Unveiling the Origins of Central Banking: A Historical Journey from Europe to England

Introduction

Central banks are supposed to be the keepers of both price and financial stability. But, have prices and finances been very stable? Or was the world of money more stable before central banking was invented? Hi, I am CashQuill and to find out, I have collected the best works from economic historians and summarized them into what I believe is the true origin story of central banking. And to be honest, after doing the research, I am no longer surprised about the popularity of central bank conspiracy theories.

The Origin of Central Banking

1. South European Bank

In 13th century Europe, a golden era of rising trade. To facilitate that trade, the various princes, dukes, and kings each offered their silver, gold, or other metallic coins. However, while the official prices of these coins were based on their precious metal content, the actual metal content of these coins frequently changed, making them not as pure as you might have expected, and therefore not always reliable. This uncertainty, along with the difficulty of carrying around heavy coins and the cost of protecting them, meant that merchants, who needed to do larger or possibly even international transactions, relied on famous European banking families such as the Bardi, Perruzzi, and Medici to transform their debts into tradeable deposit money.

2. Bank of Amsterdam

The year is 1609 roughly 30 years after the founding of the Dutch Republic, Dutch trade with the Baltic nations was flourishing but cloth importers were demanding monetary reform because there were 14 mints in the small republic all making their coins making it extremely difficult to exchange them and to separate good from bad coins. In response, the city of Amsterdam founded a bank and named it as de Amsterdam’s Wissel Bank. Which translates literally to the Exchange Bank of Amsterdam but is better known as the Bank of Amsterdam. Like its South European predecessors, it was known as a public deposit bank or full reserve bank. Here is what Adam Smith had to say about it in his famous book The Wealth of Nations: ” In Amsterdam, there is no doubt that the belief in the equivalence between every guilder in circulation as bank money and the corresponding guilder in gold or silver stored in the bank’s treasury is firmly ingrained.” However, recent research of old ledgers of the bank has revealed that in fact, Adam Smith was wrong.

3. Sveriges Riksbank

The Swedes promptly appointed him head of the Chamber of Commerce from where he was in the position to propose to King Karl Gustav to establish for Sweden a bank that would provide both deposit (Wechselbank) and credit (Landbank) services for the Swedish state. Stockholms Banco, a privately owned bank, was founded in 1656 and had notable shareholders such as the King, the City of Stockholm, and the renowned Johan Palmstruch. Now at the time in Sweden, a deposit bank was sorely needed since the Swedes mainly used copper coins for trade, which are much heavier than silver or gold coins. And so, it is perhaps not surprising that it was here in Sweden.

4. Bank of England

The year is 1688, and England has just been invaded by the Dutch. That’s right, the last successful invasion of England was by a Dutch army, led by its ruler William of Orange the Third. But while it pains this Dutch economist to admit it this was as much of a coup as it was an invasion since the royal British army helped the Dutch invaders to overthrow the British Monarchy and William of Orange to become King William the Third. What is more interesting for our financial story though is that, in an ironic twist, economic historians believe that this invasion ultimately created the central bank that would overtake the Bank of Amsterdam. You see, one of the first things that the Dutch King William did was grant the Bank of England its charter in 1694.

Conclusion

Central banks should lend early and without limit, to solvent banks, that were able to post good collateral, and at ‘high rates.’ And with that rule in place, it does appear that financial crises became a thing of the past under the Bank of England. And right up to the Second World War. British prices seemed to be more stable than in the decade before the Bank of England. While the history of central banking is intertwined with deception, financial crises, opportunistic entrepreneurs, dishonest politicians, and even endorsement of slave trading, it did appear to bring about stability in prices and the financial sector.

Not surprisingly, all continental Europe introduced their central banks, and even in the USA, which had stumbled from one banking crisis to another in the era of free banking came up with its own and so all seemed to be well in central banking land. up to the 1950s when central banks were still there, but high economic growth along with inflation became the new norm, and then finally in the 90s and early 2000s financial instability made a big come-back.

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