Central banks

A central bank, reserve bank, or monetary authority is an institution that manages a state's currency, money supply, and interest rates. Central banks also usually oversee the commercial banking system of their respective countries. In contrast to a commercial bank, a central bank possesses a monopoly on increasing the monetary base in the state, and usually also prints the national currency, which usually serves as the state's legal tender.

The main function of a central bank is to control the nation's money supply (monetary policy), through active duties such as managing interest rates, setting the reserve requirement, and acting as a lender of last resort to the banking sector during times of bank insolvency or financial crisis. Central banks usually also have supervisory powers, intended to prevent bank runs and to reduce the risk that commercial banks and other financial institutions engage in reckless or fraudulent behavior. Central banks in most developed nations are institutionally designed to be independent from political interference. Still, limited control by the executive and legislative bodies usually exists.

According to Adam Smith, human economies were based on barter prior to monetary systems. In such an economy money does not exist. Producers exchange goods directly. A butcher exchanges meat with beer produced by a brewer. Yet, there is no empirical evidence for this theory from an anthropological point of view. The use of money as a central measure for the value of goods is documented for the ancient Egyptian economy (2750-2150 BC). The Egyptians measured the value of goods with a central unit called shat. As many other currencies, the shat was linked to gold. The value of a shat in terms of goods was defined by government administrations. Other cultures in Asia Minor later materialised their currencies in the form of gold and silver coins.

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