The Bank of England, located in London, England. ⓒEPA The central bank was born in Europe at the end of the 17th century. The Riksbank in Sweden, founded in 1668, and the Bank of England in England, founded in 1691. The early Riksbank and the Bank of England were very different from modern central banks in their public duties. Initially, it was just a private company set up by stakeholders for the purpose of fulfilling their own interests. However, in the process, the work to realize private interests overlapped with the public interest, and the result of gradually institutionalizing this part can be seen as the modern central bank. At the end of the 17th century, European royal houses (governments) needed a large amount of ‘funds’ to wage war. At that time, the ‘universal money’ that anyone was willing to believe and receive was only gold and silver. There was not much gold and silver in the royal family. It issued government bonds to borrow money for the war, but failed to sell enough. Banks were already operating in the private sector, but even they did not buy government bonds. What could he trust to lend money to the royal family who would be imprisoned or beheaded if they lost the war? At this time, the savior comes out. It was that a few private businessmen would jointly lend money to the royal family (buy government bonds). Just asked for a price. It is the right to exclusively issue and circulate ‘paper money’ based on government bonds received from the royal family. If ‘my friend’ Tom drank ale beer with fish and chips at another local pub, write ‘one pound’ on a piece of paper, hand it to the owner and ask for it to be reversed, Chidogon will be beaten. However, the story is different if it is paper money issued by those private businesses that have even received the name ‘England Bank’ by decree from the British royal family. This is because behind the paper money, not just a commoner named Tom, but the authority of the royal family and the ‘gold and silver (government bonds) to be returned from the royal family’ are holding out heavily. Thanks to this trust, the paper money issued by the bank is regarded as a currency guaranteed by the state (royalty), and exerts currency in a considerable area of the country. It is strong paper money (banknote). The royal family would have been happy to borrow money for war, but private businessmen from the Bank of England hit the jackpot. Just by printing numbers on paper and distributing them, it is accepted as money by anyone, like a goblin’s bat. Similar types of banks have been established in other countries in Europe. Through the relationship with the royal family, these banks are gradually developing into ‘governmental banks’, taking on financial tasks such as ‘depositing treasury money (collected by the royal family with taxes)’ and ‘issuing government bonds and acting as an agent for repayment of royal debt’. Although privately owned, they issue widely used currencies in the country and even play the role of ‘government banks’, so let’s call these types of banks ‘national banks’ for now. Thanks to the national bank’s issuance power, its owners, private businesses, enjoyed enormous economic returns and influence. You can lend the printed banknotes to other private banks or merchants (money supply) and receive interest. Even if the money lent to the royal family is, for example, only £1 million (although it only has £1 million worth of government bonds as collateral), the State Bank can obtain greater profits by issuing and circulating £1.2 million worth of notes. However, when someone brought banknotes and asked to exchange them for gold (gold convertible), trust would collapse if they could not exchange them, so the national bank had to keep a lot of gold for its own benefit (reserve reserve). If the authority of the national bank rises thanks to this financial power and royal support, other banks will also try to keep their money by opening accounts in the national bank (banks of banks). Because if you leave it in the national bank, it won’t take your money away. In this process, a close network with other private banks is formed around the ‘National Bank’. Through this network, the national bank plays a role in clearing complex transactions between private banks (if bank A owes 100,000 pounds to bank B and bank B owes 120,000 pounds to bank A, the national bank can transfer £20,000 from Bank B’s account at its bank to Bank A’s account (payment function). The interest rate at which the national bank lends money to other banks (discount window) will play a role similar to the modern standard interest rate. In this way, the ‘banking system’ was formed. In this way, national banks, which are private corporations, gradually acquired the public status of ‘government’s bank’ and ‘banks’ bank’ along with the issuance of powerful banknotes. The term central bank didn’t come into existence until the late 19th century, but let’s call them ‘early central banks’ for now. These early central banks were nationalized only in the middle of the 20th century and then developed into public institutions independent of the executive branch. British economist Walter Battett coined the term ‘central bank’. ⓒWikipedia Limitations of early central banks ‘Early central banks’ were also constrained by the ‘gold standard’. No matter how strong paper money was, it was no better than gold (many people still think so). The most important was the ‘convertibility’ of banknotes to gold. This is because early central bank paper money could only maintain its value based on a guarantee that it could be ‘exchangable for a certain weight of gold’. Unlike today’s central banks, privately owned early central banks did not pay much attention to real economic indicators such as employment or economic growth. Their flagship product, ‘maintaining the value of paper money’, was the most important, and for this, they had to hold a large amount of gold. The biggest goal of modern central banks is to maintain the value of money, that is, to stabilize prices. This tendency of the early central banks had a tremendous impact on the national economy of the time. This is because the money supply is determined by the size of the central bank’s gold reserves. In the 18th and 19th centuries, when productivity (and economic activity) rose sharply due to the Industrial Revolution, European countries were short of money. No matter how much economic activity and consequent transactions increased, the money supply could not increase unless the central bank’s gold reserves grew. This is the reason why the world economy at the time was deflationary (price fall. If money does not increase as much as production, prices fall). This problem was not resolved until the beginning of the 20th century. Meanwhile, around the middle of the 19th century, one important function of the modern central bank was finally formulated. At that time, there were frequent financial crises. Insolvency of some banks due to bad harvests, war, bankruptcy of large corporations, etc. is transmitted to the entire banking system through a ‘bank run’ (mass withdrawal of deposits). Until the beginning of the 19th century, European central banks were private companies, so they ignored the situation of their insolvent peers. This response triggered financial crises almost every decade in the early 19th century. The Bank of England was founded in the mid-to-late 19th century on the ‘responsibility doctrine’ proposed by Walter Baggett (a British economist who served as editor-in-chief of The Economist, who first coined the term central bank). interests must be integrated with the public interest)’. Afterwards, the Bank of England (based on its exclusive ticketing power) would lend money to precarious banks, acting as a ‘lender of last resort’ to prevent the contagion of the crisis. Today, this is called the ‘financial stabilization function’ of central banks. There were no serious financial crises in the UK until the beginning of the 21st century. Alexander Hamilton, who dreamed of establishing the first central bank in the United States, was the one who meticulously studied the Bank of England.
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The 350-year history of money called ‘Central Bank’
