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Chapter 26 Central banks: the "nerve centers" of the financial system (1)
The Origins of Central Banks: Issuing Currency
Suppose there are 1000 people on an island, isolated from the outside world, and people live by exchanging items, but sometimes what they exchange in their hands is not necessarily what the other party wants, what should I do?So people use gold and silver, which they all like, as exchange items, which makes the exchange more convenient.However, gold and silver are easy to wear and are inconvenient to carry. When the exchange activities are frequent, it is found that this thing is too cumbersome, which limits the exchange activities. So in order to solve this problem, I thought of a way, that is, the administrator of the island issues a new currency, and used it instead of gold and silver, so banknotes appeared.

At the beginning, this banknote could be exchanged for gold and silver at any time.Everyone is very relieved, because banknotes are gold and silver.However, the production of gold and silver on the island is too small. When people's exchange activities become more frequent, the banknotes are not enough, so the exchange can only be suspended.The consequence of suspending the exchange is that people no longer produce what others want, because although others use it, they cannot be exchanged. To use the current words, economic development has slowed down.So everyone thought of a way to set up a bank, which belongs to everyone, and the bank issues banknotes, and stipulates that the banknotes are no longer exchanged for gold and silver, and the credit of the bank is used as a guarantee, so people can continue to exchange.And so the bank appeared.

Everyone is desperately producing, and there are more and more things on the island. The bank keeps printing banknotes according to the production quantity of the products, so as to ensure that the exchange can be carried out more deeply.Later, people's exchange activities became more frequent, and there were too few banks, so many banks appeared, and there must be someone in charge of the bank, so a banknote was designated to manage other banks, and banknotes could only be printed by this bank, and then passed through Other banks lend money to those who need it, and the central bank appears in this way.

The national currencies of all countries in the world are printed and issued exclusively by the central bank.

In fact, banknotes are a kind of credit currency. If the banknote-issuing bank goes bankrupt, the banknotes issued by it will become useless and cannot buy anything. The disadvantages are obvious. In the United States in the 19th century, more than 1600 banks competed to issue banknotes, and more than 3 banknotes entered the market at one time.The market is very chaotic, and many banknotes cannot be cashed at all, robbing the wealth of ordinary people invisibly.The chaotic monetary order has caused many countries to suffer, and they realized that it is necessary for a bank to monopolize the issuance of currency.As a result, many countries concentrated the privilege of issuing currency to a bank in their own country through laws and regulations, and this bank gradually assumed the function of implementing monetary policy in the process of circulation.

In the early days, the original intention of many countries to establish a central bank was to raise funds for the government and help the government manage its finances, which enabled the central bank to establish a very close relationship with the government from the very beginning.Coupled with the monopoly privilege of issuing currency, the strength and credibility of the central bank far surpassed other banks of the time.So the central bank began to assume the responsibility of supervising and managing the banking system and ensuring the stable operation of the economy. In response to problems in economic development, it used the tools in its hands to regulate the country's economy.So far, the central bank has gradually evolved and formed.

Historically, the emergence of the central bank has its profound economic background.

At the beginning of the 18th century, the industrial revolution began in Western countries. The rapid development of social productivity and the rapid expansion of the commodity economy made the currency business industry more and more common and profitable, which led to the desire to control monetary wealth.

The inherent contradictions of the capitalist economy will inevitably lead to continuous economic crises.Faced with the situation at that time, the bourgeois government began to look for reasons from the monetary system, trying to control, avoid and save frequent economic crises by issuing bank notes.on the other hand.The capitalist industrial revolution has led to an unprecedented increase in productivity, and the increase in productivity has also prompted the vigorous development of the capitalist banking credit industry.The main manifestations are that firstly, the number of banking institutions is continuously increasing; secondly, the banking industry is gradually moving towards union, concentration and monopoly.

central banks around the world

historic bank of england
The Bank of England is one of the most important institutions and buildings in the London area.Since the British Banking Act came into being in 1694, the Bank of England began to operate, and then gradually changed its functions. Since 1964, it has been the central bank of the United Kingdom and is the largest and busiest financial institution in the world.

