Sear

Central bank

A central bank, reserve bank, or monetary

authority is an institution that manages
the currency, money supply, and interest
rates of a state or formal monetary
union,[1] and oversees their commercial
banking system. In contrast to a
commercial bank, a central bank
possesses a monopoly on increasing the
monetary base in the state, and also
generally controls the printing/coining of
the national currency,[2] which serves as
the state's legal tender.[3] A central bank
also acts as a lender of last resort to the
banking sector during times of financial
crisis. Most central banks also have
supervisory and regulatory powers to
ensure the stability of member institutions,
to prevent bank runs, and to discourage
reckless or fraudulent behavior by member
banks.

Central banks in most developed nations

are institutionally independent from
political interference.[4][5][6] Still, limited
control by the executive and legislative
bodies exists.[7][8]

Activities and responsibilities

of the central banks
The Eccles Federal Reserve Board Building in
Washington, D.C. houses the main offices of the Board
of Governors of the United States' Federal Reserve
System

Functions of a central bank may include:

implementing monetary policies.

setting the official interest rate – used to
manage both inflation and the country's
exchange rate – and ensuring that this
rate takes effect via a variety of policy
mechanisms
controlling the nation's entire money
supply
the Government's banker and the
bankers' bank ("lender of last resort")
managing the country's foreign
exchange and gold reserves and the
Government bonds
regulating and supervising the banking
industry
Monetary policy
Central banks implement a country's
chosen monetary policy.

Currency issuance …

At the most basic level, monetary policy

involves establishing what form of
currency the country may have, whether a
fiat currency, gold-backed currency
(disallowed for countries in the
International Monetary Fund), currency
board or a currency union. When a country
has its own national currency, this involves
the issue of some form of standardized
currency, which is essentially a form of
promissory note: a promise to exchange
the note for "money" under certain
circumstances. Historically, this was often
a promise to exchange the money for
precious metals in some fixed amount.
Now, when many currencies are fiat
money, the "promise to pay" consists of
the promise to accept that currency to pay
for taxes.

A central bank may use another country's

currency either directly in a currency union,
or indirectly on a currency board. In the
latter case, exemplified by the Bulgarian
National Bank, Hong Kong and Latvia (until
2014), the local currency is backed at a
fixed rate by the central bank's holdings of
a foreign currency. Similar to commercial
banks, central banks hold assets
(government bonds, foreign exchange,
gold, and other financial assets) and incur
liabilities (currency outstanding). Central
banks create money by issuing interest-
free currency notes and selling them to the
public (government) in exchange for
interest-bearing assets such as
government bonds. When a central bank
wishes to purchase more bonds than their
respective national governments make
available, they may purchase private
bonds or assets denominated in foreign
currencies.
The European Central Bank remits its
interest income to the central banks of the
member countries of the European Union.
The US Federal Reserve remits all its
profits to the U.S. Treasury. This income,
derived from the power to issue currency,
is referred to as seigniorage, and usually
belongs to the national government. The
state-sanctioned power to create currency
is called the Right of Issuance. Throughout
history there have been disagreements
over this power, since whoever controls
the creation of currency controls the
seigniorage income. The expression
"monetary policy" may also refer more
narrowly to the interest-rate targets and
other active measures undertaken by the
monetary authority.

Goals …

High employment …

Frictional unemployment is the time period

between jobs when a worker is searching
for, or transitioning from one job to
another. Unemployment beyond frictional
unemployment is classified as unintended
unemployment.

For example, structural unemployment is a

form of unemployment resulting from a
mismatch between demand in the labour
market and the skills and locations of the
workers seeking employment.
Macroeconomic policy generally aims to
reduce unintended unemployment.
Keynes labeled any jobs that would be
created by a rise in wage-goods (i.e., a
decrease in real-wages) as involuntary
unemployment:

Men are involuntarily unemployed if, in

the event of a small rise in the price of
wage-goods relatively to the money-
wage, both the aggregate supply of
labour willing to work for the current
money-wage and the aggregate
demand for it at that wage would be
 greater than the existing volume of
employment.
—John Maynard Keynes, The General
Theory of Employment, Interest and
Money p11

Price stability …

Inflation is defined either as the

devaluation of a currency or equivalently
the rise of prices relative to a currency.

Since inflation lowers real wages,

Keynesians view inflation as the solution
to involuntary unemployment. However,
"unanticipated" inflation leads to lender
losses as the real interest rate will be
lower than expected. Thus, Keynesian
monetary policy aims for a steady rate of
inflation. A publication from the Austrian
School, The Case Against the Fed, argues
that the efforts of the central banks to
control inflation have been
counterproductive.

Economic growth …
Economic growth can be enhanced by
investment in capital, such as more or
better machinery. A low interest rate
implies that firms can borrow money to
invest in their capital stock and pay less
interest for it. Lowering the interest is
therefore considered to encourage
economic growth and is often used to
alleviate times of low economic growth.
On the other hand, raising the interest rate
is often used in times of high economic
growth as a contra-cyclical device to keep
the economy from overheating and avoid
market bubbles.

The European Central Bank building in Frankfurt

Further goals of monetary policy are

stability of interest rates, of the financial
market, and of the foreign exchange
market. Goals frequently cannot be
separated from each other and often
conflict. Costs must therefore be carefully
weighed before policy implementation.

Policy instruments

The headquarters of the Bank for International

Settlements, in Basel (Switzerland).
The Bank of Japan, in Tokyo, established in 1882.

The Reserve Bank of India (established in 1935)

Headquarters in Mumbai.

The BSP Complex, in the Philippines.

The Central Bank of Brazil (established in 1964) in

 ( )
Brasília.

The Bank of Spain (established in 1782) in Madrid.

The main monetary policy instruments

available to central banks are open market
operation, bank reserve requirement,
interest rate policy, re-lending and re-
discount (including using the term
repurchase market), and credit policy
(often coordinated with trade policy).
While capital adequacy is important, it is
defined and regulated by the Bank for
International Settlements, and central
banks in practice generally do not apply
stricter rules.

Interest rates …

By far the most visible and obvious power

of many modern central banks is to
influence market interest rates; contrary to
popular belief, they rarely "set" rates to a
fixed number. Although the mechanism
differs from country to country, most use a
similar mechanism based on a central
bank's ability to create as much fiat money
as required.

