Central banks are vital to the operation of a nation. When smaller commercial banks cannot extend enough loans to stimulate a nation's economy, the central bank of the nation supplies the necessary funds. Central banks are the safety nets of nations and usually prevent the economies of nations from completely crashing.
Under normal operations, central banks control the inflation of their nations. These banks are also usually responsible for developing and maintaining the monetary policies of their nations. For various reasons, central banks are usually independent of the governments and commercial banks of their nations.
The Influences of Central Banks.
Central banks influence economies in macroeconomic and microeconomic ways. Macroeconomically, central banks regulate inflation which also creates price stability within countries. By buying and selling government bonds, central banks can control the money supplies of their countries.
On microeconomic levels, central banks influence economies by providing funding to commercial banks when the banks are low on funds. Central banks dictate how much money commercial banks should have in their reserves. Additionally, central banks supply money to commercial banks at special interest rates, known as discount rates.
Growth of the Central Bank
The development of the central bank concept began during the 20th century when commercial banks began to experience various issues that needed to be placed under control. The gold standard was used by most countries prior to World War 1, allowing the central banks to easily control inflation. However, during World War 1, the gold standard was abandoned so that nations could print more money to fund the war. In turn, this rapidly increased inflation, which also led to many central banks becoming independent of their governments.
Central Banks and Transitional Economies
Many nations are currently transitioning their economies from managed economies to free-market economies. However, controlling inflation during this transition is tough, which is where central banks come in. While independent central banks can help solve the inflation issues of these developing nations, many of the nations are having issues with wanting to control their central banks. Government control, especially when civil wars are added into the mix, is hindering the growth of the central banks in these nations, as the governments are moving money out of the banks.
