A central bank, reserve bank, or monetary authority is a banking Banking is generally a highly regulated industry, and government restrictions on financial activities by banks have varied over time and location. The current set of global bank capital standards are called Basel II. In some countries such as Germany, banks have historically owned major stakes in industrial corporations while in other countries institution granted the exclusive privilege to lend a government its currency In economics, the term currency can refer to a particular currency, for example Pound Sterling, or to the coins and banknotes of a particular currency, which comprise the physical aspects of a nation's money supply. The other part of a nation's money supply consists of money deposited in banks , ownership of which can be transferred by means of. Like a normal commercial bank, a central bank charges interest on the loans made to borrowers, primarily the government of whichever country the bank exists for, and to other commercial banks, typically as a 'lender of last resort'. However, a central bank is distinguished from a normal commercial bank because it has a monopoly on creating the currency of that nation, which is loaned to the government in the form of legal tender. It is a bank that can lend money to other banks in times of need.^[1] Its primary function is to provide the nation's money supply In economics, the money supply or money stock, is the total amount of money available in an economy at a particular point in time. There are several ways to define "money," but standard measures usually include currency in circulation and demand deposits, but more active duties include controlling subsidized-loan A loan is a type of debt. Like all debt instruments, a loan entails the redistribution of financial assets over time, between the lender and the borrower interest rates An interest rate is the rate at which interest is paid by a borrower for the use of money that they borrow from a lender. For example, a small company borrows capital from a bank to buy new assets for their business, and in return the lender receives interest at a predetermined interest rate for deferring the use of funds and instead lending it to, and acting as a lender of last resort A lender of last resort is an institution willing to extend credit when no one else will. Originally the term referred to a reserve financial institution, most often the central bank of a country, that secured well-connected banks and other institutions that are too-big-to-fail against bankruptcy to the banking sector Banking is generally a highly regulated industry, and government restrictions on financial activities by banks have varied over time and location. The current set of global bank capital standards are called Basel II. In some countries such as Germany, banks have historically owned major stakes in industrial corporations while in other countries during times of financial crisis (private banks often being integral to the national financial system). It may also have supervisory powers, to ensure that banks and other financial institutions do not behave recklessly or fraudulently.

Most of the rich countries today have an "independent" central bank, that is, one which operates under rules designed to prevent political interference. Examples include the European Central Bank The European Central Bank is the institution of the European Union (EU) tasked with administrating the monetary policy of the 16 EU member states taking part in the Eurozone. It is thus one of the world's most important central banks. The bank was established by the Treaty of Amsterdam in 1998, and is headquartered in Frankfurt, Germany. The (ECB) and the Federal Reserve System The Federal Reserve System is the central banking system of the United States. It was created in 1913 with the enactment of the Federal Reserve Act, and was largely a response to a series of financial panics, particularly a severe panic in 1907. Over time, the roles and responsibilities of the Federal Reserve System have expanded and its structure in the United States. Some central banks are publicly owned, and others are privately owned. The United States Federal Reserve "is an unusual mixture of public and private elements".^[2]

History

In Europe prior to the 17th century most money was commodity money Commodity money is money whose value comes from a commodity out of which it is made. It is objects that have value in themselves as well as for use as money, typically gold Gold is a chemical element with the symbol Au (from Latin: aurum, "shining dawn", hence adjective, aureate) and an atomic number of 79. It has been a highly sought-after precious metal for coinage, jewelry, and other arts since the beginning of recorded history. The metal occurs as nuggets or grains in rocks, in veins and in alluvial or silver. However, promises to pay were widely circulated and accepted as value at least five hundred years earlier in both Europe and Asia. The Song Dynasty The Song Dynasty was a ruling dynasty in China between 960 and 1279; it succeeded the Five Dynasties and Ten Kingdoms Period, and was followed by the Yuan Dynasty. It was the first government in world history to issue banknotes or paper money, and the first Chinese government to establish a permanent standing navy. This dynasty also saw the first was the first to issue generally circulating paper currency, while the Yuan Dynasty The Yuan Dynasty , Mongolian: Dai Ön Ulus/Дай Юан Улс), or Great Yuan Empire (simplified Chinese: 大元帝国; traditional Chinese: 大元帝國; pinyin: Dà Yuán Dìguó) was both the continuation of the Mongol Empire and the Mongol founded historical state in Mongolia and China, lasting officially from 1271 to 1368. Although the was the first to use notes as the predominant circulating medium. In 1455, in an effort to control inflation In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time. When the price level rises, each unit of currency buys fewer goods and services; consequently, inflation is also an erosion in the purchasing power of money – a loss of real value in the internal medium of exchange and unit, the succeeding Ming Dynasty The Ming Dynasty , or Empire of the Great Ming (simplified Chinese: 大明国; traditional Chinese: 大明國; pinyin: Dà Míng Guó, also anachronistically simplified Chinese: 大明帝国; traditional Chinese: 大明帝國; pinyin: Dà Míng Dìguó), was the ruling dynasty of China from 1368 to 1644, following the collapse of the Mongol-led ended the use of paper money and closed much of Chinese trade. The medieval European Knights Templar The Poor Fellow-Soldiers of Christ and of the Temple of Solomon , commonly known as the Knights Templar or the Order of the Temple (French: Ordre du Temple or Templiers), were among the most famous of the Western Christian military orders. The organization existed for approximately two centuries in the Middle Ages ran an early prototype of a central banking system, as their promises to pay were widely respected, and many regard their activities as having laid the basis for the modern banking system.

