A central bank (or central bank , central bank , central Reserve Bank , National Bank , State Bank , the monetary authority ; English central bank is a) national or supranational authority or institution , mostly from the state or from a union of states was built and sovereign rights in the field of money and Monetary policy is equipped.
To distinguish a central bank from the credit institutions , the latter are also referred to as commercial banks . There is often a legal relationship and always a business relationship between the central bank and commercial banks . Organizationally, there are central banks that are also allowed to do banking with anyone and central banks that are prohibited from doing so. Central banks, mostly state-owned and equipped with sovereign tasks of controlling the money , foreign exchange , capital and credit markets , then function as an extended arm of the state. They only intervene in the banking sector , so that the function of the lender of last resort for non-banks is left to other state institutions (see bailout ).
In all countries today the issue of banknotes, the transactions permitted by the central bank and their organization are regulated by law. Central banks are organized either as a legal person under public law or as a legal person under private law . In the latter case, the state is the sole or majority shareholder . If the state assigns sovereign monetary policy tasks to the central bank, it is also called the monetary authority . The central bank of a state is responsible for national monetary and currency policy, the central bank of an association of states (e.g. European Union ) for its member states ( EU member states ).
- middle age
In the Middle Ages, note banks took over the tasks of a central bank. The first is the Circulations- und Zettelbank in Genoa , founded in 1345 , only functional in 1407 under the name " Casa di San Giorgio " and liquidated in 1808. When Austria conquered Genoa in 1746 , the Genoese bank of notes got into trouble because the entire assets needed to cover the notes (banknotes) had been confiscated by the conquerors. The giro banks provided a public infrastructure for cashless international payments. In doing so, they should increase the efficiency of trading and ensure the stability of the value of money. The giro banks thus already fulfilled essential functions of modern central banks.
Opened on January 31, 1609, the Amsterdam Exchange Bank ( Dutch Amsterdamsche Wisselbank ) is considered the first urban exchange bank in Western Europe. It was followed in November 1656 by the Swedish Palmstruch Bank , which as a private bank issued the world's first paper money from July 16, 1661 . The Swedish Reichsbank was founded in September 1668 as a Zettelbank and is considered the oldest still existing central bank, which received the monopoly on the issue of banknotes in 1897 . On 2 March 1705, the establishment of the carried Banco di gyro d'affrancatione in Cologne , the first notes Bank of the German Reich, which the first payment in the form of Banco papers in Germany spent ( "Elector Palatine Gülich and Bergischer Bancozettel").
In the meantime, on July 27, 1694, a royal privilege in England ensured that a central bank could be founded in the legal form of a stock corporation under the name "The Governor and Company of the Bank of England". The central bank known today as the Bank of England was allowed to issue banknotes and conduct banking business. The "Peelsche Bankakt" ( English Bank Charter Act ) of July 1844 ensured that the Bank of England was divided into two departments, the "Issue Department" for banknote issuance and the "Banking Department" for banking transactions. The "Issue Department" had to cover all banknotes with gold . This so-called gold standard was introduced in Great Britain in 1873 and adopted in most European countries. The bank act forbade the establishment of new central banks.
- Founding period
For a long time, the Banque de France did not have the sole banknote privilege in France, but from 1803 only for Paris. It was not until March 15, 1848, when the banknotes of the Banque de France received a compulsory exchange rate for all of France, that the other banks were weakened, so that the Banque de France received a sole note privilege from 1863 onwards. The Bank of Finland was founded in March 1811 and was not given the right to issue notes until 1840.
In Hong Kong , the Hong Kong dollar has been issued in parallel by three commercial banks since 1872 ( Hong Kong and Shanghai Banking Corporation - HSBC, Standard Chartered Bank ) and (since 1994) the Bank of China , which is unusual and unique in the world. Since the Currency Ordinance of November 9, 1935, these banks received from the Government Authority Hong Kong Monetary Authority (HKMA) to legal tender banks (banks legal tender declared). The banknotes can differ in motif and color depending on their denomination , as each of the three banks can choose its own design. The HKMA is thus the actual (but not the formal) central bank in Hong Kong, which has delegated the banknote privilege to three commercial banks.
