Monetary Sovereignty: The Politics of Central Banking in Western Europe

By John B. Goodman | Go to book overview

CHAPTER Two
The Rise of Central Banking
in Germany, France, and Italy

Twenty centuries before the Christian era, the merchants and traders of Babylon relied on notes and checks to conduct their transactions. Central banks, by contrast, are much newer institutions; the first of the species emerged in Britain at the end of the seventeenth century. By the nineteenth century, they had proliferated throughout the European continent.

The principal function of early central banks was to raise and advance money to governments. Some countries relied on an existing private bank for this purpose; others chartered a new state bank. In either case, the government of the day usually granted special legal treatment—often in the form of note-issuing privileges—in return for the bank's financial support. With time, this support for the government led to the bank's enjoying a monopoly, either partial or complete, over note issue. Although the timing of the process varied across Europe, one bank in each country gradually acquired both the benefits and obligations of serving as banker to the government. 1.

This privileged position led to the development of strong ties be-

____________________
1.
Debate over the proper role of central banks has persisted from their creation to the present day. Classic works on the topic include Walter Bagehot, Lombard Street, 14th ed. ( London: John Murray, 1915); Ralph G. Hawtrey, The Art of Central Banking ( London: Longmans, Green, 1932); and Vera C. Smith, The Rationale of Central Banking ( London: P. S. King, 1936). See also Charles Goodhart, The Evolution of Central Banks ( Cambridge: MIT Press, 1988); Michael H. De Kock, Central Banking, 4th ed. ( London: Crosby Lockwood Staples, 1974); and Douglass C. North and Barry R. Weingast, " Constitutions and Commitment: The Evolution of Institutions Governing Public Choice in Seventeenth-Century England," Journal of Economic History 49 ( December 1980): 803-32.

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