Central bank

The central bank is the institution that in most countries acts as the monetary authority and as such is usually in charge of issuing legal money and in general designing and executing monetary policy of the country to which it belongs

Functions

The central bank has two very important functions within the economic system of a country. The first economy is to preserve the value of the currency and maintain price stability, and for this its main tool is the management of interest rates. When the gold standard was used, the value of the bills issued by the central banks it was expressed in terms of the content of that metal, or eventually of some other, that the bank tried to maintain at certain levels over time.

The second is to maintain the stability of the financial system, since the central bank is the bank of banks, its clients are not ordinary people or private companies, as well as the State and existing state or private banks within of the territory of the nation to which it belongs. The central bank takes deposits from its customers and saves them in accounts they have with it. With these accounts, customers carry out transactions with other banks through the payment and clearing systems (SNCE, TARGET2), in the same way that an individual in a commercial bank uses his account to carry out transactions with another individual. In turn, the central bank also grants loans to banks with liquidity difficulties, or even to other States.

Normally, in circumstances of war, the governments of a country meet their financial needs with their own central bank.

Headquarters of the European Central Bank in Frankfurt.

Banco de España building in Madrid.

Central banks are constituted in

• Custodians and administrators of gold and currency reserves;
• Providers of legal course money;
• Executors of exchange policies;
• Responsible for monetary policies and price stability;
• Providers of Treasury Services and Public Debt Financial Agents of National Governments;
• Government advisers, in the relevant reports or studies.
• Auditors, responsible for conducting and publishing statistics related to their functions;
• Ultimate lenders (banks);
• Promoters of the proper functioning and stability of the financial system, as well as payment systems;
• Supervisors of solvency and compliance with existing regulations, with respect to credit entities, or other financial entities or markets whose supervision is under their care.

All these characteristics and functions mean that central banks have great influence on the economic policy of the countries and that they are a key element in the functioning of the economy. They control the monetary system, that is, the money that circulates in the economy, trying to avoid adverse effects such as high levels of inflation or unemployment, as well as negative situations in the credit system, through the regulation of interest rates that banks offer or charge to their customers, and through the banking reserve requirements that banks and other financial institutions and the exchange system require, controlling the value of local currency against foreign currencies.

Issuance of money

Torre del Banco Central de la República Dominicana.

In order to fulfill its functions, the central bank has a monopoly on the issuance of legal money, therefore, the central bank, depending on the economic conditions of the country (inflation, unemployment, etc.), decides, issue or drain liquidity from the system through different tools, such as open market operations, permanent facilities and minimum reserves.

Physical money (bills and coins) is manufactured by mints. These entities manufacture the amounts and types of banknotes or coins requested by the Central Bank to be distributed to commercial banks.

In addition to issuing or draining liquidity from the system, central banks, through commercial banks, are in charge of withdrawing damaged coins and bills and replacing them with new ones.

Some economists of the so-called Austrian School such as Von Mises, Hayek or Murray Rothbard have argued that the central bank can wreak havoc in an economy, through a systematic devaluation of the currency and by being part of monopolies of force, since that it does not have a physical and intrinsic value that supports it (as gold could be); In this way, an excess of currency could be created, this affects relative prices and generates the economic cycle.

Central bank independence

2008 -G7 finance ministers and central bank governors - Meeting in the US Treasury Department. America in Washington on April 11.
Front row Finance Ministers: Canada Jim Flaherty, France Christine Lagarde, Germany, Peer Steinbrück, U.S. Treasury Secretary. U.S. Henry Paulson, Italy Tommaso Padoa-Schioppa, Japan Fukushiro Nukaga, United Kingdom Alistair Darling and Jean-Claude Juncker, president of the Eurogroup.
Second row - central bank governors-: IMF Managing Director Dominique Strauss- Kahn, Canada Mark Carney, France Christian Noyer, Germany Axel Weber, president of the US Federal Reserve. U.S. Ben Bernanke, Italy Mario Draghi, Japan Masaaki Shirakawa, England Mervyn King, president of the European Central Bank Jean-Claude Trichet and World Bank President Robert Zoellick.

According to the European Central Bank, numerous studies, theoretical analysis, and empirical data maintain that the independence of the central bank favors inflation control and price stability. For this reason, the bank is conceived as a public body independent of the Government of the State to which it belongs. In this way, the central bank will try to preserve that independence, and this will guarantee its proper functioning, and the correct development of the State's economy.

In this line, also supported by the IMF, the independence of the central bank is established in its institutional framework, in the laws and other regulations that regulate it, so that neither the bank itself nor any of its governing members, can request or accept instructions from the Government of the State to which it belongs, or from any other. In turn, state institutions and agencies, as well as their governments, undertake to respect this independence. To ensure this independence, certain measures are taken, among others:

• The financial mechanisms of the central bank are kept separate from those of the Government of the State to which they belong, with their own budget.
• Governors and directors, appointed by the Government of the State to which they belong, are guaranteed the security of their posts as follows:
  • a minimum term, longer than the Government of the State to which they belong;
  • dismissal only in case of incapacity or serious failure;
• The granting of credits to the State itself, which protects it to a greater extent from any influence of the public authorities, is prevented.
• The central bank has the capacity to analyse, independently, the various economic phenomena that arise and to design and implement the policy at its disposal without being subject to other State bodies.

On the other hand, the independence of the Central Bank has been maintained by the neoconservative current that reached its peak in the 1980s and 1990s.

Examples of models that present themselves as autonomous and independent from their governments, could be the European Central Bank itself —and all the member banks of the European System of Central Banks— or the United States Federal Reserve.

However, other schools of economic thought maintain that behind the argument of the independence of the central bank are the private interests of the financial sector, those who manage the monetary policy of the central banks. The Mexican economist Arturo Huerta González argues that "instead of the central bank being independent of the government and responding to non-democratic objectives that favor financial capital, it should be an institution that responds to the democratic objectives of the representatives who are elected and who have to meet the national demands for economic growth and full employment that guarantee conditions of economic and political stability". Le Heron and Carre have criticized the lack of effective democratic controls over banks autonomous centrals: in a regime of credibility, central bankers are neither elected by the people nor are they government agents. The general public has no power over them", a criticism also supported by Berman and McNamara and the Alfred Nobel Joseph Stiglitz Memorial Prize in Economic Sciences. 34;If you want a conservative, anti-political idea that preserves the interests of privileged minorities, you don't have to look far. It is on display with the "independence" of the Central Bank".

Duties before the State Government

Regardless of the independence of the central bank with respect to the Government of the State to which it belongs, the following conditions also apply, which the central bank must comply with for the same State:

• Transparency: The central bank makes available to the public and markets all relevant information about its monetary policy strategy, evaluation and decisions, as well as its procedures in an open, clear and timely manner.
• Accounts in the exercise of its mandate to democratic institutions and citizens. To this end, it has independent auditors, and various elements responsible for presenting, among others, an annual report on its activities, balance of accounts and on the monetary policy of the previous year and the current year.
• Benefit sharing: discounted the costs of maintenance, payment of wages, reports, etc., the benefits of any central bank, revert to the State to which the bank belongs, or to the increase of the possible funds of guarantee, which it has established.