Have you ever sat down and thought about who owns a central bank?
While a simple Google search will drown you with imaginative conspiracies about the Rothschilds and illicit international trade agreements, the reality of central banking is a much more modest affair.
So, why do we need central banks, and what would the world look like without them?
Join us as we explain the purpose of a central bank and investigate who’s really in control of your hard-earned money.
What is a Central Bank?
Central banks are government-led institutions that oversee the economic strength of a nation. The key responsibilities of a central bank are as follows:
- Managing debt. Central banks are responsible for buying and selling government debt using short-term bonds. Economists call this 'open market operations'. Governments work with the open market to manage the country’s financial position.
- Printing & Controlling Local Currencies. Not only is a central bank responsible for printing money, but it must also decide how much money is needed in the system to promote economic growth on the world stage.
- Overseeing National Interest Rates. Central banks control short-term interest rates to promote stability and liquidity in the economy.
- Protecting Gold Reserves. Central banks invest in gold to protect their currency in the event of inflation. The purchasing power of gold is universal.
Why Are Central Banks Important for Economic Stability?
Central banks also regulate private ‘member’ banks to ensure financial stability in the event of a crisis. It’s in the interest of the central bank to support its members to maintain financial credibility and trust in their currency.
If customers panic in the event of a financial crisis, a currency can experience hyperinflation as demand exceeds supply. People become fearful of increasing prices and terrified of the banks defaulting. Chaos ensues as everyone withdraws money from the banks, stockpiles goods and prices skyrocket.
If a country’s central bank doesn’t have the economic resources to reverse the effect of hyperinflation, their only option is to print more cash — digging them deeper and deeper into economic decline.
In mid-November 2008, the world watched in horror as the Zimbabwean dollar experienced year-on-year hyperinflation of 89.7 sextillion percent.
How Do Central Banks Control the Supply of Money?
The old saying of “money doesn’t grow on trees” isn’t strictly true when it comes to the supply of money through central banks. Central banks have the power to print new money and remove it from the economy to maintain the right level of liquidity without devaluing a currency.
A process known as quantitative easing involves central banks buying huge chunks of money via government bonds to inject extra cash into the economy.
While spending government money to increase national wealth might seem counterintuitive, quantitative easing can help countries "spend their way out" of economic difficulty.
What is the European Central Bank?
The European Central Bank is a central bank that represents the Eurozone — 19 of the 27 European Union (EU) member countries that have adopted the euro.
The euro is a 'single currency' as it's used by all members of an economic federation. The ultimate goal of the European Central Bank is to “serve the people of Europe by safeguarding the value of the euro” and maintaining it’s purchasing power against other international currencies.
Who Controls the European Central Bank?
Any money held by the European Central Bank is owned by the central banks of each of the 27 EU member states.
The top seat is held by Christine Lagarde, and the Vice-President is Luis de Guindos. Six members of the organisation's executive board plus a member from each of the 19 Eurozone central banks form the governing council. The governing council is responsible for major decision-making and overseeing day-to-day activities.
As an official EU institution, the European Central Bank must report to the European Parliament and set monetary policies that serve to protect the strength and stability of banks across the continent.
Is Populism Impacting Central Banks?
Populism is a political movement where the people of a country rebel against established institutions and elite groups in a bid to have their voices heard.
Whether it was Michael Gove declaring that “Britain has had enough of experts” or Trump’s plea to “drain the swamp,” many politicians use populism as a manipulative tactic to win the hearts of the people.
Unsurprisingly, central banks get a bad wrap from many politicians who condemn their tendency to keep inflation prices high. Years of austerity in the wake of the 2008 recession in the UK means many people are eager for central banks to loosen the reigns by dropping interest rates.
While the case for economic populism has its merit, the risks associated with financing a nation on public desire over regulatory decision-making are enormous.
In an age of populism, central banks must avoid public backlash by listening to the needs of the people and adjusting their policies accordingly.
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