Routledge Dictionary of Economics, Second Edition
The bank of any country which ultimately guarantees the LIQUIDITY of the banking system as a whole. It is usually owned by the government (in the USA, the Federal Reserve System is owned by the member banks). By setting interest rates for discounting the short-term BILLS of the banking system and by OPEN MARKET OPERATIONS, a central bank is able to exert a powerful influence over the size of the money supply. Other methods of control over the banking and financial systems include the prescribing of RESERVE ASSETS ratios, the issuing of directives and the examination of the accounts of banks and other financial institutions.
Although the oldest central bank is Sweden’s Riksbank (founded in 1668), the Bank of England was the first central bank to specialize as a central bank, i.e.
largely to abandon its private functions and to concentrate on issuing banknotes, acting as the government’s bank in managing the national debt and controlling the money supply and the exchange value of the pound sterling. In the nineteenth century, England’s example influenced France, the Netherlands, Austria, Norway, Denmark, Belgium, Spain, Germany and Japan to set up their own national banks. The USA’s Federal Reserve System of twelve district banks was set up in 1913.
See also: Bank of England; Bundesbank; Federal Reserve System
References
Blinder, A.S. (1998) Central banking in theory and practice, Cambridge, MA, and London: MIT Press.
Goodhart, C.A.E. (1987) ‘Why do banks need a central bank?’, Oxford Economic Papers 39:75–89.
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