SIGNIFICANCE OF THE CENTRAL BANK AS AN INSTITUTION FOR THE NATIONAL ECONOMY

Abstract

The central bank takes a central position in the banking system of every country. In the time first banks, for which the state vouched were founded (for example Swedish Riksbank – 1668 or The Bank of England – 1694), the intention couldn’t have been for those banks to deal with the functions of a modern central bank: regulating and financial support of the total bank system of a country. The aim was much simpler and came down to advantages that that the state could pull out from the patronage over this chosen bank no matter whether the bank was in state or private ownership.

The privileged bank was mostly offered monopoly advantage in issuing banknotes on certain areas of a country or it was proclaimed for the only shareholder bank in a country which was allowed to issue banknotes. So putting the job of issuing banknotes, that is guarding and managing gold reserves under the patronage of one institution had positive consequences for the functioning of the total economy and enabled the state to participate in the gain from issuing money and to achieve its immediate effect in controlling total gold reserves of a country. Central banks, due to the patronage of the state, gain political strength to ensure additional amount of money through rediscounting commercial promissory notes and with that become “bank of banks”. Business banks get the commitment to keep the largest part of their liquid assets at the central bank, but they gain the financial support of the central bank in the periods when their liquidity is bad.