As the first public bank to "offer accounts not directly convertible to coin", the Bank of Amsterdam established in 1609 is considered to be a precursor to a central bank.^[3]. In 1664, the central bank of Sweden—"Sveriges Riksbank Sveriges Riksbank, or simply Riksbanken, is the central bank of Sweden and the world's oldest central bank. It is sometimes called the Swedish National Bank or the Bank of Sweden" or simply "Riksbanken"—was founded in Stockholm and is by that the world's oldest central bank (still operating today)^[4]. This was followed in 1694 by the Bank of England The Bank of England is (despite its name) the central bank of the whole of the United Kingdom and is the model on which most modern, large central banks have been based. It was established in 1694 to act as the English Government's banker, and to this day it still acts as the banker for HM Government. The Bank was privately owned and operated from, created by Scottish businessman William Paterson Sir William Paterson was a Scottish trader and banker in the City of London The City of London is a small area within Greater London, United Kingdom. It is the historic core of London around which the modern conurbation grew and has held city status since time immemorial. The City’s boundaries have remained almost unchanged since the Middle Ages, and it is now only a tiny part of the metropolis of London, though remains at the request of the English The Kingdom of England was, from 927 to 1707, a sovereign state to the northwest of continental Europe. At its height, the Kingdom of England spanned the southern two-thirds of the island of Great Britain and several smaller outlying islands; what today comprises the legal jurisdiction of England and Wales. It had a land border with the Kingdom of government to help pay for a war.

Although central banks today are generally associated with fiat money The term derives from the Latin fiat, meaning "let it be done", as the money is established by government decree. Where fiat money is used as currency, the term fiat currency is used. Today, most national currencies are fiat currencies, including the US dollar, the euro, and all other reserve currencies, and have been since the Nixon, the nineteenth and early twentieth centuries central banks in most of Europe and Japan The Bank of Japan is the central bank of Japan. The Bank is often called Nichigin (日銀?) for short. It has its headquarters in Chuo, Tokyo developed under the international gold standard The gold standard is a monetary system in which the standard economic unit of account is a fixed weight of gold. There are distinct kinds of gold standard. First, the gold specie standard is a system in which the monetary unit is associated with circulating gold coins, or with the unit of value defined in terms of one particular circulating gold, elsewhere free banking Free banking is a theory of banking in which market forces control the provision of banking services, where there is no central bank to protect commercial banks, or serve as a lender of last resort and where money production is conducted through legalized competition between monetary and fiduciary producers. Under free banking, government- or currency boards A currency board is a monetary authority which is required to maintain a fixed exchange rate with a foreign currency. This policy objective requires the conventional objectives of a central bank to be subordinated to the exchange rate target were more usual at this time. Problems with collapses of banks during downturns, however, was leading to wider support for central banks in those nations which did not as yet possess them, most notably in Australia For at least 40,000 years before European settlement in the late 18th century, Australia was inhabited by indigenous Australians, who belonged to one or more of the roughly 250 language groups. After sporadic visits by fishermen from the immediate north and discovery by Dutch explorers in 1606, Australia's eastern half was claimed by Britain in 177.