The mechanism to move the market

towards a 'target rate' (whichever specific
rate is used) is generally to lend money or
borrow money in theoretically unlimited
quantities, until the targeted market rate is
sufficiently close to the target. Central
banks may do so by lending money to and
borrowing money from (taking deposits
from) a limited number of qualified banks,
or by purchasing and selling bonds. As an
example of how this functions, the Bank of
Canada sets a target overnight rate, and a
band of plus or minus 0.25%. Qualified
banks borrow from each other within this
band, but never above or below, because
the central bank will always lend to them
at the top of the band, and take deposits at
the bottom of the band; in principle, the
capacity to borrow and lend at the
extremes of the band are unlimited.[9]
Other central banks use similar
mechanisms.

The target rates are generally short-term

rates. The actual rate that borrowers and
lenders receive on the market will depend
on (perceived) credit risk, maturity and
other factors. For example, a central bank
might set a target rate for overnight
lending of 4.5%, but rates for (equivalent
risk) five-year bonds might be 5%, 4.75%,
or, in cases of inverted yield curves, even
below the short-term rate. Many central
banks have one primary "headline" rate
that is quoted as the "central bank rate". In
practice, they will have other tools and
rates that are used, but only one that is
rigorously targeted and enforced.

"The rate at which the central bank lends

money can indeed be chosen at will by the
central bank; this is the rate that makes
the financial headlines."[10] Henry C.K. Liu
explains further that "the U.S. central-bank
lending rate is known as the Fed funds
rate. The Fed sets a target for the Fed
funds rate, which its Open Market
Committee tries to match by lending or
borrowing in the money market ... a fiat
money system set by command of the
central bank. The Fed is the head of the
central-bank because the U.S. dollar is the
key reserve currency for international
trade. The global money market is a USA
dollar market. All other currencies markets
revolve around the U.S. dollar market."
Accordingly, the U.S. situation is not
typical of central banks in general.

Typically a central bank controls certain

types of short-term interest rates. These
influence the stock- and bond markets as
well as mortgage and other interest rates.
The European Central Bank for example
announces its interest rate at the meeting
of its Governing Council; in the case of the
U.S. Federal Reserve, the Federal Reserve
Board of Governors. Both the Federal
Reserve and the ECB are composed of one
or more central bodies that are
responsible for the main decisions about
interest rates and the size and type of
open market operations, and several
branches to execute its policies. In the
case of the Federal Reserve, they are the
local Federal Reserve Banks; for the ECB
they are the national central banks.

A typical central bank has several interest

rates or monetary policy tools it can set to
influence markets.
Marginal lending rate – a fixed rate for
institutions to borrow money from the
central bank. (In the USA this is called
the discount rate).
Main refinancing rate – the publicly
visible interest rate the central bank
announces. It is also known as minimum
bid rate and serves as a bidding floor for
refinancing loans. (In the USA this is
called the federal funds rate).
Deposit rate, generally consisting of
interest on reserves and sometimes
 also interest on excess reserves – the
rates parties receive for deposits at the
central bank.

These rates directly affect the rates in the

money market, the market for short term
loans.

Some central banks (e.g. in Denmark,

Sweden and the Eurozone) are currently
applying negative interest rates.

Open market operations …

Through open market operations, a central
bank influences the money supply in an
economy. Each time it buys securities
(such as a government bond or treasury
bill), it in effect creates money. The central
bank exchanges money for the security,
increasing the money supply while
lowering the supply of the specific
security. Conversely, selling of securities
by the central bank reduces the money
supply.
Open market operations usually take the
form of:

Buying or selling securities ("direct

operations") to achieve an interest rate
target in the interbank market .
Temporary lending of money for
collateral securities ("Reverse
Operations" or "repurchase operations",
otherwise known as the "repo" market).
These operations are carried out on a
regular basis, where fixed maturity loans
 (of one week and one month for the
ECB) are auctioned off.
Foreign exchange operations such as
foreign exchange swaps.

These interventions can also influence the

foreign exchange market and thus the
exchange rate. For example, the People's
Bank of China and the Bank of Japan have
on occasion bought several hundred
billions of U.S. Treasuries, presumably in
order to stop the decline of the U.S. dollar
versus the renminbi and the yen.
Quantitative easing …

When faced with the zero lower bound or a

liquidity trap, central banks can resort to
quantitative easing (QE). Like open market
operations, QE consists in the purchase of
financial assets by the central bank. There
are however certain differences:

The scale of QE is much larger. The

central bank implementing QE usually
announces a specific amount of assets
it intends to purchase.
 The duration of QE is purposefully long
if not open-ended.
The asset eligibility is usually wider and
more flexible under QE, allowing the
central bank to purchase bonds with
longer maturity and higher risk profile.

In that sense, quantitative easing can be

considered as an extension of open
market operations.

Capital requirements …
All banks are required to hold a certain
percentage of their assets as capital, a
rate which may be established by the
central bank or the banking supervisor. For
international banks, including the 55
member central banks of the Bank for
International Settlements, the threshold is
8% (see the Basel Capital Accords) of risk-
adjusted assets, whereby certain assets
(such as government bonds) are
considered to have lower risk and are
either partially or fully excluded from total
assets for the purposes of calculating
capital adequacy. Partly due to concerns
about asset inflation and repurchase
agreements, capital requirements may be
considered more effective than reserve
requirements in preventing indefinite
lending: when at the threshold, a bank
cannot extend another loan without
acquiring further capital on its balance
sheet.

Reserve requirements …
Historically, bank reserves have formed
only a small fraction of deposits, a system
called fractional-reserve banking. Banks
would hold only a small percentage of
their assets in the form of cash reserves
as insurance against bank runs. Over time
this process has been regulated and
insured by central banks. Such legal
reserve requirements were introduced in
the 19th century as an attempt to reduce
the risk of banks overextending
themselves and suffering from bank runs,
as this could lead to knock-on effects on
other overextended banks. See also money
multiplier.

