The evolution of modern central bank –Reflection from ‘The Alchemists’ Three central bankers and a world on fire by Neil Irwin

Neil Irwin gives historical account that narrates the evolution of central bank from its genesis to present state. Irwin writes in a fascinating and informative way that makes central banking kind of cool! To capture the essence of the central bank one should imagine the world before the introduction of money. The simple answer is a barter trade, where individual could only meet his needs by finding a correspondent who can exchange. So how did it come that there was money and institution that controls money?  The following reflection will try to explain how the modern central bank came along

In early 17^th century Hans Witmacker a Latvian born son of a Dutch merchant who changed his name to Johan Palmstruch practiced the genesis of the modern finance. Johan a smooth talker with charm and charisma was able to convince King Gustav to establish a bank they dreamed. Johan was therefore allowed to establish the Stockholm’s Banco in 1965. He was so convincing that it’s doubtful if the king even checked his credibility. Johan a financial wizard had already plundered to the point he had to change his name and go to exile. Such an individual is hard to trust with people’s wealth.  So how did Johan manage to establish a bank? He was a risk taker and creative chap.

Any financial guy understands the business cycle with boom and crisis. Johan had experienced boom and crisis within the first decade of his banking career. When Johan started his banking there was no money instead copper was the medium of exchange. He used to store people’s money and found himself with excess so he decided to issue loans. As time went on people came to withdraw their money and they had a bank run because most of the stock was issued as loan. They then couldn’t call back the loans they therefore decided to issue receipt (which it then acted as money). They soon had an inflation problem and the story goes on but they had faced nearly all financial phenomena’s.  What exactly that brought the modern finance was how they come out of those problems. Arguably, one can say that after every cycle there was a distance covered towards the modern financial system.

Irwin’s The Alchemist gives a detail account of how the greatest financial crisis of our time was managed. He starts by explaining a central bank in Palmstruch era to the era of Ben Bernanke, Mervyn King and Jean-Claude Trichet. These three men found themselves with great responsibilities in their hands that made them the most powerful men in the globe during the crisis period. These men had to make tough decisions which had socio-economic effect around the world.

There are some key lessons that we can learn from Irwin’s narration. First, if the financial system is not regulated it becomes so complicated. For instance, in Palmstruch era they couldn’t issue back the loans because the regulators had loans they therefore couldn’t dare to force Palmstruch to issue the loans back. Second lesson, it’s very hard to separate the central bank from politics. Both Fiscal and monetary policy they work together. This is because the decisions of central bank have a social economic. Third and most important lesson, there is no economy that can grow out of air, if there is a bubble there is a burst.