The evolution of modern central bank –Reflection from ‘The Alchemists’ Three central bankers and a world on fire by Neil Irwin
by Shirumisha Kwayu on 07/16/14
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 17th 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.