Central bank


A central bank, reserve bank, national bank, state bank, or monetary authority is an institution that manages the monetary policy of a country or monetary union. In contrast to a commercial bank, a central bank possesses a monopoly on increasing the monetary base. Many central banks also have supervisory or regulatory powers to ensure the stability of commercial banks in their jurisdiction, to prevent bank runs, and, in some cases, to enforce policies on financial consumer protection, and against bank fraud, money laundering, or terrorism financing. Central banks play a crucial role in macroeconomic forecasting, which is essential for guiding monetary policy decisions, especially during times of economic turbulence.
Central banks in most developed nations are usually set up to be institutionally independent from political interference, even though governments typically have governance rights over them, legislative bodies exercise scrutiny, and central banks frequently do show responsiveness to politics.
Issues like central bank independence, central bank policies, and rhetoric in central bank governors' discourse or the premises of macroeconomic policies of the state, are a focus of contention and criticism by some policymakers, researchers, and specialized business, economics, and finance media.

Definition

The notion of central banks as a separate category from other banks has emerged gradually, and only fully coalesced in the 20th century. In the aftermath of World War I, leading central bankers of the United Kingdom and the United States respectively, Montagu Norman and Benjamin Strong, agreed on a definition of central banks that was both positive and normative. Since that time, central banks have been generally distinguishable from other financial institutions, except under Communism in so-called single-tier banking systems such as Hungary's between 1950 and 1987, where the Hungarian National Bank operated alongside three other major state-owned banks. For earlier periods, what institutions do or do not count as central banks is often not univocal.
Correlatively, different scholars have held different views about the timeline of emergence of the first central banks. A widely held view in the second half of the 20th century has been that Stockholms Banco, as the original issuer of banknotes, counted as the oldest central bank, and that consequently its successor the Sveriges Riksbank was the oldest central bank in continuous operation, with the Bank of England as second-oldest and direct or indirect model for all subsequent central banks. That view has persisted in some early-21st-century publications. In more recent scholarship, however, the issuance of banknotes has often been viewed as just one of several techniques to provide central bank money, defined as financial money of the highest quality. Under that definition, municipal banks of the late medieval and early modern periods, such as the Taula de canvi de Barcelona or Bank of Amsterdam, issued central bank money and count as early central banks.

Naming

There is no universal terminology for the name of a central bank. Early central banks were often the only or principal formal financial institution in their jurisdiction, and were consequently often named "bank of" the relevant city's or country's name, e.g. the Bank of Amsterdam, Bank of Hamburg, Bank of England, or Wiener Stadtbank. Naming practices subsequently evolved as more central banks were established. The expression "central bank" itself only appeared in the early 19th century, but at that time it referred to the head office of a multi-branched bank, and was still used in that sense by Walter Bagehot in his seminal 1873 essay Lombard Street. During that era, what is now known as a central bank was often referred to as a bank of issue. The reference to central banking in the current sense only became widespread in the early 20th century.
Names of individual central banks include, with references to the date when the bank acquired its current name:
In some cases, the local-language name is used in English-language practice, e.g. Sveriges Riksbank, De Nederlandsche Bank, Deutsche Bundesbank, or Bangko Sentral ng Pilipinas.
Some 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, National Bank of Greece, Banco do Brasil, National Bank of Pakistan, Bank of China, Bank of Cyprus, or Bank of Ireland, as well as Deutsche Bank. Some but not all of these institutions had assumed central banking roles in the past.
The leading executive of a central bank is usually known as the Governor, President, or Chair.

History

The widespread adoption of central banking is a rather recent phenomenon. At the start of the 20th century, approximately two-thirds of sovereign states did not have a central bank. Waves of central bank adoption occurred in the interwar period and in the aftermath of World War II.
In the 20th century, central banks were often created with the intent to attract foreign capital, as bankers preferred to lend to countries with a central bank on the gold standard.

Background

The use of money as a unit of account predates history. Government control of money is documented in the ancient Egyptian economy. The Egyptians measured the value of goods with a central unit called shat. Like 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.
The mere issuance of paper currency or other types of financial money by a government is not the same as central banking. The difference is that government-issued financial money, as present e.g. in China during the Yuan dynasty in the form of paper currency, is typically not freely convertible and thus of inferior quality, occasionally leading to hyperinflation.
From the 12th century, a network of professional banks emerged primarily in Southern Europe. Banks could use book money to create deposits for their customers. Thus, they had the possibility to issue, lend and transfer money autonomously without direct control from political authorities.

Early municipal central banks

The Taula de canvi de Barcelona, established in 1401, is the first example of municipal, mostly public banks which pioneered central banking on a limited scale. It was soon emulated by the Bank of Saint George in the Republic of Genoa, first established in 1407, and significantly later by the Banco del Giro in the Republic of Venice and by a network of institutions in Naples that later consolidated into Banco di Napoli. Notable municipal central banks were established in the early 17th century in leading northwestern European commercial centers, namely the Bank of Amsterdam in 1609 and the Hamburger Bank in 1619. These institutions offered a public infrastructure for cashless international payments. They aimed to increase the efficiency of international trade and to safeguard monetary stability. These municipal public banks thus fulfilled comparable functions to modern central banks.

Early national central banks

The Swedish central bank, known since 1866 as Sveriges Riksbank, was founded in Stockholm in 1664 from the remains of the failed Stockholms Banco and answered to the Riksdag of the Estates, Sweden's early modern parliament. One role of the Swedish central bank was lending money to the government.
The establishment of the Bank of England was devised by Charles Montagu, 1st Earl of Halifax, following a 1691 proposal by William Paterson. A royal charter was granted on through the passage of the Tonnage Act. The bank was given exclusive possession of the government's balances, and was the only limited-liability corporation allowed to issue banknotes. The early modern Bank of England, however, did not have all the functions of a today's central banks, e.g. to regulate the value of the national currency, to finance the government, to be the sole authorized distributor of banknotes, or to function as a lender of last resort to banks suffering a liquidity crisis.
In the early 18th century, a major experiment in national central banking failed in France with John Law's Banque Royale in 1720–1721. Later in the century, France had other attempts with the Caisse d'Escompte first created in 1767, and King Charles III established the Bank of Spain in 1782. The Russian Assignation Bank, established in 1769 by Catherine the Great, was an outlier from the general pattern of early national central banks in that it was directly owned by the Imperial Russian government, rather than private individual shareholders. In the nascent United States, Alexander Hamilton, as Secretary of the Treasury in the 1790s, set up the First Bank of the United States despite heavy opposition from Jeffersonian Republicans.