As the early 20th century gold standard

was undermined by inflation and the late
20th century fiat dollar hegemony evolved,
and as banks proliferated and engaged in
more complex transactions and were able
to profit from dealings globally on a
moment's notice, these practices became
mandatory, if only to ensure that there was
some limit on the ballooning of money
supply. Such limits have become harder to
enforce. The People's Bank of China
retains (and uses) more powers over
reserves because the yuan that it manages
is a non-convertible currency.

Loan activity by banks plays a

fundamental role in determining the
money supply. The central-bank money
after aggregate settlement – "final money"
– can take only one of two forms:
 physical cash, which is rarely used in
wholesale financial markets,
central-bank money which is rarely used
by the people

The currency component of the money

supply is far smaller than the deposit
component. Currency, bank reserves and
institutional loan agreements together
make up the monetary base, called M1, M2
and M3. The Federal Reserve Bank
stopped publishing M3 and counting it as
part of the money supply in 2006.[11]
Credit guidance and controls …

Central banks can directly control the

money supply by placing limits on the
amount banks can lend to various sectors
of the economy.[12][13] Central banks can
also control the amount of lending by
applying credit quotas. This allows the
central bank to control both the quantity of
lending and its allocation towards certain
strategic sectors of the economy, for
example to support the national industrial
policy. The Bank of Japan used to apply
such policy ("window guidance") between
1962 and 1991.[14][15]

Exchange requirements …

To influence the money supply, some

central banks may require that some or all
foreign exchange receipts (generally from
exports) be exchanged for the local
currency. The rate that is used to purchase
local currency may be market-based or
arbitrarily set by the bank. This tool is
generally used in countries with non-
convertible currencies or partially
convertible currencies. The recipient of the
local currency may be allowed to freely
dispose of the funds, required to hold the
funds with the central bank for some
period of time, or allowed to use the funds
subject to certain restrictions. In other
cases, the ability to hold or use the foreign
exchange may be otherwise limited.
In this method, money supply is increased
by the central bank when it purchases the
foreign currency by issuing (selling) the
local currency. The central bank may
subsequently reduce the money supply by
various means, including selling bonds or
foreign exchange interventions.

Margin requirements and other

tools
…

In some countries, central banks may have

other tools that work indirectly to limit
lending practices and otherwise restrict or
regulate capital markets. For example, a
central bank may regulate margin lending,
whereby individuals or companies may
borrow against pledged securities. The
margin requirement establishes a
minimum ratio of the value of the
securities to the amount borrowed.

Central banks often have requirements for

the quality of assets that may be held by
financial institutions; these requirements
may act as a limit on the amount of risk
and leverage created by the financial
system. These requirements may be
direct, such as requiring certain assets to
bear certain minimum credit ratings, or
indirect, by the central bank lending to
counterparties only when security of a
certain quality is pledged as collateral.

Limits on policy effects …

Although the perception by the public may

be that the "central bank" controls some or
all interest rates and currency rates,
economic theory (and substantial
empirical evidence) shows that it is
impossible to do both at once in an open
economy. Robert Mundell's "impossible
trinity" is the most famous formulation of
these limited powers, and postulates that
it is impossible to target monetary policy
(broadly, interest rates), the exchange rate
(through a fixed rate) and maintain free
capital movement. Since most Western
economies are now considered "open"
with free capital movement, this
essentially means that central banks may
target interest rates or exchange rates with
credibility, but not both at once.

In the most famous case of policy failure,

Black Wednesday, George Soros
arbitraged the pound sterling's relationship
to the ECU and (after making $2 billion
himself and forcing the UK to spend over
$8bn defending the pound) forced it to
abandon its policy. Since then he has been
a harsh critic of clumsy bank policies and
argued that no one should be able to do
what he did.

The most complex relationships are those

between the yuan and the US dollar, and
between the euro and its neighbors. US
dollars were ubiquitous in Cuba's economy
after its legalization in 1991, but were
officially removed from circulation in 2004
and replaced by the convertible peso.

Forward guidance …
 This section is empty.
Learn more

More radical instruments …

Some have envisaged the use of what

Milton Friedman once called "helicopter
money" whereby the central bank would
make direct transfers to citizens[16] in
order to lift inflation up to the central
bank's intended target. Such policy option
could be particularly effective at the zero
lower bound.[17]
Banking supervision and
other activities
In some countries a central bank, through
its subsidiaries, controls and monitors the
banking sector. In other countries banking
supervision is carried out by a government
department such as the UK Treasury, or by
an independent government agency, for
example, UK's Financial Conduct Authority.
It examines the banks' balance sheets and
behaviour and policies toward consumers.
Apart from refinancing, it also provides
banks with services such as transfer of
funds, bank notes and coins or foreign
currency. Thus it is often described as the
"bank of banks".

Many countries will monitor and control

the banking sector through several
different agencies and for different
purposes. the Bank regulation in the
United States for example is highly
fragmented with 3 federal agencies, the
Federal Deposit Insurance Corporation, the
Federal Reserve Board, or Office of the
Comptroller of the Currency and numerous
others on the state and the private level.
There is usually significant cooperation
between the agencies. For example,
money center banks, deposit-taking
institutions, and other types of financial
institutions may be subject to different
(and occasionally overlapping) regulation.
Some types of banking regulation may be
delegated to other levels of government,
such as state or provincial governments.
Any cartel of banks is particularly closely
watched and controlled. Most countries
control bank mergers and are wary of
concentration in this industry due to the
danger of groupthink and runaway lending
bubbles based on a single point of failure,
the credit culture of the few large banks.

Independence
Governments generally have some degree
of influence over even "independent"
central banks; the aim of independence is
primarily to prevent short-term
interference. In 1951, the Deutsche
Bundesbank became the first central bank
to be given full independence, leading this
form of central bank to be referred to as
the "Bundesbank model", as opposed, for
instance, to the New Zealand model, which
has a goal (i.e. inflation target) set by the
government.

Advocates of central bank independence

argue that a central bank which is too
susceptible to political direction or
pressure may encourage economic cycles
("boom and bust"), as politicians may be
tempted to boost economic activity in
advance of an election, to the detriment of
the long-term health of the economy and
the country. In this context, independence
is usually defined as the central bank's
operational and management
independence from the government.

