Conclusion
The 1990s revived the old dilemma in the theory of what is the better, central or free banking. In our view this is a quite false, non-existent dilemma. The central bank has proven to be an indispensable social institution, although some controversies on its status, duties and social importance remain.
Central banking had its natural development. Nobody could have foreseen the range of central bank’s duties when the first government-sponsored (privileged) banks were incorporated (Goodhart 1985; 1988). German banking theory probably depicted most accurately the central bank’s development, firstly speaking about issuing banks, later central issuing banks, and finally, in the 1930s only about central banks. Although there is a similarity across central banks, it is impossible to find two equally regulated ones. As the result of traditional, cultural and other differences, there are huge variations in the institutional framework for different central banks. However, the late 1980s and 1990s brought new initiatives in central banking theory. At present the ‘state-of-the-art’ assumes central bank independence. This is usually seen as the ability of central banks to be fully separated from the government and its direct and/or indirect influence. Some empirical (econometric) studies conducted in the 1980s and early 1990s suggested that independence delivers higher monetary stability, but recent ones conducted in the very late 1990s failed to find a direct causal link between central bank independence and low inflation. Intuitively, it was assumed that de jure independence has to deliver, but it seems that there is a need for overall social ‘institutional capacity building’, as the central bank delivers in those countries where the entire institutional setting is rule-dominated.The central bank is of interest for law and economics as the traditionally regulatory body, as well.
From the end of the nineteenth century, the central bank has been in charge of supervising the banking system, as well as supporting individual banks in a liquidity trap. Banking regulation and its efficiency is closely related to quality of the institutional framework for the central bank. Banking crises and runs on banks can endanger the whole economy, and this is the reason for the central bank to resume the micro function of lender of last resort. In recent times the question of whether a compulsory deposit protection scheme should be organized has also been raised. The opponents of central banking usually argue that this can increase moral hazard. This could be true, but from which situation will society benefit more? Apart from the theoretical considerations, deposit protection is the current reality. However, the central bank itself also fails victim of ‘political delegation’ which strengthens its independence, as regulatory functions are increasingly taken away from the central bank and given to an independent regulatory body (as in the UK with the creation of the Financial Service Authority - FSA). The central bank will increasingly be focused exclusively on monetary policy and, as the trend shows, on financial system stability.What are the perspectives for future research on the central bank? Probably, analysis of the central banks’ efficiency from the property rights theory perspective. Previously, this has been done for the individual banking system (Davies, 1981). Also, researchers on central bank independence need a comprehensive law and economics approach to facilitate research on the institutional framework and its efficiency, especially focusing on central bank accountability and social responsibility. These two latter areas could be a completely new avenue of research. Nevertheless, the time for research on the central bank in this branch of economics (and legal theory) is yet to come.
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