) as though she had had first hand knowledge of the material she treated. In a pamphlet fairly humourously entitled 'Isis very much unveiled', W.E. Coleman proved that in fact she had not looked at more than a hundred of the 1400 books cited in her first book's bibliography, and had drawn all her references from them (Farquhar, 1915, pg. 224). Even more interestingly, he showed that most of the information contained in 'The Secret Doctrine' in fact came from three books including Wilson's Vishnu Purana and Dowson's Hindu Classical Dictionary. Likewise, she used information contained in the Asiatic Researches 8 The passage deserves to be fully quoted : "But whatever Wilson might say in his preface, his work is less a translation of the Rigveda than a translation of Sayana. Convinced that Sayana was in a position to understand the Veda much better than an European interpreter (these are his own words), he followed the Hindu author even in his worst contradictions : going to the point of replacing the vivid or precise term in the text with the proper or generic equivalent provided by the commentary. [START_REF] Renou | Les maîtres de la philologie védique[END_REF], pg. 5) (Campbell, 1980, Pg.41) without giving references. Besides, her book begins with a Vedic hymn whose translation was directly lifted from Max Muller.

It may accordingly be appropriate to say that the champions of scientific orientalism in Europe suffered the same fate at the hands of the theosophists that Brahmanic tradition did at the hands of the former. They did not hesitate to appropriate anything that could serve their purpose, especially the most ancient references. They did not hesitate either to belittle, marginalise and sometimes even remove explicit references to the intermediary process of transmission and exegesis of texts without which they would not have had access to them. For Max Muller as well as for the theosophists and most of the erudites of the time, it was the western libraries that provided privileged access to knowledge. Except that those who had adequate training worked in the manuscript room of course, while the others made do with the public reading room.

Even if we confine our study to sanskritists and theosophists (not taking into account, for example, administrators, missionaries and so many others), we can see now that there are at least two missing links for the understanding of the scope of orientalism during the Victorian age. The first is the better known and is also the subject of current enquiry and criticism -the process of disjunction between western knowledge of the Veda and Hindu exegetic tradition.

The second missing link is the one corroborated by the seeming conjunction between movements of western inspiration (like the theosophist movement) and the Hindu tradition with which they identified.

Yet another hiatus exists, as significant as the two preceding ones, but which seems to have never really been analysed. It is created by the efforts of learned orientalists, theosophists and spiritual movements to be differentiated from each other. Scientific orientalists had only disdain or scorn for the work of theosophists. This is understandable insofar as the books of the theosophists (like their modern equivalents) had at least as much influence and success as those of the scholars, while representing the most total negation of their work that could be imagined. The orientalists devoted years if not decades to publishing manuscripts to try and clarify their meaning or their history. On the other hand, the theosophists, when they were not simply fabricating these texts, seemed to take delight in making matters more obscure, claiming a perfect knowledge of their ultimate meaning when they didn't even have first hand knowledge of them.

There was also another characteristic of the theosophists that vastly displeased most erudites. Max Muller, for example, may well have been a German by origin, was perhaps not always regarded as sufficiently orthodox in matters of religion or politics, had also perhaps an excessive penchant for Indian or oriental cultures. He was nonetheless an extremely respectable personality, holding a chair at Oxford and being a private counselor to Queen Victoria.

The least that can be said is that the main leaders of the theosophist movement were rather different. It would certainly be difficult to find personalities as little respectable and as 'shocking' as Colonel Olcott and Helena Petrovna Blavatsky, the cofounders of the theosophist movement. Though the former may have claimed that he was a hero of the American civil war and the latter that she was a Russian aristocrat, other rumours also abounded about them. They were suspected of having abandoned husbands, wives or children and of having led the dissolute lives of adventurers and charlatans in different parts of the world. They were not only accused of it, it was proved that they had exploited the naiveté of their audiences during the spiritual seances which then enjoyed a large wave of popularity in all classes of society in the West.

Finally questions arose about the real finalities of the theosophist movement in India and H.P. Blavatsky was suspected of being a spy in the service of the Czar.

The couple who more or less took over their role at the head of the theosophist movement, i.e. Leadbater and Annie Besant, weren't any more reassuring by the standards of the time. Leadbater was publicly implicated in a homosexual scandal with a teenager, Krishnamurti, destined, according to the theosophists, to become the new Messiah of his time. As for Annie Besant, she had actively supported, as mentioned earlier, most 'subversive' causes of the period.