Central bank independence is usually

guaranteed by legislation and the
institutional framework governing the
bank's relationship with elected officials,
particularly the minister of finance. Central
bank legislation will enshrine specific
procedures for selecting and appointing
the head of the central bank. Often the
minister of finance will appoint the
governor in consultation with the central
bank's board and its incumbent governor.
In addition, the legislation will specify
banks governor's term of appointment.
The most independent central banks enjoy
a fixed non-renewable term for the
governor in order to eliminate pressure on
the governor to please the government in
the hope of being re-appointed for a
second term.[18] Generally, independent
central banks enjoy both goal and
instrument independence.[19]

In return to their independence, central

bank are usually accountable at some
level to government officials, either to the
finance ministry or to parliament. For
example, the Board of Governors of the
U.S. Federal Reserve are nominated by the
U.S. President and confirmed by the
Senate,[20] publishes verbatim transcripts,
and balance sheets are audited by the
Government Accountability Office.[21]

In the 2000s there has been a trend

towards increasing the independence of
central banks as a way of improving long-
term economic performance. While a large
volume of economic research has been
done to define the relationship between
central bank independence and economic
performance, the results are
ambiguous.[22]

The literature on central bank

independence has defined a cumulative
and complementary number of
aspects:[23][24]

Institutional independence: The

independence of the central bank is
enshrined in law and shields central
bank from political interference. In
general terms, institutional
independence means that politicians
should refrain to seek to influence
monetary policy decisions, while
symmetrically central banks should also
avoid influencing government politics.
Goal independence: The central bank
has the right to set its own policy goals,
whether inflation targeting, control of
the money supply, or maintaining a fixed
exchange rate. While this type of
independence is more common, many
central banks prefer to announce their
policy goals in partnership with the
appropriate government departments.
This increases the transparency of the
policy setting process and thereby
increases the credibility of the goals
chosen by providing assurance that they
will not be changed without notice. In
addition, the setting of common goals
by the central bank and the government
helps to avoid situations where
monetary and fiscal policy are in
conflict; a policy combination that is
clearly sub-optimal.
Functional & operational independence:
The central bank has the independence
to determine the best way of achieving
its policy goals, including the types of
instruments used and the timing of their
use. To achieve its mandate, the central
bank has the authority to run its own
operations (appointing staff, setting
budgets, and so on.) and to organize its
internal structures without excessive
involvement of the government. This is
the most common form of central bank
independence. The granting of
independence to the Bank of England in
1997 was, in fact, the granting of
operational independence; the inflation
target continued to be announced in the
Chancellor's annual budget speech to
Parliament.
Personal independence: The other
forms of independence are not possible
unless central bank heads have a high
security of tenure. In practice, this
means that governors should hold long
mandates (at least longer than the
electoral cycle) and a certain degree of
legal immunity.[25] One of the most
common statistical indicators used in
the literature as a proxy for central bank
independence is the "turn-over-rate" of
central bank governors. If a government
is in the habit of appointing and
replacing the governor frequently, it
clearly has the capacity to micro-
manage the central bank through its
choice of governors.
Financial independence: central banks
have full autonomy on their budget, and
some are even prohibited from financing
governments. This is meant to remove
incentives from politicians to influence
central banks.
Legal independence: some central
banks have their own legal personality,
which allows them to ratify international
agreements without government's
 approval (like the ECB) and to go in
court.

There is very strong consensus among

economists that an independent central
bank can run a more credible monetary
policy, making market expectations more
responsive to signals from the central
bank.[26] Both the Bank of England (1997)
and the European Central Bank have been
made independent and follow a set of
published inflation targets so that markets
know what to expect. Even the People's
Bank of China has been accorded great
latitude, though in China the official role of
the bank remains that of a national bank
rather than a central bank, underlined by
the official refusal to "unpeg" the yuan or
to revalue it "under pressure". The People's
Bank of China's independence can thus be
read more as independence from the US,
which rules the financial markets, rather
than from the Communist Party of China
which rules the country. The fact that the
Communist Party is not elected also
relieves the pressure to please people,
increasing its independence.[27]

International organizations such as the

World Bank, the Bank for International
Settlements (BIS) and the International
Monetary Fund (IMF) strongly support
central bank independence. This results, in
part, from a belief in the intrinsic merits of
increased independence. The support for
independence from the international
organizations also derives partly from the
connection between increased
independence for the central bank and
increased transparency in the policy-
making process. The IMF's Financial
Services Action Plan (FSAP) review self-
assessment, for example, includes a
number of questions about central bank
independence in the transparency section.
An independent central bank will score
higher in the review than one that is not
independent. [27]

History
Early history …

The use of money as a unit of account

predates history. Government control of
money is documented in the ancient
Egyptian economy (2750–2150 BC).[28]
The Egyptians measured the value of
goods with a central unit called shat. As
many other currencies, the shat was linked
to gold. The value of a shat in terms of
goods was defined by government
administrations. Other cultures in Asia
Minor later materialized their currencies in
the form of gold and silver coins.[29]

In the medieval and the early modern

period a network of professional banks
was established in Southern and Central
Europe.[30] The institutes built a new tier in
the financial economy. The monetary
system was still controlled by government
institutions, mainly through the coinage
prerogative. Banks, however, could use
book money to create deposits for their
customers. Thus, they had the possibility
to issue, lend and transfer money
autonomously without direct
governmental control.

In order to consolidate the monetary

system, a network of public exchange
banks was established at the beginning of
the 17th century in main European trade
centres. The Amsterdam Wisselbank was
founded as a first institute in 1609. Further
exchange banks were located in Hamburg,
Venice and Nuremberg. The institutes
offered a public infrastructure for cashless
international payments.[31] They aimed to
increase the efficiency of international
trade and to safeguard monetary stability.
The exchange banks thus fulfilled
comparable functions to modern central
banks.[32] The institutes even issued their
own (book) currency, called Mark Banco.

Bank of Amsterdam
(Amsterdamsche Wisselbank)
…
The old town hall in Amsterdam where the Bank of

Amsterdam was founded in 1609, painting by Pieter

Saenredam.

