Central Bank History and Functionality

Study Notes

Central Bank History

The first central bank, the Swedish Riksbank, was established in 1668.
The Bank of England, founded in 1694, is considered one of the most influential central banks of its time.
The Federal Reserve System was created in 1913 to unify currency and financial stability efforts in the United States.
The Banque de France was established in 1800 by Napoleon to aid economic recovery after the French Revolution.
The Bank of Canada was established in 1935 to standardize money production.
The German Bundesbank was reestablished after World War II.
The European Central Bank replaced individual eurozone central banks in 1998.

How Central Banks Work

Central banks have the sole authority to print and circulate banknotes, and they can also recall and destroy banknotes.
Central banks manage monetary policy by adjusting the money supply to promote economic growth.
The primary goal of central banks is to maintain currency stability and prevent inflation.
Monetary policy aims to preserve price stability.
Open market operations are used to influence short-term interest rates.
Central banks manage a country's gold and currency reserves.

The Function of Central Banks to the Economy

Base Rate: The rate at which commercial banks can borrow from the central bank. Increasing the base rate makes borrowing more expensive for commercial organizations.
Open Market Operations: These involve the central bank creating money and purchasing financial assets.
Reserve Requirements: These regulations set minimum amounts that commercial banks must hold as a percentage of their liabilities.
Foreign Exchange Reserves: These are foreign currencies held by the country's central bank. They help stabilize fluctuations in the foreign exchange market.

Major Central Banks Today

US Federal Reserve Bank (US)
- Established on December 23, 1913.
- Recognized as the most influential central bank due to the US dollar's global dominance.
- Composed of three groups:
  - Board of Governors: Operates independently of the government but reports to Congress for oversight.
  - Federal Reserve Banks: Twelve regional banks located throughout the US, each with its own board of directors.
  - Federal Open Market Committee (FOMC): Made up of the Board of Governors and the presidents of the 12 Federal Reserve Banks. Meets eight times a year to discuss economic conditions, financial system stability, and monetary policy.
European Central Bank (EUR)
- Established on June 1, 1998.
- Governing Council determines monetary policy changes.
- Council consists of six members of the ECB's executive board and the governors of the national central banks from the 19 Eurozone countries.
- Council meets biweekly, with major decisions discussed during 11 annual meetings accompanied by press conferences.
Bank of England (GBP)
- Publicly owned and accountable to the British people through Parliament.
- Founded on July 27, 1694.
- Monetary Policy Committee (MPC) consists of nine members: the governor, three deputy governors, the chief economist, and four external experts.
- The MPC meets eight times a year to announce monetary policy decisions.
Bank of Japan (JPY)
- Established on October 10, 1882.
- Focuses on maintaining price stability and ensuring financial system stability.
- Inflation is the central bank's primary concern.