The Bank of England is the central bank of the United Kingdom. It is responsible for convening the Monetary Policy Committee, which is responsible for formulating the country's monetary policy.

The original mission of the Bank of England was to act as the Bank of the Government of England, a mission that remains valid today.The Bank of England Building is located on Thread needle (Needle) Street in London. Because of its long history, it is also known as the "Old Lady on Needle Street".

As the earliest central bank in the world, the Central Bank of the United Kingdom is the originator of the central bank system of various countries. It was established in 1694 according to the charter of the King of England, with a share capital of 120 million pounds, which was raised from the society.At the beginning of its establishment, it obtained the right to issue banknotes not exceeding the total capital, and its main purpose was to advance funds for the government.

In 1844, the British Parliament passed the "Bank Charter Regulations" (the "Bill Regulations").Since then, the Bank of England has gradually monopolized the country's currency issuance rights, and by 1928 it became the only currency-issuing bank in the UK.At the same time, the Bank of England, relying on its increasing status, undertakes such businesses as the transfer and write-off of creditor-debt relationships between commercial banks and the final settlement of bill exchange. It accepts commercial bank bill rediscounts during economic prosperity, and acts as The "lender of last resort" of commercial banks, thus finally establishing the status of "bank of banks".

Multinational Central Bank: European Central Bank

The European Central Bank was born along with the creation of the euro, and its predecessor was the European Monetary Office in Frankfurt.The function of the European Central Bank is to maintain the stability of the euro, manage the dominant interest rate, currency reserves and issuance, and formulate European monetary policy; its responsibilities and structure are modeled on the German Bundesbank, independent of EU institutions and national governments.

The European Central Bank is the world's first central bank to manage a supranational currency.Independence is a distinguishing feature of it, it does not accept the directives of the EU's governing bodies, and is not subject to the supervision of national governments.It is the only institution qualified to issue euros within the EU. After the euro was officially launched on January 1999, 11, the governments of [-] euro countries will lose the power to formulate monetary policies, and must implement the monetary policies formulated by the European Central Bank.

The main decision-making body of the European Central Bank is the European Central Bank Committee composed of the executive board and the central bank governors of 12 euro countries, which is responsible for determining monetary policy and maintaining currency stability in the euro area; The governor and central bank governors of all 15 EU countries are tasked with keeping the euro countries in the EU in touch with non-euro countries.

Decision-making of the ECB Council adopts a simple majority voting system, and each member has only one vote.Although the power of monetary policy has been centralized, the specific implementation is still the responsibility of the central banks of the euro countries.The central banks of the euro countries still maintain their own foreign exchange reserves.The European Central Bank has only 10 billion euros in reserves, which are provided by the central banks of the member states according to the proportion of their population in the euro zone and the proportion of their gross domestic product.The euro has brought great benefits to the economic stability of the EU countries since its creation [-] years ago. When the international community is optimistic about the future of the euro, the European Central Bank will continue to play an irreplaceable role and continue its glorious mission.

Federal Reserve System
The U.S. Federal Reserve (FED) is the highest monetary policy authority in the United States, responsible for keeping commercial bank reserves, lending to commercial banks and issuing Federal Reserve notes. The FED is divided into three levels of organization, the highest is the board of directors, under it are the 12 Federal Reserve Banks and the member banks of the Reserve Banks.

The US Federal Reserve takes "independence" and "checks and balances" as its basic principles.In terms of checks and balances, the bureau's seven directors (including the chairman and vice-chairman) are all nominated by the president and subject to the approval of the Senate.For monetary policy resolutions, such as raising or lowering the rediscount rate, a collegial and voting system is adopted, with one person, one vote, and a "record vote". The chairman's vote usually goes to the party that already has the majority.Although the president can control the nomination of directors, chairmen, and vice chairmen, once the Senate approves it, the term of office is as long as 14 years, and he may serve as president five times at most.

