The history of Central Bank independence occupies a very important position in any nations development, both financial development and other wise. However, central banking in its modern form is a recent development when you consider the history of central bank independence.
Commercial Bank Vs Central Bank
Before the present day central bank came into existence and its development, commercial banking has been in existence for many years. In each country, commercial banking started before central banking. In many cases, it is a popular commercial bank in the country that will be transformed in a central bank and then taken over by the government.
Right from the ancient times through the goldsmith era, several commercial banks were engaged in the issue of their own currency notes which is a central banking function. This notwithstanding, the first function as a central bank, in the real sense of the word is the central bank of England.
When we discuss the history of central bank independence, we look at the bank of England, Bank of England started as a joint stock commercial bank in the year 1694, but it was in 1844, that is 150 years later, the bank began to function as a true central bank.
According to a discovery by Lipsey, central banking itself was “a natural outcome of the evolutionary process”, this statement emphasizes on the importance of central bank. The goldsmiths, who were the first set of bankers in Great Britain kept stock of gold and issued currency notes in form gold receipt.
They gave out their excess reserve of gold as loans to individuals. Later on such loans were given through the issues of the bank notes. It was natural for these goldsmiths to also need a place to keep their own excess reserve. Moreover, if they had temporal liquidity problem and do not have enough cash to meet unexpected and unusual cash withdrawals they need a place to turn to from where they too could borrow. Another need is that goldsmiths (bankers) also need a place they could settle their counter claims as well as the extension of credit facilities.
In response to the these needs, some stronger banks and wealthy merchants began to meet the needs of ordinary private banks. They could issue their own notes and then were not restricted in England. From these narratives, you will begin to see the history of central bank independence. Meanwhile, from the year 1808 a license was required. Apart from this requirement, a bank could still issue as many notes as it would. And whenever there is a banking panic, which could even arise from a rumour, many bank failed. There was therefore a need to have a stronger bank that other banks could run to for rescue.
As this point, the bank of England which was already in existence and operating as a commercial bank began to play some important central banking role for other banks, one can easily argue that they performed the central bank functions in full. The bank of England had started as a joint stock company established by an Act of the Parliament.
Who Owns Central Banks Or The Bank Of England
The main purpose of funding the bank was to finance the war that King William III engaged with the Arabian continent. The bank had or operated on an initial capital of £1,200,000, which was fully subscribed by the government through loan from Micheal Godfrey and other rich city merchants, the merchants were in fact mere creditors to the bank and members of the court of directors.
History Of Central Bank Independence In England
Owing to the history of central bank independence and the Bank Of England, what we’ve discussed already clearly shows that although the central banks are meant to be independent, they are not because they are highly influenced by the government in charge of the economy.
Just like we have in England, after setting up the bank, which at the time functioned as a commercial bank, the government borrowed heavily from it to finance the war. With government backing, the bank was also in a position to lend to other banks in time of crisis and to help in clearing their checks.
When other banks began to have problems in redeeming their notes under the gold standard, the Bank of England strengthened its hold over the note issue and reduced in its role as a commercial bank.
In 1844, the Bank Charter Act was passed which divided the bank into two departments;
- The issue department
- The banking department
Thus, the bank began to function effectively as a central bank even though it was still carrying out some commercial banking function. In the year 1946, the government acquired the whole of the banks capital stock under the Bank of England Act.
This became one of the early examples of the central banks establishments, hence, one can say the history of central bank independence may not be achieved due to government interference.
In considering the history of central bank independence in other countries, other central banks before then were those of State Bank Of Russia, the Bank of Finland, and the Swedish Riksbank.
Several countries established their central bank in the nineteenth century. Many others established their own at the early part of the twentieth century. A list of central banks and their name have also been included in this post. From the list, you will see that most of these central banks were established before 1950 except those central banks in the developing countries.
It was observed that before the end of the nineteenth century, almost every country in Europe had a central bank, but many countries of the orient and of the new world did not have any central bank, until a later period. The growth of central banks continued in the twentieth century because of strong nationalism movement. This explains little as to countries with independent central banks, in 1920, an international financial conference was held in Brussels, Belgium.
It was resolved in that conference that every country without an established central bank should quickly begin to do so, the idea of a central bank as agreed in that conference was not only centered in the central banks facilitating the restoration of as well as maintaining currency stability through monetary policy but to also encourage and also enhance international cooperation.
This conference gives the resign why most countries in Europe and America began to establish their own central bank after the First World War. Also in the year 1944, another conference was held at the Bretton Woods. This conference brought about the establishment of the international financial institution now known as International Monetary Fund (IMF).
After the establishment, the International Monetary Fund (IMF) encouraged member country to establish an independent central bank that could deal with the fund. Since then, the growth of central banks became so rapid that today, all the independent nations of the world have their own central bank. Meanwhile the Nigerian central bank was established in the year 1958.
List Of Central Banks And Dates Of Establishments
- Britain – Bank Of England Established in 1694
- France – Bank Of France Established in 1800
- Germany – German Reichsbank 1878
- Netherlands – Netherlands Bank 1814
- Australia – Australian National Bank 1878
- Norway – Bank Of Norway – 1817
- Denmark – National Bank Of Denmark – 1818
- Belgium – National Bank Of Belgium – 1850
- Spain – National Bank Of Spain – 1856
- Russia – State Bank Of Russia – 1860
- Japan – Bank Of Japan – 1882
- Italy – Bank Of Italy (Banca d’ Italia) 1893
- Switzerland – Swiss National Bank – 1907
- America (USA) – Federal Reserve System – 1913
- Canada – Bank Of Canada – 1934
With all that have been discussed on the history of central bank independence, it is important to note that central bank is not achievable since the bank is run and controlled by any government in power.