Role of Central Banks in Modern Society

May 29, 2017 | Barcelona, ​​Spain

Image result from the fed

The Federal Reserve (“Fed”) – Central Bank of the United States of America

With so many country’s experiencing struggling economies, central banks have begun to play an increasingly important role in society. Central banks can be best described as the “lender of last resort” (Investopedia), as their job is to provide the economy with funds when commercial banks can’t cover a supply shortage. It is the last defense for a country’s economy from failing or defaulting. To do this, the central bank’s goal is to provide their country with control over currency to stabilize price and maintain proper inflation levels. Furthermore, the central bank acts as the regulatory authority of the nation’s monetary policy and is the only one who is able to print cash and coins for that country.

In order to maintain an unbiased position in the economy and best serve it’s purpose, the central banks perform best when they are an independent entity from government fiscal policy and therefore are uninfluenced by any political regime. They also should be separate from any commercial banking interests. In almost every country today, the central bank operate on it’s own, separate from the government, even though it handles the buying and selling of government bonds and other instruments. This is largely due to problems caused by government influence in the past.

Today, central banks play a more pivotal role than ever because of problems developing in the commercial banking system globally. A century ago, the central banks job was much easier as they were primarily responsible just for converting gold into currency. Maintaining price stability was a lot easier because the amount of gold available in the global economy was limited. Due to a number of historical events, including the Great Depression and WWII, the role of the central banks became much larger again, although they were heavily dependent on government decision making then.

So, with it’s two primary functions of regulating inflation and price stability and being the last resort for lenders, central banks today are more important than ever. With what seems like country’s nearing or having already experience default in the past decade, more regulation is necessary to ensure economic stability. For example, a country like Greece would have tremendously benefited from a more accountable central bank to keep the country from taking on so much unaccounted for debt until it was too late. More awareness of the central bank and accountability of those that are a part of them are needed in the world. I am all for more emphasis on the development of central banks as they can help immensely with helping the financial and economic stability of a country.

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