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The Functions of Modern Central Banking - Case Study Example

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This paper "The Functions of Modern Central Banking" discusses the central banks that have come a long way from just being mere providers of their countries’ currencies and lenders of last resort to banking institutions to being the ultimate monetary authorities in their respective countries…
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The Functions of Modern Central Banking
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Download file to see previous pages It now directs and supervises banking activities through a complex set of tools and instruments that embody the country’s monetary policies.
Central banking can be traced to the 17th century Swedish Riksbank. The bank was created in 1668 as a joint-stock bank and helped the Swedish government with its monetary needs as well as serve as a clearinghouse for commerce. Just a few decades after, or in 1694, England established its own joint-stock bank called Bank of England. It was established primarily to buy the country’s debts. Other European countries soon followed and established their own national banks not only to serve their debts but also to solve monetary disarray as in the case of France’s Banque de France, which was created by Napoleon Bonaparte to take care of the hyperinflation brought about by the French Revolution (Bordo 1).

The early central banks can be characterized by the duality of their nature: a national bank as well as a private entity. While these banks were primarily set-up to give aid to the monetary needs of their government, they were also at the same time private entities, which offered banking services to banks. Their large reserves and extensive banking networks made them a convenient repository of private banks and hence, they became lenders of the last resort for large financial institutions (Bordo 1).

At the turn of the 20th century, most central banks were established by various countries to rationalize the different currencies being held and used by their citizens as well as provide financial stability and manage the gold standard. The gold standard is the old method of defining currencies by pegging them to fixed gold weights. This was the prevailing method until 1914 where central banks held gold reserves to make currencies convertible to gold anytime. To raise gold reserves, central banks would increase their discount rates or the rates which are used in lending money to banks.  ...Download file to see next pagesRead More
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