In the early modern period, the Dutch were

pioneering financial innovators who
developed many advanced techniques and
helped lay the foundations of modern
financial systems.[33] The Bank of
Amsterdam (Amsterdam Wisselbank),
established in the Dutch Republic in 1609,
was a forerunner to modern central banks.
The Wisselbank's innovations helped lay
the foundations for the birth and
development of the central banking
system that now plays a vital role in the
world's economy. Along with a number of
subsidiary local banks, it performed many
functions of a central banking system.[34]
The model of the Wisselbank as a state
bank was adapted throughout Europe,
including Sveriges Riksbank (1668) and
the Bank of England (1694).

Sveriges Riksbank …

Established by Dutch-Latvian Johan

Palmstruch in 1668, Sweden's central
bank, the Riksbank, is often considered by
many as the world's oldest central bank.
However it lacked a central function before
1904 since it did not have a monopoly over
issuing bank notes.[35]
Bank of England …

Sealing of the Bank of England Charter (1694), by

Lady Jane Lindsay, 1905.

The establishment of the Bank of England,

the model on which most modern central
banks have been based, was devised by
Charles Montagu, 1st Earl of Halifax, in
1694, following a proposal by the banker
William Paterson three years earlier, which
had not been acted upon.[36] In the
Kingdom of England in the 1690s, public
funds were in short supply, and the credit
of William III's government was so low in
London that it was impossible for it to
borrow the £1,200,000 (at 8 percent)
needed to finance the ongoing Nine Years'
War with France. In order to induce
subscription to the loan, Montagu
proposed that the subscribers were to be
incorporated as The Governor and
Company of the Bank of England with long-
term banking privileges including the issue
of notes. The lenders would give the
government cash (bullion) and also issue
notes against the government bonds,
which could be lent again. A Royal Charter
was granted on 27 July through the
passage of the Tonnage Act 1694.[37] The
bank was given exclusive possession of
the government's balances, and was the
only limited-liability corporation allowed to
issue banknotes.[38] The £1.2M was raised
in 12 days; half of this was used to rebuild
the Navy.

The Bank of England, established in 1694.

Although this establishment of the Bank of
England marks the origin of central
banking, it did not have the functions of a
modern central bank, namely, to regulate
the value of the national currency, to
finance the government, to be the sole
authorized distributor of banknotes, and to
function as a 'lender of last resort' to
banks suffering a liquidity crisis. These
modern central banking functions evolved
slowly through the 18th and 19th
centuries.[39]
Although the Bank was originally a private
institution, by the end of the 18th century it
was increasingly being regarded as a
public authority with civic responsibility
toward the upkeep of a healthy financial
system. The currency crisis of 1797,
caused by panicked depositors
withdrawing from the Bank led to the
government suspending convertibility of
notes into specie payment.[40] The bank
was soon accused by the bullionists of
causing the exchange rate to fall from over
issuing banknotes, a charge which the
Bank denied. Nevertheless, it was clear
that the Bank was being treated as an
organ of the state.

Henry Thornton, a merchant banker and

monetary theorist has been described as
the father of the modern central bank. An
opponent of the real bills doctrine, he was
a defender of the bullionist position and a
significant figure in monetary theory.
Thornton's process of monetary expansion
anticipated the theories of Knut Wicksell
regarding the "cumulative process which
restates the Quantity Theory in a
theoretically coherent form". As a
response to the 1797 currency crisis,
Thornton wrote in 1802 An Enquiry into the
Nature and Effects of the Paper Credit of
Great Britain, in which he argued that the
increase in paper credit did not cause the
crisis. The book also gives a detailed
account of the British monetary system as
well as a detailed examination of the ways
in which the Bank of England should act to
counteract fluctuations in the value of the
pound.[41]

Walter Bagehot, an influential theorist on the

economic role of the central bank.
Until the mid-nineteenth century,
commercial banks were able to issue their
own banknotes, and notes issued by
provincial banking companies were
commonly in circulation.[42] Many consider
the origins of the central bank to lie with
the passage of the Bank Charter Act
1844.[39] Under the 1844 Act, bullionism
was institutionalized in Britain,[43] creating
a ratio between the gold reserves held by
the Bank of England and the notes that the
Bank could issue.[44] The Act also placed
strict curbs on the issuance of notes by
the country banks.[44]

The Bank accepted the role of 'lender of

last resort' in the 1870s after criticism of
its lacklustre response to the Overend-
Gurney crisis. The journalist Walter
Bagehot wrote on the subject in Lombard
Street: A Description of the Money Market,
in which he advocated for the Bank to
officially become a lender of last resort
during a credit crunch, sometimes referred
to as "Bagehot's dictum". Paul Tucker
phrased the dictum in 2009 as follows:

…to avert panic, central banks

should lend early and freely (ie
without limit), to solvent firms,
against good collateral, and at
'high rates'.[45]

Spread around the world …

Central banks were established in many
European countries during the 19th
century.[46][47] Napoleon created the
Banque de France in 1800, in an attempt to
improve the financing of his wars.[48] On
the continent of Europe, the Bank of
France remain the most important central
bank throughout the 19th century. A
central banking role was played by a small
group of powerful family banking houses,
typified by the House of Rothschild, with
branches in major cities across Europe, as
well as the Hottinguer family in
Switzerland and the Oppenheim family in
Germany.[49][50]

Although central banks today are generally

associated with fiat money, the 19th and
early 20th centuries central banks in most
of Europe and Japan developed under the
international gold standard. Free banking
or currency boards were common at this
time. Problems with collapses of banks
during downturns, however, led to wider
support for central banks in those nations
which did not as yet possess them, most
notably in Australia.

Australia established its first central bank

in 1920, Peru in 1922, Colombia in 1923,
Mexico and Chile in 1925 and Canada,
India and New Zealand in the aftermath of
the Great Depression in 1934. By 1935, the
only significant independent nation that
did not possess a central bank was Brazil,
which subsequently developed a precursor
thereto in 1945 and the present Central
Bank of Brazil twenty years later. After
gaining independence, African and Asian
countries also established central banks
or monetary unions. The Reserve Bank of
India, which had been established during
British colonial rule as a private company,
was nationalized in 1949 following India's
independence.

