Central bank of India

A Brief History of Central Banking

Central Bank is an authority in charge of policies that affect a country’s money supply and manages a country’s currency. This article analyzes the history of Central banks. 

History of the banking system

The history of the banking system dates back to Mesopotamian civilization. This civilization was built around main cities. That city gave impetus to the economic activity of the surrounding areas. Therefore, many commercial activities took place in those cities. Moreover, in every Mesopotamian city, there was a temple. And the city was built around the temple. Those shrines provided safekeeping facilities to protect the grain and other items of the people. In simple terms, banks are intermediaries between depositors (who lend valuable assets to the bank) and borrowers (to whom the bank lends valuable assets). In this sense, these safe houses kept by the Mesopotamian shrines were considered the beginning of the bank system. 

Later, this system spread to the Mesopotamian houses as well. According to the clay tablets, Mesopotamians have used their homes as safe houses for precious assets. They also made laws for that. In addition, the Egyptians stored their produce in government-owned archives. 

However, Italians developed the current banking system in 13th century Europe. According to historians, the word bank has derived from the Italian word banco. With the development of trade, the banking system was spread throughout the world. Due to the development of the banking system and monetary policy, there was a requirement to create central banks. 

History of the Central Banking

First Central Banks

The world’s first central banks were established for a variety of purposes. They are,

1. To lend the government funds

2. To maintain the stability of the financial system

3. To implement the gold standard

4. To maintain the stability of the foreign exchange market

Sveriges Riksbank

Sveriges Riksbank was founded due to the failure of its predecessor, Stockholms Banko, the first bank of Sweden. Johan Palmstruch founded this bank in 1656. The story begins when Johan Palmstruch lives in Netherland. After seeing the well-developed banking structure in the Netherlands, John Palmstruch attempted to start the first bank in Sweden. As a result, he was allowed to establish a bank for loan facilities in 1656, and its name was Stockholms Banco. 

During this period, Sweden used copper coins for the transaction. However, these coins were hefty, and some coins were even weighed up to 20kg. Stockholms Banco started to issue banknotes, known as credit notes, as a solution for this. The Stockholms Banco guaranteed the banknotes’ value and replaced the banknotes with coins on circulation. 

In the beginning, this process was a success; however, after several years, the bank started to print more and more notes. Hence the number of notes in circulation increased, and as a result, notes value started to decline. 

The public became suspicious, and a rising number of people demanded that their banknotes be exchanged for coins. This led to the failure of Stockholms Banco. In 1668, the upper class in Sweden proposed establishing a new bank from the ruins of Stockholms Banco. According to this proposal, the Sweden government established Sveriges Riksbank as a joint venture in 1668. Since then, Sveriges Riksbank’s main objective has been to maintain price stability. 

The history of the bank of England

Bank of England was created in 1694 from an act of parliament. It was created as the banker to the government. During the time, England was at war against France. Hence the bank was established to raise funds for the war. The bank of England was a joint-stock bank, which means it was a joint venture between the government and private parties. When the bank was established, over 1,200 people from various backgrounds, such as merchants, doctors, royalty, carpenters, etc., purchased shares worth £1.2 million of the bank.  

Being the government’s bank gave huge power to the bank. Moreover, there weren’t any other joint ventures until 1826. The Bank of England grew to be England’s largest and most prominent financial institution with time. The banknotes issued by the bank were widely circulated among the general public. In addition, due to its power and reserves, it became a banker to other banks. So, banks came to the Bank of England if they wanted to settle the debts. In the 19th century, the bank gradually converted to a central bank. During the first few decades of the 19th century, it became the guardian of the nation’s gold reserves and lender of last resort. The Bank of England was nationalized in 1946 due to its importance to the economy. 

Bank of France (Banque de France)

Some central banks were created to maintain the stability of the financial system. The best example is Banque de France or the Bank of France. In 1800 Napoleon Bona­parte started the Banque de France to stabilize the currency after the hyperinflation of money during the French Revolution. Napoleon Bonaparte and his family members were the initial stockholders of the bank. The Bank of France was closely associated with the state and partially funded by the state. However, most of the funding for the bank came from private capital. The French government claimed control of the bank by appointing the governor and two deputy governors. At the same time, the shareholders were represented by a board of 15 regents elected by the 200 most significant shareholders.

In the initial period, the bank was able to issue banknotes to people in Paris for 15 years. Later, the bank established discount offices around the country. And these discount offices also had the privilege to issue banknotes. In 1848 the Bank of France gained the power to issue notes to the entire country. After the second world war, similar to the Bank of England, the Bank of France was nationalized in 1946. 

History of the us federal reserve

Since the 17th-century, banks started to flourish in colonial America. However, these colonial banks accepted no deposits and made no loans. Instead, they produced paper money (commodity money) backed by land or precious metals like gold. Two attempts were taken to establish a central bank to formalize the banking system. First in 1791 and second in 1836. However, both attempts were failed. After the failure of the second attempt, banks were flourished around the United States without any Federal regulations. And each bank issued its paper notes. Hence, there were thousands of different notes in circulation. To solve this issue, National Banking Act was passed in 1863. This act created a uniform national currency, and only nationally charted banks were able to issue the banknotes. However, there was no powerful central banking structure. 

During this period United state economy suffered from several bank failures. For instance, in 1907, severe panic happened, in which people began withdrawing all of their money from the US banking system. As a solution to this and prior collapses, Federal Reserves was established in 1913 by President Woodrow Wilson. Federal Reserves’ main objectives are maintaining an effective bank supervision system, providing an elastic currency, coping with major financial crises, etc. 

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