History of central banking: what can we learn from it?

Why do we need central banks? Do we need them really? These questions have been around for some time but gained weight in recent decades with the advent of cryptocurrency. Nowadays a bank account is vital in a person's financial plan whether it is for savings, investment, or operations. Mundo decided to write this piece because the evolution of central banks can teach us about the logic of the financial world today.

Central bank: what is it

A central bank is responsible for issuing currency and regulating financial activities, for example, the granting of credits. Their goals are to maintain prices, avoid inflation, and ensure long-term growth and stability.

However, this gives central banks the position to establish their own conditions, costs, interests, etcetera. The question of “why do we need central banks” arose from the very beginning as we can see in historical figures like John Locke. 

Since 2009, cryptocurrency has been advancing as a possibility to issue currency safely and without a regulator. Libertarians and nomad capitalists, who are in favor of ultimate freedom, have embraced this position.

History of central banking: England

We can see the origins of central banking in the 17th century when King William III of England needed money to fund war. In those days money could only be backed up by limited resources such as gold or silver, but everything was about to change. The king made a deal with the bankers which meant the beginning of the evolution of central banks.

Thus, the bankers agreed to loan money to the king in exchange for the right to issue money. The paper money was then accepted as a promise from the bank to deliver gold or silver, but they issued more than they could back up, relying on the fact that not everyone would claim their rights at the same time.

There were detractors like the above-mentioned John Locke who stood by the belief that money constituted a property like any other, and that it should not be created out of thin air. 

History of central banking: beginning of Federal Reserve

The Federal Reserve was created on December 23rd, 1913, after two failed attempts to establish central banks. The first one was established in 1791 and the second in 1836 but they both went bankrupt.

Nonetheless, the financial crises towards the end of the 19th century and the beginning of the 20th century required extreme measures. People were panicking and withdrawing their money from the banks. This is why the Federal Reserve was created after a meeting led by John Pierpoint Morgan, in which bankers agreed to compromise 25 million dollars to stabilize the financial system. 

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Although some argue that the Federal Reserve has too much power, it is now the symbol of the economy in the United States and the regulator of one of the main currencies worldwide. Whether we like it or not, banking in an institution backed up by the Federal Reserve, like a bank in Puerto Rico, provides a high level of security to the funds.

Why do we need central banks: countries that don't have them

Today there are only a handful of countries with no central bank among which we can count the Marshall Islands, Monaco, Micronesia, and Panama.

Since its independence, Panama never had a central bank. In part, this is because it doesn't issue money since the currency here is the US dollar. The Balboa is the official currency, but it's only used for accounting purposes and issued in coins.

Panama is a safe banking jurisdiction partly because it relies on the US dollar, hence the Federal Reserve, but also for its financial stability. Thanks to smart policies like free zones and special economic areas, a wide spectrum of residency options, and a friendly tax system, Panama has earned a stable position as a financial hub in the region. 

The banking system is secure and reliable, and it offers modern services including advanced online banking for perpetual travelers or clients abroad.

Disclaimer: this article is based on editorial research, and it presents a general view of the history of central banking. Therefore, this article should not be taken as financial advice. Before making any important financial or migration decision, it's vital to conduct proper research and consult with a certified professional.

History of central banking: what can we learn from it

Why do we need central banks? While they can help in times of crisis and contribute to boosting long-term economic growth, there are other aspects to consider.

They impose their regulations and are based on mere trust rather than tangible assets. On the other hand, it is true that the future of crypto is uncertain. Its disrupting technology has given a new field of investment, yet it hasn’t constituted so far a new financial system.

Nevertheless, in countries like Panama, there's no central bank and the country maintains a healthy financial landscape based on free trade, smart policies, and a solid currency.

Mundo has a team in Panama and a wide network of experts in Panama and other countries. We are proud of our publication in which we provide vital information about trusts, banking, corporate, real estate, and investment migration. To find out more about these topics please contact us.

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