- Modern times
Over time, the amount of paper money significantly exceeded the amount of coins and precious metals (see Money Creation ). In 1914, in connection with the First World War, the gold cover requirement was lifted in many countries. After World War I, when unemployment and price instability played a major role, central banks began to place more emphasis on maintaining economic equilibrium . This was particularly evident during the economic crisis from 1929 to 1933. Due to the two world wars in the first half of the 20th century, the main task of the central banks during this period was to provide financial resources to cover war expenses. After the Second World War , the state's influence on the central banks increased. The objectives of the central banks have been expanded to include promoting employment and income growth. The central banks thus became a main instrument for supporting state goals, which is sometimes referred to as a loss of their autonomy . Some banks like the Reserve Bank of India have been nationalized. Others like the Federal Reserve System are considered institutionally independent but still have to report on business to the government.
In fact, until the late 1980s, no central bank had set a numerical inflation target to support price stability. In the 1990s, however, more and more central banks set themselves an explicit inflation target. Such a target inflation rate is prescribed by the respective government for some central banks (such as the Bank of England). At present there is no uniform handling of the central banks with regard to the numerical figureing of the price level stability.
Today central banks focus on three main goals that have evolved throughout history: price stability, economic equilibrium, and financial stability. Achieving these goals is currently quite difficult in view of the financial crisis since 2007 .
The second stage of monetary union began on January 1, 1994 with the establishment of the European Monetary Institute . The tasks of the institute were to strengthen the cooperation between the national central banks, to coordinate their monetary policy more closely and to carry out the preparatory work for the establishment of the European System of Central Banks (ESCB) for the implementation of a single monetary policy and for the creation of the single currency. The European Central Bank (ECB) became the successor to the European Monetary Institute on June 1, 1998, which had completed all tasks on time. In October 1998 the ECB set out its monetary policy strategy , which should bring stability and confidence in the ECB and the euro. The ECB took over the implementation of the single monetary policy with the beginning of the third and final stage on January 1, 1999. The last step towards the common currency was the introduction of the euro as legal tender on January 1, 2002 .
The Eurosystem stopped rediscounting bills of exchange in December 1998 , so that the commercial banks no longer have to refinance their discount business and have therefore abolished the discount credit . Bills of exchange have also not been eligible for central banks since January 2006 , so that the once important monetary policy measure of discount policy was no longer applicable . Payments by bill of exchange are now only occasionally used by non-banks .
Functions and tasks
The legal regulations governing central banking differ significantly from country to country. Nevertheless, it is possible to identify four basic central bank functions on the basis of the central bank balance sheet.
Holding the currency reserve
The currency reserves (item (1) of the central bank balance sheet) include the holdings of gold and gold receivables as well as convertible currencies (exchangeable currencies). Convertible currencies include receivables in foreign currencies in the form of cash , bank balances , securities and foreign credits minus foreign liabilities in foreign currencies (net foreign receivables).
Bank of banks
The central bank is at the top of a country's banking system and offers commercial banks the opportunity to obtain central bank money from their central bank in order to process payment transactions smoothly, and refinancing on the part of commercial banks. Position (2) of the central bank balance sheet shows this supply of central bank money to commercial banks. The opposite item to the refinancing transactions on the assets side is item (6) on the liabilities side of the central bank balance sheet, which represents the liabilities to the commercial banks . Behind this are deposits of the commercial banks in current accounts of the central bank, which are primarily minimum reserve balances and deposits of the commercial banks from deposit facilities, i.e. That is, commercial banks deposit their excess reserves with the central bank. The central bank is also supposed to act as the last refinancing agency ( lender of last resort ) to provide liquidity in economic crisis situations in order to ward off a loss of confidence in the credit system and the banking system . However, this task can result in a decrease in the private responsibility of commercial banks. Therefore, the provision of means of payment to cover the necessary requirements only takes place at high interest rates. However, the central bank is only supposed to act as the last refinancing agency if the commercial banks have suffered a banking crisis through no fault of their own.
Public Sector Bank
In addition to the commercial banks, the state can still borrow from the central bank. In many cases, the central bank assists the public sector in financing its functions by granting loans. This is reflected in position (3) of the central bank balance sheet. In the European Union, direct financing of public debt by the ESCB is prohibited ( TFEU ). This is to prevent excessive indebtedness and maintain monetary stability.
Furthermore, the central bank is involved in the public sector's cash management and in this sense acts as the state's house bank , i. In other words, the state holds its balances predominantly with the central bank. These deposits are booked under item (7) on the central bank balance sheet. In addition, the central bank buys securities as part of open market operations in order to control the money supply. These holdings of securities are listed under item (4) on the central bank balance sheet.