As for independence, FED is most praised for its personnel independence and budget independence. In addition to the board of directors, it also has the Federal Open Market Operations Committee (FOMC), which is responsible for long-term monetary decision-making and is based on foreign exchange guidelines and foreign exchange operations. Authorize operations and foreign exchange operation procedures to conduct foreign exchange operations.

And the most surprising thing about the Federal Reserve is that it is a privately owned central bank.It is not an exaggeration to say that perhaps few economists in China know this.The so-called "Federal Reserve Bank" is actually neither the "Federation", nor a "reserve", nor is it a "bank".Most Chinese government officials may take it for granted that the U.S. government issues U.S. dollars, but the reality is that the U.S. government does not have the right to issue currency at all! After President Kennedy was assassinated in 1963, the U.S. government finally lost the right to issue the only remaining "silver dollar".If the U.S. government wants to obtain U.S. dollars, it must mortgage the future taxes of the American people (national debt) to the private Federal Reserve, and the U.S. Federal Reserve will issue "Federal Reserve Bonds", which are "U.S. dollars."

Independence: the line between central banks and governments

On June 1963, 6, U.S. President Kennedy signed a little-known Executive Order 4 directing the U.S. Treasury Department to "redeem silver in any form, including silver bullion, silver coins, and standard silver dollar coins, in the possession of the Treasury Department." Support, issue "silver certificates", and immediately enter circulation.

If this plan is implemented, the U.S. government will gradually get rid of the embarrassment that it had to borrow money from the "Fed" and pay high interest. The circulation of "silver bonds" will gradually reduce the circulation of "dollars" issued by the Federal Reserve, which may eventually force the Federal Reserve bank to go bankrupt.As a privately owned central bank, the Federal Reserve is backed by a strong international consortium.Kennedy's move undoubtedly brought danger to himself. On November 1963, 11, President Kennedy was assassinated in Dallas, Texas.Analysts have drawn from many indications that the Presidential Order No. 22, which is related to the Federal Reserve's currency issuance power, is likely to be the direct cause of Kennedy's death.

The right to issue currency is the most basic power of a central bank.Preserving the central bank's right to issue currency is also to preserve the central bank's independence and position in the economy.If it loses the right to issue currency, the Federal Reserve will lose its status as a central bank, which also means losing the power to influence and control the US economy.As a private central bank, the Federal Reserve has historically kept a distance from the US government, which has given full play to its independence.The role of the Federal Reserve in the U.S. economy is self-evident, and because of this, there has never been a shortage of fighters defending the Fed in U.S. history.

In 1996, U.S. Democratic Senator Sabanis once proposed a "bad idea", which was unanimously reviled by economists.He proposed that regional Fed presidents should be stripped of their voting rights on the Federal Open Committee.Gonzalez, another Democratic representative, added that the president of the regional Federal Reserve Bank is appointed by the president and confirmed by the Senate.Both proposals have been unanimously attacked by economists.At that time, the well-known economist Martin Feldstein, who was considered likely to succeed Greenspan as the chairman of the Federal Reserve, wrote an article calling for "don't step on the Fed's head."

Why "Don't Step on the Fed's Head"?Because everyone knows that the success of the US economy is largely due to the monetary policy of the Federal Reserve.The correctness of monetary policy depends on the independence of the Fed's decision-making.The Fed's seven top chairs are appointed by the president and confirmed by the Senate.The Fed's monetary policy decision-maker is the Federal Open Market Committee, whose members include the seven governors of the Federal Reserve and the presidents of the 7 regional Federal Reserve Banks.Five of these presidents have voting rights, with the exception of the president of the Federal Reserve Bank of New York who always has voting rights. The other presidents have voting rights in rotation. Many of the Fed's employees support prudent monetary policy goals.This personnel appointment and decision-making system is the institutional guarantee for the independence of the Federal Reserve and monetary policy.The proposal of these two congressmen is to weaken the independence of the Federal Reserve, which naturally aroused Feldstein's anger and unanimous opposition from economists.

(End of this chapter)