Central Banking: Theory and Practice in Sustaining Monetary and Financial Stability

Chapter 1A Brief Look at Central Banking History

Learning Objectives

1. Describe historical roles and functions of central banks.
2. Explain how various central banking roles and functions came about.
3. Define money and its relation to central banking.
4. Describe key commonalities and differences of modern central banks.

Historically, central banking is a relatively new phenomenon, tracing its origin to about 400 years ago. In that relatively short period of time, however, central banks have evolved to become among the most important public institutions, which profoundly affect everyone’s daily life. This chapter briefly reviews the evolution of central banking in various stages, so the reader will understand the background of how central banks rose to become what they are today.

The chapter starts with the context in which the central bank was first created. Earlier roles of central banks—such as coin sorting, banknote issuance, banker to the government, and banker to banks—will first be discussed. Later, the chapter looks at newer roles of central banks, such as the lender of last resort, bank supervisor, and the conductor of monetary policy. Lastly, the chapter looks at the current stage of central banking, especially in the wake of the 2007–2010 global financial crisis that led to extensive reexamination of the role of central banks around the world.

1.1 PRIOR TO CENTRAL BANKING

Prior to the creation of central banks, societies often used precious metals such as gold or silver ...