Central bank: history and its (natural) development

When the first central banks or, more correctly, governmentally-sponsored banks, were incorporated, such as the Swedish Riksbank and the Bank of England in 1668 and 1694, respectively, they were entrusted with a mon­opoly over money issuing in the metropolitan area or in a part of the country.

With the emergence of imperialism in the late nineteenth century, central banks started to be concerned about the metal reserves of the country, allow­ing them to facilitate the national payment system. History shows that the growth of central banking is closely connected with nineteenth century, espec­ially its last quarter. The central bank in France was incorporated in 1800 (Boyer-Fraise, 1903), Norges Bank and Austrian National Bank in 1816, and in Denmark a year later. At the end of the nineteenth century, central banks were established in Portugal, Bulgaria, Romania, Serbia (Sevic, 1996a) Egypt, Algeria, Turkey, Japan and Java (Kent, 1966).

Also central banks are interesting institutions since they are, generally, in public hands and therefore entities regulated by public law. Even the banks which began to operate under private ownership (the vast majority of banks established before the First World War) were nationalized after the Second World War. The years immediately after the Second World War were shown to be a turning point of the central bank’s engagement in commercial banking operations. From the 1950s, it was quite unusual to observe commercial banking operations being undertaken by a central bank, in a two-tier banking (financial) system. In so-called ‘socialist countries’, the mono-bank usually called a state bank resumed both commercial and central banking operations. Strictly speaking, the latter function was not really performed since the ‘socialist society’ was theoretically ‘moneyless’ (Sevic, 1997a).

In our view central banking has had a quite natural development following the requirements of the system whose centre it is. A number of authors support this approach (Friedman, 1959; Goodhart, 1985, 1988, 1994, 1995; Sevic, 1996b, 1999), in contrast to advocates of free banking theory who oppose it (Klein, 1974; Karekan and Wallace, 1984; White, 1984, 1995; Selgin and White, 1987; Selgin, 1988, 1994). It is generally agreed that free banking had its ‘golden age’ in the nineteenth century, but in a diversified, fast-growing economy with increased information flows, it is necessary to supervise the system and provide more harmonic development and growth. For instance, interest in the soundness of banking systems emerged in the 1880s-90s with capital concentration and the appearance of ‘financial capital’ (Hilferding, 1920).

The central bank as, currently, an entity in the publicly regulated regime is quite strongly regulated by law (statute, act) and other legal acts derived from law. It is noted that both de facto and de jure independence of a central bank influences its performance as the centre of the financial sys­tem. This is a possible avenue for the extension of research on the central bank in law and economics. Its path from a privately owned, but privileged (governmentally-sponsored) bank to the entity owned and closely moni­tored by the state is another reason to attract researchers’ attention. Also, the widely accepted opinion is that a central bank’s macroeconomic per­formance depends on its institutional features. So, what is a central bank today? What are its status, functions and social significance?