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The History And Rising Power Of Central Banks

Date: Friday, June 8, 2018 9:02 PM EDT

Until the early twentieth century, the purpose of central banks was to stabilize and control the value of the currency. When currency was backed by gold, that was reasonably easy to do. The amount of money placed into circulation was limited to the amount of gold held in reserve. By the early twentieth century, however, countries, including the U.S. shifted away from a gold-backed currency to fiat money. This changed the functions of central banks from stabilizing currency to actively affecting global economic decisions.

When Great Britain gave the Bank of England the power to determine interest rates twenty years ago, a questionable and dangerous trend was set. The role of central bankers changed from bit players in the economic realm to all-powerful stars on the global stage. This trend has continued as central banks are buying up billions of dollars in assets and determining and managing policies far beyond economics. The Reserve Bank of India has opined on religious tolerance, while the Bank of England has been vocal on the subject of climate change. As a result, central banks have been criticized for overstepping their role as a monetary stabilizer to determining economic policies, as they widely did during and after the 2008 financial crisis.

Since the 17th century, the powers of central banks have fluctuated. Much of these powers were given or restricted by the needs of governments, who demanded stabilization of currency, protection against inflation, and manipulation of global policies. Bankers have been seen as experts, and governments have happily used them when it suited their needs. The relationship between government and central banks has become so symbiotic, it is frequently difficult to determine which entity holds the real power.

Since the Federal Reserve was established in 1913, it has had its hands in manipulating the Great Depression, the inflation of the 1960s, and the financial crisis of 2008. Instead of allowing market forces to stabilize the economy, the Federal Reserve has become an active participant, working hand in glove with the government to achieve its ever-changing goals.

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