central bank

The Columbia Encyclopedia, 6th ed.

central bank

central bank, financial institution designed to regulate and control the money supply of a nation, with the goal of fostering economic growth without inflation. Although central banking systems have varying levels of autonomy, there is generally a significant level of government control. The responsibilities of the central bank usually include maintaining adequate reserve backing for the nation's commercial banks and regulating the exchange rate of the nation's currency. Such duties are met by controlling the discount rate, making reserve advances to commercial banks, trading in government obligations, and acting as the government's fiduciary agent in its dealings with other governments and other central banks. The central bank has been called the "lender of last resort" and is expected to lend to its nation's banks at any time, particularly during a panic. Although the term was hardly known before 1900, the concept of central banking dates back to at least 1694, when the Bank of England was founded. Today, all economically developed nations—and most developing nations—possess the equivalent of a central bank; there are 172 central banks around the world. Notable central banks include France's Banque de France, Germany's Bundesbank, and the U.S. Federal Reserve System (est. 1913). The Bank for International Settlements in Switzerland serves as a central bank for the central banks of the world's largest capitalist nations. The World Bank and the International Monetary Fund also serve certain central banking functions for member nations. The European Union established the European Central Bank in 1998 as a prelude to the adoption of the euro (see European Monetary System). In the United States, the inflation crisis of the late 1970s led to greater public awareness of the role of the Federal Reserve in setting interest rates; reaction to its decisions (and expected decisions) concerning interest rates often produces sharp movements in the stock and bond markets.

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