Handbook of Critical Issues in Finance
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Handbook of Critical Issues in Finance

Edited by Jan Toporowski and Jo Michell

This vital new Handbook is an authoritative volume presenting key issues in finance that have been widely discussed in the financial markets but have been neglected in textbooks and the usual compilations of conventional academic wisdom.
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Chapter 7: Central banks

Tim Congdon


The first examples of ‘money’ took the form of a commodity, usually a precious metal such as gold or silver. Meanwhile embryonic banking evolved from other kinds of business activity (such as the trading of coin or bullion) and was characterized by competition between different suppliers. However, in the modern world, commodity money has been almost entirely replaced by paper substitutes in the form of notes or scriptural money like bank deposits. Economies have benefited from this development, because the production of notes – unlike the mining of precious metals – requires negligible resources. But an interesting problem of social organization is implied. Who should benefit from the so-called ‘seigniorage’ on money, the difference between the notes’ production cost and their face value? The answer – found more or less uniformly in all sovereign nation states – is in three parts. The state consolidates the note issue to establish a single national currency, it gives the monopoly right to issue the notes to a distinct type of banking institution called ‘a central bank’, and it requires this institution to hand over the profits from the note issue to the government.

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