Glamor Economics

Chapter 103

Chapter 14 Section 4 The Lender of Last Resort - The Central Bank

Suppose there are 1000 people on an island, isolated from the world, and people exchange items to live, but sometimes the things you exchange in your hand are not necessarily what the other party wants, what should you do?So people used gold and silver, which they all liked, as exchange items, so the exchange was convenient.However, gold and silver wear and tear, and it is inconvenient to carry. When the exchange activities are frequent, it is found that this thing is too cumbersome, which limits the exchange activities. So in order to solve this problem, I thought of a way, which is to issue a symbol by the administrator of the island. , use it instead of gold and silver, so banknotes appeared.

At the beginning, this banknote could be exchanged for gold and silver at any time.Everyone is very relieved, because banknotes are gold and silver.However, the production of gold and silver on the island is too small. When people's exchange activities become more frequent, the banknotes are not enough, so the exchange can only be suspended.The consequence of suspending the exchange is that everyone does not produce what others want, because although others have needs, they cannot be exchanged, so everyone thinks of a way to set up a bank, which belongs to everyone, and the bank issues banknotes and prints The banknotes issued are lent to those who want to use the money, and then the person has money and then returns it to the bank.And so the bank appeared.

The emergence of the bank can ensure the continuous exchange activities. Everyone is desperately producing, and there are more and more things on the island. The bank keeps printing banknotes according to the production quantity of the products to ensure that the exchange can be carried out more deeply.Later, people's exchange activities became more frequent, and there were too few banks, so many banks appeared.There must be someone in charge of the bank, so a bank is designated to manage other banks. Banknotes can only be printed by this bank, and then lent to people who use the money through other banks. This is how the central bank appeared.

The central bank was born in the second half of the 17th century and formed in the early 19th century. At the beginning of the 18th century, the industrial revolution began in Western countries. The rapid development of social productivity and the rapid expansion of the commodity economy made currency operations more and more common and profitable.

The inherent contradictions of the capitalist economy itself lead to successive economic crises.Faced with the situation at that time, the bourgeois government began to look for reasons from the monetary system, trying to control, avoid and save frequent economic crises by issuing bank notes.On the other hand, the capitalist industrial revolution has led to an unprecedented increase in productivity, and the increase in productivity has also prompted the vigorous development of the capitalist banking credit industry.The main manifestations are firstly that the number of banking institutions is increasing continuously; secondly, the banking industry is gradually moving towards union, concentration and monopoly.These have created conditions for the emergence of the central bank.

So, what are the main functions of the central bank?In a nutshell, the central bank has three functions: the issuing bank, the bank's bank, and the country's bank.

The central bank is the issuing bank.It monopolizes the right to issue currency and is the only banknote issuer in the country.

The central bank is the bank of the banks.This function can best reflect the special nature of the central bank as a financial institution.Handling "deposit, release, and remittance" is still the main business content of the central bank, but the business objects are not ordinary enterprises and individuals, but commercial banks and other financial institutions.

The central bank is the country's bank. It is the maker and executor of the country's monetary policy, and it is also a tool for the government to intervene in the economy; at the same time, it provides financial services for the country, acts as an agent for the treasury, issues government bonds, and raises funds for the government; Financial organizations and various international financial activities.

The main businesses of the central bank include: currency issuance, centralized deposit reserves, loans, rediscounts, securities, gold and foreign exchange funds, transfer and liquidation of funds and transfer of funds for commercial banks and other financial institutions.

Usually, when a banking crisis occurs in a certain country, the central bank can provide refinancing for other commercial banks to meet the short-term funding needs of commercial banks, so as to prevent crises in the banking system, just like the lenders behind commercial banks.Thus, "lender of last resort" is how people describe this behavior of the central bank.

[links to related words]

Central Bank The central bank is the highest monetary and financial management institution in a country and occupies a dominant position in the financial system of each country.The functions of the central bank are macro-control, ensuring financial security and stability, and providing financial services.

Central bank loans (customarily called re-lending) refer to loans issued by the central bank to financial institutions. They are an important channel for the central bank to regulate the base currency and a traditional policy tool for financial regulation.Generally speaking, the increase in central bank loans is one of the signals that the "money root" will be loosened; on the contrary, it is one of the signals that the "money root" will be tightened.

Base currency, also known as high-energy currency, refers to a currency that has the ability to expand or contract the monetary aggregate exponentially.In the modern monetary statistical system, it is defined as a reserve currency.At the present stage of our country, it is mainly composed of three parts: deposit reserves of financial institutions, cash issuance (cash in circulation + cash in stock of financial institutions) and deposits of non-financial institutions (transferred deposits of postal savings in the central bank).

(End of this chapter)