Historical roles of central banks in the development of modern banking systems

Ascent of Money

As we will see in this short essay, The Bank of Amsterdam, the Bank of England and the Federal Reserve are linked in the history of money and banking. We will investigate the roles that each of these institutions played in providing a critical institutional foundation for the expansion of the world trading system. We will explore the Bank of England's role in providing a guiding influence in the functioning of the gold standard. The creation of the Federal Reserve was linked to the actions of the Bank of England which was what it was modeled upon.

While not a true central bank, the bank of Amsterdam was a precursor and was founded to help the Dutch finance their wars against Spain. Paper money was issued based upon the public credit (Ferguson, 2008, 47). This type of institution spread to England where the Bank of England was founded in 1694. The subscribers of the bank were incorporated and given the exclusive possession of the government's balances and allowed to issue bank-notes (ibid., 54). The Federal Reserve was founded under similar terms in 1913 (ibid., 167-168).

What unites all of the above was that they were private central banks that underwrote government debts and issued currencies, providing the basis for the present world financial system as we know it that is based upon fiat, paper currency. Further than that, the actions of central banks were rational ways to underwrite a rational system of such fiat currency in an effort to fight what every person, bank and government wants to avoid which is financial uncertainty. Just as corporate finance was the foundational principle of the Dutch and the later British empires, sophisticated Wall Street financial engineering is intractably linked with America's global primacy as represented by the Federal Reserve. Indeed, almost all of the countries in the world now have a private central bank that sets interest rates and controls the amount of money in the circulation (ibid., 19).

This example of central banking has changed through the years as it used to based not just upon public faith in money, but also upon some kind of hard currency basis, which was the basis upon which central banking functioned until the Bank of England got of the gold standard in the wake of World War One and adopted a purely fiat standard ("Gold standard," 2010).