With the collapse of the gold standard after World War I World War I was a military conflict that lasted from 1914 to 1918 and involved most of the world's great powers, assembled in two opposing alliances: the Allies and the Central Powers. More than 70 million military personnel, including 60 million Europeans, were mobilized in one of the largest wars in history. More than 15 million people were, central banks became much more widespread. The US Federal Reserve The Federal Reserve System is the central banking system of the United States. It was created in 1913 by the enactment of the Federal Reserve Act, largely as a response to a series of financial panics or bank runs, particularly a severe panic in 1907. Over time, the roles and responsibilities of the Federal Reserve System have expanded and its was created by the U.S. Congress The United States Congress is the bicameral legislature of the federal government of the United States of America, consisting of the Senate and the House of Representatives. The Congress meets in the United States Capitol in Washington, D.C through the passing of the Glass-Owen Bill The Federal Reserve Act is the act of Congress that created the Federal Reserve System, the central banking system of the United States of America, which was signed into law by President Woodrow Wilson, signed by President Woodrow Wilson Thomas Woodrow Wilson was the 28th President of the United States. A leader of the Progressive Era, he served as President of Princeton University from 1902 to 1910, and then as the Governor of New Jersey from 1911 to 1913. With Theodore Roosevelt and William Howard Taft dividing the Republican Party vote, Wilson was elected President as a on December 23, 1913, whilst Australia established its first central bank in 1920, Colombia Colombia (pronounced /kəˈlʌmbiə/ ), officially the Republic of Colombia (Spanish: República de Colombia, pronounced [reˈpuβlika ðe koˈlombja] ( listen)), is a constitutional republic in northwestern South America. Colombia is bordered to the east by Venezuela and Brazil; to the south by Ecuador and Peru; to the north by the Caribbean Sea; in 1923, Mexico In Pre-Columbian Mesoamerica many cultures matured into advanced civilizations such as the Olmec, the Toltec, the Teotihuacan, the Zapotec, the Maya and the Aztec before the first contact with Europeans. In 1521, Spain conquered and colonized the territory, which was administered as the viceroyalty of New Spain which would eventually become Mexico and Chile Chile (traditional English pronunciation /ˈtʃɪli/, also pronounced /ˈtʃiːleɪ/ ), officially the Republic of Chile (Spanish: República de Chile [reˈpuβlika ðe ˈtʃile] ( listen)), is a country in South America occupying a long, narrow coastal strip between the Andes mountains to the east and the Pacific Ocean to the west. It borders in 1925 and Canada The land occupied by Canada was inhabited for millennia by various groups of Aboriginal peoples. Beginning in the late 15th century, British and French expeditions explored, and later settled, along the Atlantic coast. France ceded nearly all of its colonies in North America in 1763 after the Seven Years' War. In 1867, with the union of three and New Zealand New Zealand is an island country in the south-western Pacific Ocean comprising two main landmasses , and numerous smaller islands, most notably Stewart Island/Rakiura and the Chatham Islands. The indigenous Māori language name for New Zealand is Aotearoa, commonly translated as The Land of the Long White Cloud. The Realm of New Zealand also in the aftermath of the Great Depression The Great Depression was a severe worldwide economic depression in the decade preceding World War II. The timing of the Great Depression varied across nations, but in most countries it started in about 1929 and lasted until the late 1930s or early 1940s. It was the longest, most widespread, and deepest depression of the 20th century. In the 21st in 1934. By 1935, the only significant independent nation that did not possess a central bank was Brazil Brazil (pronounced /brəˈzɪl/ ; Portuguese: Brasil, IPA: [bɾaˈziw]), officially the Federative Republic of Brazil (Portuguese: República Federativa do Brasil, listen (help·info)), is the largest country in South America. It is the world's fifth largest country, both by geographical area and by population. It is the only Portuguese-speaking, which developed a precursor thereto in 1945 and created its present central bank twenty years later. When African and Asian countries gained independence, all of them rapidly established central banks or monetary unions.

The People's Bank of China The People's Bank of China (simplified Chinese: 中国人民银行; traditional Chinese: 中國人民銀行; pinyin: Zhōngguó Rénmín Yínháng) is the central bank of the People's Republic of China with the power to control monetary policy and regulate financial institutions in mainland China. The People’s Bank of China has more financial evolved its role as a central bank starting in about 1979 with the introduction of market reforms in that country, and this accelerated in 1989 when the country took a generally capitalist approach to developing at least its export economy. By 2000 the People's Bank of China was in all senses a modern central bank, and emerged as such partly in response to the European Central Bank The European Central Bank is the institution of the European Union (EU) tasked with administrating the monetary policy of the 16 EU member states taking part in the Eurozone. It is thus one of the world's most important central banks. The bank was established by the Treaty of Amsterdam in 1998, and is headquartered in Frankfurt, Germany. The. This is the most modern bank model and was introduced with the euro The euro is the official currency of the eurozone: 16 of the 27 Member States of the European Union (EU). It is also the currency used by the EU institutions. The eurozone consists of Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia and Spain. Estonia is to coordinate the European national banks, which continue to separately manage their respective economies other than currency exchange and base interest rates.