The headquarters of the People's Bank of China

(established in 1948) in Beijing.
The People's Bank of China evolved its role
as a central bank starting in about 1979
with the introduction of market reforms,
which accelerated in 1989 when the
country adopted a generally capitalist
approach to its export economy. Evolving
further partly in response to the European
Central Bank, the People's Bank of China
had by 2000 become a modern central
bank. The most recent bank model was
introduced together with the euro, and
involves coordination of the European
national banks, which continue to manage
their respective economies separately in
all respects other than currency exchange
and base interest rates.

United States …

Alexander Hamilton as Secretary of the

Treasury in the 1790s strongly promoted
the banking system, and over heavy
opposition from Jeffersonian Republicans,
set up the First Bank of the United States.
Jeffersonians allowed it to lapse, but the
overwhelming financial difficulties of
funding the War of 1812 without a central
bank changed their minds. The Second
Bank of the United States (1816–1836)
under Nicholas Biddle functioned as a
central bank, regulating the rapidly
growing banking system.[51] The role of a
central bank was ended in the Bank War of
the 1830s by President Andrew Jackson
when he shut down the Second Bank as
being too powerful and elitist.[52]

In 1913 the United States created the

Federal Reserve System through the
passing of The Federal Reserve Act.[53]

Naming of central banks …

There is no standard terminology for the

name of a central bank, but many
countries use the "Bank of Country" form—
for example: Bank of Canada, Bank of
Mexico, Bank of Thailand. The United
Kingdom does not follow this form as its
central bank is the Bank of England (which,
despite its name, is the central bank of the
United Kingdom as a whole). The name's
lack of representation of the entire United
Kingdom ('Bank of Britain', for example)
can be owed to the fact that its
establishment occurred when the
Kingdoms of England, Scotland and
Ireland were separate entities (at least in
name), and therefore pre-dates the merger
of the Kingdoms of England and Scotland,
the Kingdom of Ireland's absorption into
the Union and the formation of the present
day United Kingdom).

The word "Reserve" is also often included,

such as the Reserve Bank of India, Reserve
Bank of Australia, Reserve Bank of New
Zealand, the South African Reserve Bank,
and Federal Reserve System. Other central
banks are known as monetary authorities
such as the Saudi Arabian Monetary
Authority, Hong Kong Monetary Authority,
Monetary Authority of Singapore, Maldives
Monetary Authority and Cayman Islands
Monetary Authority. There is an instance
where native language was used to name
the central bank: in the Philippines the
Filipino name Bangko Sentral ng Pilipinas
is used even in English.

Some are styled "national" banks, such as

the Swiss National Bank, National Bank of
Poland and National Bank of Ukraine,
although the term national bank is also
used for private commercial banks in
some countries such as National Bank of
Pakistan. In other cases, central banks
may incorporate the word "Central" (for
example, European Central Bank, Central
Bank of Ireland, Central Bank of Brazil). In
some countries, particularly in formerly
Communist ones, the term national bank
may be used to indicate both the monetary
authority and the leading banking entity,
such as the Soviet Union's Gosbank (state
bank). In rare cases, central banks are
styled "state" banks such as the State
Bank of Pakistan and State Bank of
Vietnam.

Many countries have state-owned banks

or other quasi-government entities that
have entirely separate functions, such as
financing imports and exports. In other
countries, the term national bank may be
used to indicate that the central bank's
goals are broader than monetary stability,
such as full employment, industrial
development, or other goals. Some state-
owned commercial banks have names
suggestive of central banks, even if they
are not: examples are the State Bank of
India and Central Bank of India.

The chief executive of a central bank is

usually known as the Governor, President
or Chair.

21st century …

After the Financial crisis of 2007–2008

central banks led change, but as of 2015
their ability to boost economic growth has
stalled. Central banks debate whether they
should experiment with new measures like
negative interest rates or direct financing
of government, "lean even more on
politicians to do more". Andy Haldane
from the Bank of England said "central
bankers may need to accept that their
good old days – of adjusting interest rates
to boost employment or contain inflation –
may be gone for good". The European
Central Bank and The Bank of Japan
whose economies are in or close to
deflation, continue quantitative easing –
buying securities to encourage more
lending.[54]

Since 2017, prospect of implementing

central bank digital currency (CBDC) has
been in discussion[55]. As of the end of
2018, at least 15 central banks were
considering to implementing CBDC[56].
Since 2014, People's Bank of China has
been working on a project for digital
currency to make its own digital currency
and electronic payment systems.[57][58]
Statistics

Total assets of central banks

worldwide
(in trillion U.S. dollars)[59]
Collectively, central banks purchase less
than 500 tonnes of gold each year, on
average (out of an annual global
production of 2,500-3,000 tonnes per
year).[60] In 2018, central banks collectively
hold over 33,000 metric tons of the gold,
about a fifth of all the gold ever mined,
according to Bloomberg News.[61]

In 2016, 75% of the world's central-bank

assets were controlled by four centers in
China, the United States, Japan and the
eurozone. The central banks of Brazil,
Switzerland, Saudi Arabia, the U.K., India
and Russia, each account for an average
of 2.5 percent. The remaining 107 central
banks hold less than 13 percent.
According to data compiled by Bloomberg
News, the top 10 largest central banks
owned $21.4 trillion in assets, a 10 percent
increase from 2015.[62]
Top 5 Largest Central Bank by Total Assets[63]
Rank Central Bank Profile Total Assets

1 People's Bank of China $5,196,560,000,000

2 Bank of Japan $4,945,440,000,000

3 Federal Reserve System $3,857,715,000,000

4 Bank of Spain $861,564,000,000

5 Central Bank of Brazil $856,248,000,000

Criticism

Libertarian criticisms …

This section needs additional citations for

verification. Learn more

This article is written like a personal reflection,

personal essay, or argumentative essayLearn
that more

Certain groups of people, like Libertarians,

believe central banking is an incompetent
cartel that does very little to prevent
recessions. Milton Friedman for example
has claimed the Federal Reserve, which
had been founded in 1913, contributed to
worsening the Great Depression by
artificially keeping interest rates too low
and then suddenly shocking the system
with outrageously high rates. Although
Friedman was a monetarist, he believed
decisions regarding interest rates should
be left to computers, similar to the way the
modern stock market is heavily
automated.

Individuals who support free banking

believe that fiat money should not exist,
but that currencies should be freely traded
in the economy, and indexing those
currencies to precious commodities.