But, if Max Muller wished to place as much distance as he could between his work and that of the theosophists, the feeling was mutual. H.P. Blavatsky did not acknowledge any debt towards Wilson and other Sanskritists any more than Wilson did towards Sayana. Instead of appealing to science to ascertain the singularity of her work, she referred to the supernatural nature of the inspiration that served as her guide. And just as Hindu tradition could serve upon occasion as a foil for the Sanskritists, the Sanskritists served as foil for the theosophists. It was even, according to H.P.

Blavatsky, the blatant falseness of Max Muller's and other contemporary scholars' interpretation of the oriental doctrines that had incited her to reveal publicly, quite simply, "the outline of a few fundamental truths from the Secret Doctrine of the Archaic Age".

Conclusion

In order to understand what forms orientalism assumed in the second half of the nineteenth century, it seems to me that one must take into account not one but at least three or more processes of reading:

-the first one is well known; it is exemplified by scholars who worked on texts they progressively assembled from manuscripts and copies of manuscripts, and who published critical editions, translations with commentaries and learned exegeses.

-the second process is equally important. It is carried out by readers who were extremely different, both socially and culturally, from the scholars, and who tended to make theirs the works of the latter. In doing so, they altered both meaning and purpose of the works, because they reintroduced a sacred dimension into texts which the sanskritists had tried to eradicate, or else because they introduced a fair amount of confusion and obscurity in texts which the scholars tried to read with as much precision and clarity as possible.

-The third process, no doubt, the more innfluential one but which is beyond the scope of this paper, would be then to compare and to analyse the reception of these different brands of orientialism in India itself Such processes of recycling of learned works are rarely analysed as such, because they are both concealed by the authors and despised by learned scholars. But if we concentrate on the processes of transmission and distortion of knowledge, Victorian orientalism appears as the hybrid result of multiple readings and misreadings, revelations and concealments, rigorous scholarship and sweeping generalisations. In order to analyse it one must not be overly impressed by the "ivory tower" of the scholar and the rather fanciful spirituality of the theosophists.

A detailed analysis of the common forms of colonial ideology can be found in "White mutiny, The Ilbert Crisis in India and Genesis of the Indian National Congress"(Hirschmann, 1980)

See J.M. Voigt; the 'solution' that Max Muller would have desired was an imperial alliance between England, Germany and the United States.

there also, Max Muller could acknowledge the value of jewish culture without too much compassion for jewish people themselves: "disgraceful as the antisemitic riots have been in Germany and in Russia, there can be no doubt that in this as in most cases, bothh sides were to blame and there is little prospect of peace being reestablished till many more heads have been broken"( Muller, 1901, p.70)

Absolute non-discrimination is, besides, the first of the three commandments of the theospohical faith.

Max Muller's access to the Veda was through the copying and compilation of manuscripts that were available in libraries in Paris and London, or of texts that had been entrusted to him by contemporary Sanskritists (Burnouf and Wilson in particular).

His critical edition of the Veda was accompanied by the commentary, written by Sayana, a fourteenth century author, who paraphrased it exhaustively with various annotations and analyses 6 .

One of the main problems in Vedic studies is to decide what value should be ascribed to exegeses not only in the interpretation of the Vedic texts but, even more fundamentally, in the very definition of their most literal meaning. We need only read Louis Renou's work, devoted to the masters of Vedic philology, to understand the large variety of stands taken by different parties. On the whole, though, it would seem that most of the Sanskritists adopted the position advocated most systematically by Roth, another great Sanskritist and Max Muller's contemporary -disclaiming almost any importance whatsoever of the Hindu tradition, of Sayana's commentary in particular, for a literal interpretation of the Veda.

From this point of view, Max Muller's work is rather ambiguous. It would be difficult to reproach him with having completely ignored the importance of Hindu tradition in understanding the Veda. The very fact that he included a version as complete as possible of Sayana's commentary to his first critical edition of the Rgveda proves it. And yet, if Max Muller was considered to be one of the greatest scholars of his time by his contemporaries, it is not because he published the text of an Indian erudite of the fourteenth century but rather because he flattered himself that he had printed the "oldest book in the world" for the first time 7 . Going by Louis Renou, the same remark would be applicable to Wilson, who supervised Max Muller's work for a 6 See Louis Renou's critical appreciation of Sayana's annotations (Renou, 1928, pg. 8) 7 We have Muller's own testimony about his career (Muller, 1901). There is also a vast correspondence which has been extensively consulted in the biography by Nirad [START_REF] Chaudhuri | Scholar Extraordinary; The Life of Professor the Rt[END_REF] about whom it mustn't be forgotten however, that he is himself first a polemist and a great writer