Central Banking

Abstract

When the first government-sponsored banks were founded in Europe, for example the Swedish Riksbank (1668) and the Bank of England (1694), there was no intention that these should undertake the functions of a modern central bank, that is, discretionary monetary management and the regulation and support, for example through the ‘lender of last resort’ function, of the banking system. Instead, the initial impetus was much more basic, generally relating to the financial advantages a government felt that it could obtain from the support of such a bank, whether a State bank, as in the case of the Prussian State Bank, or a private bank, like the Bank of England. This naturally involved some favouritism, often supported by legislation, by the government for this particular bank in return for its financial assistance. The favoured bank was often granted a monopoly advantage, for example over the note issue in certain areas, or as the sole chartered joint stock bank in the country; and this may have had the effect in some countries, such as England and France, of weakening the early development of other commercial banks, so that, at the outset, the foundation of a government-sponsored bank was a mixed blessing for the development of banking in such countries.