Activities and responsibilities

Functions of a central bank (not all functions are carried out by all banks):

• implementing monetary policy
• determining Interest rates
• controlling the nation's entire money supply
• the Government's banker and the bankers' bank ("lender of last resort")
• managing the country's foreign exchange The foreign exchange market is a worldwide decentralized over-the-counter financial market for the trading of currencies. Financial centers around the world function as anchors of trading between a wide range of different types of buyers and sellers around the clock, with the exception of weekends and gold reserves Gold reserves are held by central banks as a store of value. In 2006, it was estimated that all the gold ever mined totaled 158,000 tonnes. One tonne of gold equated to a value of US$30.27 million as of February 14, 2009 ($941.35/troy ounces). The total value of all gold ever mined would be US$4.78 trillion at that price.[note 1] and the Government's stock register
• regulating and supervising the banking industry
• setting the official interest rate – used to manage both inflation In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time. When the price level rises, each unit of currency buys fewer goods and services; consequently, inflation is also an erosion in the purchasing power of money – a loss of real value in the internal medium of exchange and unit and the country's exchange rate In finance, the exchange rates between two currencies specifies how much one currency is worth in terms of the other. It is the value of a foreign nation’s currency in terms of the home nation’s currency. For example an exchange rate of 91 Japanese yen (JPY, ¥) to the United States dollar (USD, $) means that JPY 91 is worth the same as USD 1 – and ensuring that this rate takes effect via a variety of policy mechanisms

Monetary policy

Central banks implement a country's chosen monetary policy. At the most basic level, this involves establishing what form of currency the country may have, whether a fiat currency, gold-backed currency (disallowed for countries with membership of the IMF), currency board or a currency union. When a country has its own national currency, this involves the issue of some form of standardized currency, which is essentially a form of promissory note: a promise to exchange the note for "money" under certain circumstances. Historically, this was often a promise to exchange the money for precious metals in some fixed amount. Now, when many currencies are fiat money, the "promise to pay" consists of nothing more than a promise to pay the same sum in the same currency.

In many countries, the central bank may use another country's currency either directly (in a currency union), or indirectly, by using a currency board. In the latter case, local currency is directly backed by the central bank's holdings of a foreign currency in a fixed-ratio; this mechanism is used, notably, in Bulgaria, Hong Kong and Estonia.

In countries with fiat money, monetary policy may be used as a shorthand form for the interest rate targets and other active measures undertaken by the monetary authority.

Goals of monetary policy

Price Stability

Unanticipated inflation leads to lender losses. Nominal contracts attempt to account for inflation. Effort successful if monetary policy able to maintain steady rate of inflation.

High Employment

The movement of workers between jobs is referred to as frictional unemployment. All unemployment beyond frictional unemployment is classified as unintended unemployment. Reduction in this area is the target of macroeconomic policy.

Economic Growth

Economic growth is enhanced by investment in technological advances in production. Encouragement of savings supplies funds that can be drawn upon for investment.

Interest Rate Stability

Volatile interest and exchange rates generate costs to lenders and borrowers. Unexpected changes that cause damage, making policy formulation difficult.

Financial Market Stability

Foreign Exchange Market Stability

Conflicts Among Goals

Goals frequently cannot be separated from each other and often conflict. Costs must therefore be carefully weighed before policy implementation. To make conflict productive, to turn it into an opportunity for change and progress, Follett advises against domination, manipulation, or compromise. "Just so far as people think that the basis of working together is compromise or concession, just so far they do not understand the first principles of working together. Such people think that when they have reached an appreciation of the necessity of compromise they have reached a high plane of social development . . . But compromise is still on the same plane as fighting. War will continue - between capital and labour, between nation and nation - until we reliquich the ideas of compromise and concession."

Currency issuance

Many central banks are "banks" in the sense that they hold assets (foreign exchange, gold, and other financial assets) and liabilities. A central bank's primary liabilities are the currency outstanding, and these liabilities are backed by the assets the bank owns.

Central banks generally earn money by issuing currency notes and "selling" them to the public for interest-bearing assets, such as government bonds. Since currency usually pays no interest, the difference in interest generates income, called seigniorage. In most central banking systems, this income is remitted to the government. The European Central Bank remits its interest income to its owners, the central banks of the member countries of the European Union.

Although central banks generally hold government debt, in some countries the outstanding amount of government debt is smaller than the amount the central bank may wish to hold. In many countries, central banks may hold significant amounts of foreign currency assets, rather than assets in their own national currency, particularly when the national currency is fixed to other currencies.

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