A central bank is the term given to the authority responsible for policies that affect a country’s supply of money and credit. The story of the central bank goes back to the seventeenth century during these early years the central banks helped fund the government’s debt and primary focus was to stabilize and control the value of the currency. The central banks of this era also acted as lenders of last resort in times of financial crisis like during events such as bad harvests and wars that accelerated a scramble for liquidity.
Since the 17th century, the influence of the central bank has alternated depending on the needs of government and it has been difficult to determine which entity holds the real power. From the beginning of the twentieth century, countries such as the U.S shifted away from gold-backed currency to fiat system. This altered the functions of the central bank from preserving currency to actively affecting global economic outcomes. Central banks broadened their responsibilities in the 20th century to other important functions such as administering exchange control systems, clearing checks, regulating the money supply and supervising of commercial banking. Central banks are operated for the public welfare and not for maximum profit.
The original purpose of central banks has clearly changed as their powers and responsibilities have expanded. They have become disaster managers but as history will suggest they have not always proven effective in that function. Their role in the future is sure to evolve and for the near future, their degree of influence will still be very prevalent in today’s economies.