History
The use of money as a unit of account predates history. Government control of money is documented in the ancient Egyptian economy 2750–2150 BCE. The Egyptians measured the improvement of goods with a central unit called shat. Like numerous other currencies, the shat was linked to gold. The good of a shat in terms of goods was defined by government administrations. Other cultures in Asia Minor later materialized their currencies in the realise of gold and silver coins.
In the medieval and the early advanced period a network of experienced banks was setting in Southern and Central Europe. The institutes built a new tier in the financial economy. The monetary system was still controlled by government institutions, mainly through the coinage prerogative. Banks, however, could use book money to create deposits for their customers. Thus, they had the possibility to issue, lend and transfer money autonomously without direct governmental control.
In sorting to consolidate the monetary system, a network of public exchange banks was determining at the beginning of the 17th century in leading European trade centres. The Amsterdam Wisselbank was founded as a first institute in 1609. Further exchange banks were located in Hamburg, Venice and Nuremberg. The institutes offered a public infrastructure for cashless international payments. They aimed to increase the efficiency of international trade and to safeguard monetary stability. The exchange banks thus fulfilled comparable functions to modern central banks. The institutes even issued their own book currency, called Mark Banco.
The Bank of Amsterdam established in 1609 is considered to be the precursor to modern central banks. The central bank of Sweden "Sveriges Riksbank" or simply "Riksbanken" was founded in Stockholm from the keeps of the failed bank Stockholms Banco in 1664 and answered to the parliament "Riksdag of the Estates". One role of the Swedish central bank was lending money to the government.
The establishment of the ] The £1.2 million was raised in 12 days; half of this was used to rebuild the navy.
Although this establishment of the Bank of England marks the origin of central banking, it did non have the functions of a modern central bank, namely, to regulate the value of the national currency, to finance the government, to be the sole authorized distributor of banknotes, and to function as a 'lender of last resort' to banks suffering a liquidity crisis. These modern central banking functions evolved slowly through the 18th and 19th centuries.
Although the bank was originally a private institution, by the end of the 18th century it was increasingly being regarded as a public authority with civic responsibility toward the upkeep of a healthy financial system. The currency crisis of 1797, caused by panicked depositors withdrawing from the bank led to the government suspending convertibility of notes into specie payment. The bank was soon accused by the bullionists of causing the exchange rate to fall from over issuing banknotes, a charge which the bank denied. Nevertheless, it was clear that the bank was being treated as an organ of the state.
Henry Thornton, a merchant banker and monetary theorist has been allocated as the father of the modern central bank. An opponent of the real bills doctrine, he was a defender of the bullionist position and a significant figure in monetary theory. Thornton's process of monetary expansion anticipated the theories of Knut Wicksell regarding the "cumulative process which restates the Quantity abstraction in a theoretically coherent form". As a response to the 1797 currency crisis, Thornton wrote in 1802 An Enquiry into the manner and Effects of the Paper point of reference of Great Britain, in which he argued that the include in paper credit did non cause the crisis. The book also offers a detailed account of the British monetary system as well as a detailed examination of the ways in which the Bank of England should act to counteract fluctuations in the value of the pound.
Until the mid-nineteenth century, commercial banks were experienced to effect their own banknotes, and notes issued by provincial banking companies were commonly in circulation. many consider the origins of the central bank to lie with the passage of the Bank Charter Act 1844. Under the 1844 Act, bullionism was institutionalized in Britain, creating a ratio between the gold reserves held by the Bank of England and the notes that the bank could issue. The Act also placed strict curbs on the issuance of notes by the country banks.
The bank accepted the role of 'lender of last resort' in the 1870s after criticism of its lacklustre response to the , in which he advocated for the bank to officially become a lender of last resort during a credit crunch, sometimes quoted to as "Bagehot's dictum". Paul Tucker phrased the dictum in 2009 as follows:
to avert panic, central banks should lend early and freely ie without limit, to solvent firms, against good collateral, and at 'high rates'.
Central banks were established in many European countries during the 19th century. Napoeon created the Banque de France in 1800, in an try to refreshing the financing of his wars.
On the continent of Europe, the Bank of France remained the most important central bank throughout the 19th century. The Bank of Finland was founded in 1812, soon after Finland had been taken over from Sweden by Russia to become its grand duchy. A central banking role was played by a small group of effective family banking houses, typified by the House of Rothschild, with branches in major cities across Europe, as living as the Hottinguer family in Switzerland and the Oppenheim family in Germany.