See also
List of central banks
History of central banking in the United
States
Fractional-reserve banking
Free banking
Full-reserve banking
Notes and references
1. Compare: Uittenbogaard, Roland
(2014). Evolution of Central Banking?:
De Nederlandsche Bank 1814 -1852 .
Cham (Switzerland): Springer. p. 4.
ISBN 9783319106175. Retrieved
3 February 2019. "Although it is
difficult to define central banking, [...] a
functional definition is most useful. [...]
Capie et al. (1994) define a central
bank as the government's bank, the
 monopoly note issuer and lender of
last resort."
2. Bank of Canada. "$5 and $10 Bank
Note Issue" . Retrieved 7 November
2013.
3. Compare states like Zimbabwe or
Kosovo, which have special currency
systems.
4. David Fielding, "Fiscal and Monetary
Policies in Developing Countries" in
The New Palgrave Dictionary of
Economics (Springer, 2016), p. 405:
 "The current norm in OECD countries
is an institutionally independent
central bank ... In recent years some
non-OECD countries have introduced
... a degree of central bank
independence and accountability."
5. "Public governance of central banks:
an approach from new institutional
economics" (PDF). The Bulletin of the
Faculty of Commerce. 89 (4). March
2007.
6. Apel, Emmanuel (November 2007). "1".
Central Banking Systems Compared:
The ECB, The Pre-Euro Bundesbank
and the Federal Reserve System.
Routledge. p. 14. ISBN 978-
0415459228.
7. "Ownership and independence of
FED" . Retrieved 29 September 2013.
8. Deutsche Bundesbank#Governance
9. Bank of Canada backgrounders:
Target for the Overnight Rate
10. How the US Money Market Really
Works (Part III of "Greenspan - the
Wizard of Bubbleland" ). By Henry C.K.
Liu, October 27, 2005.
11. Reserve, Federal. "Fed stops
publishing M3" . press release. Federal
Reserve Board. Retrieved 9 March
2006.
12. Werner, Richard (2002). ‘Monetary
Policy Implementation in Japan: What
They Say vs. What they Do’, Asian
Economic Journal, vol. 16 no.2,
 Oxford: Blackwell, pp. 111–151;
Werner, Richard (2001). Princes of the
Yen, Armonk: M. E. Sharpe [1]
13. Chan, Szu Ping (26 June 2014). "Bank
of England cracks down on
mortgages" . The Telegraph.
14. "Effectiveness of Window Guidance
and Financial Environment – In Light
of Japan's Experience of Financial
Liberalization and a Bubble Economy
– : ⽇本銀⾏ Bank of Japan" .
 www.boj.or.jp. Retrieved 12 November
2017.
15. Rhodes and Yoshino. "Japan=s
Monetary Policy Transition, 1955–
2004" (PDF).
16. Baeriswyl, Romain (2017). "The Case
for the Separation of Money and
Credit". Monetary Policy, Financial
Crises, and the Macroeconomy.
Springer, Cham. pp. 105–121.
doi:10.1007/978-3-319-56261-2_6 .
ISBN 9783319562605.
17. "The Simple Analytics of Helicopter
Money: Why It Works – Always —
Economics E-Journal" .
www.economics-ejournal.org.
Retrieved 12 November 2017.
18. John Goodman, Monetary Sovereignty:
The Politics of Central Banking in
Western Europe , Cornell University
Press, 1992
19. Stanley Fischer, "Central Bank
Independence"
20. Who are the members of the Federal
Reserve Board, and how are they
selected? U.S. Federal Reserve Board
of Governors FAQ, July 22, 2015
21. Is the Federal Reserve accountable to
anyone? U.S. Federal Reserve Board
of Governors FAQ June 17, 2011
22. Banaian, Burdekin, and Willett, 1998
"Reconsidering the principal
components of central bank
independence: The more the merrier?"
23. Bank, European Central. "Why is the
ECB independent?" . European Central
Bank. Retrieved 13 November 2017.
24. EU, Transparency International (28
March 2017). "Transparency
International EU – The global coalition
against corruption in Brussels" .
transparency.eu. Retrieved
13 November 2017.
25. "Privileges and immunities of the
European Central Bank" (PDF).
26. http://www.igmchicago.org/surveys/fe
d-appointments
27. "GLOBAL". Central Banks Directory.
International Business Publications,
USA. 1. 2011. ISBN 978-1-4387-1931-
3.
28. Monetary practices In ancient Egypt.
Money Museum National Bank of
Belgium, 31 May 2012. Retrieved 10
February 2017.
29. Metcalf, William E. The Oxford
Handbook of Greek and Roman
 Coinage., Oxford: Oxford University
Press, 2016, pp. 43–44
30. Collins, Christopher. The Oxford
Encyclopedia of Economic History,
Volume 3. BANKING: Middle Ages and
Early Modern Period., Oxford
University Press, 2012, pp. 221–225
31. Collins, Christopher. The Oxford
Encyclopedia of Economic History,
Volume 3. BANKING: Middle Ages and
Early Modern Period., Oxford
University Press, 2012, p. 223
32. Kurgan-van Hentenryk, Ginette.
Banking, Trade and Industry: Europe,
America and Asia from the Thirteenth
to the Twentieth Century, Cambridge
University Press, 1997, p. 39
33. Goetzmann, William N.; Rouwenhorst,
K. Geert (2008). The History of
Financial Innovation, in Carbon
Finance, Environmental Market
Solutions to Climate Change. (Yale
School of Forestry and Environmental
Studies, chapter 1, pp. 18–43). As
Goetzmann & Rouwenhorst (2008)
noted, "The 17th and 18th centuries in
the Netherlands were a remarkable
time for finance. Many of the financial
products or instruments that we see
today emerged during a relatively
short period. In particular, merchants
and bankers developed what we would
today call securitization. Mutual funds
and various other forms of structured
finance that still exist today emerged
 in the 17th and 18th centuries in
Holland."
34. Stephen Quinn, and William Roberds.
2007. "The Bank of Amsterdam and
the Leap to Central Bank Money."
American Economic Review, 97 (2):
262–265. doi:10.1257/aer.97.2.262
35. Robin Teigland; et al. (2018). The Rise
and Development of FinTech:
Accounts of Disruption from Sweden
and Beyond . Taylor & Francis. p. 113.
ISBN 9781351183604.
36. Committee of Finance and Industry
1931 (Macmillan Report) description
of the founding of Bank of England .
1979. ISBN 9780405112126. Retrieved
10 May 2010. "Its foundation in 1694
arose out the difficulties of the
Government of the day in securing
subscriptions to State loans. Its
primary purpose was to raise and lend
money to the State and in
consideration of this service it
received under its Charter and various
 Act of Parliament, certain privileges of
issuing bank notes. The corporation
commenced, with an assured life of
twelve years after which the
Government had the right to annul its
Charter on giving one year's notice.
'''Subsequent extensions of this period
coincided generally with the grant of
additional loans to the State'''"
37. H. Roseveare, The Financial Revolution
1660–1760 (1991, Longman), p. 34
38. Bagehot, Walter (5 November 2010).
Lombard Street: a description of the
money market (1873) . London: Henry
S. King and Co. (etext by Project
Gutenberg).
39. Capie, Forrest, Fischer, Stanley,
Goodhart, Charles and Schnadt,
Norbert (1994). "The development of
central banking" . The future of central
banking: the tercentenary symposium
of the Bank of England. Cambridge,
UK: Cambridge University Press.
 ISBN 9780521496346. Retrieved
17 December 2012.
40. "Crisis Chronicles: The Panic of 1825
and the Most Fantastic Financial
Swindle of All Time - Liberty Street
Economics" .
libertystreeteconomics.newyorkfed.or
g. Retrieved 30 August 2019.
41. Philippe Beaugrand, Henry Thornton,
un précurseur de J.M. Keynes, Paris:
Presses Universitaires de France,
1981.
42. "£2 note issued by Evans, Jones,
Davies & Co" . British Museum.
Archived from the original on 18
January 2012. Retrieved 31 October
2011.
43. Anna Gambles, Protection and Politics:
Conservative Economic Discourse,
1815-1852 (Royal Historical
Society/Boydell Press, 1999), pp. 117-
18.
44. Mary Poovey, Genres of the Credit
Economy: Mediating Value in
 Eighteenth- and Nineteenth-Century
Britain (University of Chicago Press,
2008), p. 49.
45. Paul Tucker, Deputy Governor,
Financial Stability, Bank of England,
The Repertoire of Official Sector
Interventions in the Financial System:
Last Resort Lending, Market-Making,
and Capital, Bank of Japan 2009
International Conference, 27–28 May
2009, p. 5
46. Clifford Gomez (2011). Banking and
Finance: Theory, Law and Practice .
PHI. p. 100. ISBN 9788120342378.
47. Michael D. Bordo; Marc Flandreau; Jan
F. Qvigstad (2016). Central Banks at a
Crossroads: What Can We Learn from
History? . Cambridge UP. pp. 1–17.
ISBN 9781107149663.
48. Michael Stephen Smith (2006). The
Emergence of Modern Business
Enterprise in France, 1800–1930 .
 Harvard UP. p. 59.
ISBN 9780674019393.
49. Niall Ferguson, The House of
Rothschild: Volume 1: Money's
Prophets: 1798–1848 (1999).
50. Gabriele Teichmann, "Sal. Oppenheim
jr. & Cie., Cologne." Financial History
Review 1.1 (1994): 69–78, online in
English .
51. Federal Reserve Bank of Minneapolis.
"A History of Central Banking in the
United States" online
52. Bray Hammond, "Jackson's Fight with
the 'Money Power.'" American Heritage
(June 1956) 7#4: 9–11, 100–103.
53. Miklos Sebok, "President Wilson and
the International Origins of the Federal
Reserve System—A Reappraisal."
White House Studies 10.4 (2011):
424–447.
54. Howard Schneider; Balazs Koranyi (1
October 2015). "From heroes to
bystanders? Central banks' growth
 challenge" . Reuters. Retrieved
1 October 2015.
55. BankUnderground (13 September
2017). "Beyond blockchain: what are
the technology requirements for a
Central Bank Digital Currency?" . Bank
Underground. Retrieved 10 July 2019.
56. Tommaso Mancini-Griffoli, Maria
Soledad Martinez Peria, Itai Agur, Anil
Ari, John Kiff, Adina Popescu, Celine
Rochon (12 November 2018). "Casting
 Light on Central Bank Digital
Currency". IMF Staff Discussion Note.
57. "What is China's digital currency
plan?" . Financial Times. 25 November
2019. Retrieved 30 November 2019.
58. "Explainer: Central bank digital
currencies - edging toward reality?" .
Reuters. 6 November 2019. Retrieved
30 November 2019.
59. "Assets of central banks globally 2002-
2017 | Statistic" . Statista. Retrieved
20 March 2019.
60. "Swiss love affair with gold could heat
up again" .
61. "Why Central Bank Buying Has the
Gold Market Guessing" . Bloomberg
Businessweek. 29 October 2018.
Retrieved 20 March 2019.
62. Big Central Bank Assets Jump Fastest
in 5 Years to $21 Trillion Bloomberg
News, October 16, 2016
63. "Top 67 Largest Central Bank Rankings
by Total Assets - SWFI" .
 www.swfinstitute.org. Retrieved
12 November 2019.

Further reading
Acocella, N., Di Bartolomeo, G., and
Hughes Hallett, A. [2012], "Central banks
and economic policy after the crisis:
what have we learned?", ch. 5 in: Baker,
H. K. and Riddick, L. A. (eds.), Survey of
International Finance, Oxford University
Press.

External links
List of central bank websites at the Bank
for International Settlements
International Journal of Central Banking
"The Federal Reserve System: Purposes
and Functions" – A publication of the
U.S. Federal Reserve, describing its role
in the macroeconomy
A hundred ways to skin a cat: comparing
monetary policy operating procedures in
the United States, Japan and the euro
area (PDF). (176 KB) – C E V Borio, Bank
for International Settlements, Basel
Retrieved from
"https://en.wikipedia.org/w/index.php?
title=Central_bank&oldid=934489986"

Last edited 6 hours ago by BernardoSulzbach

Content is available under CC BY-SA 3.0 unless

otherwise noted.