Position (5) of the central bank balance sheet is a special feature of the central bank and indicates its monopoly of notes . The central bank has sole power to issue banknotes and to put them into circulation (banknote privilege ). Hence the “central bank” got its name. The banknotes in circulation are on the liabilities side of the central bank balance sheet and make it clear that banknotes in the balance sheet sense represent claims on the central bank system. The task of maintaining the quality of cash is also derived from the banknote monopoly. That means weeding out counterfeit money and replacing damaged coins and banknotes.
Due to its monopoly on issuing banknotes, the central bank can never become illiquid domestically (in terms of its own currency) , as it can create the means of payment itself. Only in the foreign currency , there is a risk of insolvency , as the central bank does not have the production power of foreign currency.
For historical reasons, in many countries the right to mint coins does not lie with the central banks, but with the governments. For example in the Eurosystem . Here, the monetary policy independence of the ECB is preserved by the fact that the issuance of coins has to be approved by the ECB.
Central bank profit
In supplying the banks with central bank money, the central bank normally makes a profit . This is due to the fact that the central bank money issued to refinance the commercial banks on the liabilities side of the central bank balance sheet is regularly or without interest (e.g. cash), while the claims on the assets side usually bear interest. The resulting profit minus other costs is a form of seigniorage . Central bank profits usually go to the treasury , in some cases other groups are involved. In developed countries it only plays a minor role in public finances . In those whose ability to raise taxes is restricted, the share of seigniorage in the state's financing is higher. There are other definitions of seigniorage, such as monetary seigniorage. This increases with the rate at which the currency in circulation increases. Since this rate can be set by the central bank, this type of seigniorage can mobilize considerable financial resources in the event of war. For this, however, high inflation has to be accepted, which can undermine confidence in the respective currency. The different definitions of seigniorage are not congruent.
Financial market supervision
The extent to which a central bank performs the task of financial market supervision depends on the respective monetary system. In principle, central banks are not absolutely necessary for the exercise of this function, so that independent institutions can also exercise financial market supervision. Due to the financial crisis since 2007, financial market supervision will be more restrictive in the future and will also change institutionally. As part of this, the large central banks are reorganizing their tasks and areas of responsibility. In contrast to the first four functions, the possible function of financial market supervision is not derived from the central bank balance sheet.
Central Bank Instruments
In order to fulfill its tasks, the central bank has a number of instruments at its disposal, with the help of which it can influence economic development inside and outside the currency area. The articles on monetary policy and currency policy provide an overview of the various instruments . Monetary regulatory policy is divided into monetary policy and monetary policy instruments.
The tasks of the central banks to be performed within the framework of their sovereign rights usually extend to
- Issuing of banknotes (hence: central bank ) and coins , as a banknote privilege reserved exclusively for the central bank. Conversely, it is also responsible for withdrawing banknotes.
- Banking supervision : The commercial banks are supervised in a microprudential form , the financial markets in a macroprudential form. In addition, there is often an independent banking supervisory authority .
- Monetary Policy : A comprehensive monetary policy instruments ( instruments of central banks ) may be on the money market , the money supply by the central bank on the money supply and money demand are affected. The key interest rate serves the central banks as an action parameter for influencing the interest rate level .
- Currency policy : As the “guardian of the currency”, the central bank with its currency monopoly influences the foreign exchange market with the help of foreign exchange market interventions in the supply or demand of foreign exchange . By virtue of its sovereign activity, it can issue foreign exchange restrictions, for example in the form of a transfer stop.
Monetary policy is understood to be a policy that supports general economic policy by controlling the supply of money and, indirectly, the demand for money and the demand for credit . The supply of money can be controlled by lending central bank money against collateral . Various instruments are available for this, such as securities repurchase agreements , Lombard policy or marginal lending . There are also other instruments, such as minimum reserve or open market policy, that influence the supply of money. The demand for money and credit is primarily controlled by interest rate policy.
Interest rate policy
The interest rate policy includes all the measures taken by the central bank to influence the general level of interest rates . For borrowers, interest represents the cost of capital and, by changing the interest rates calculated between the central bank and commercial banks, the central bank wants to influence the demand for credit for corporate investment loans or consumer credit for private households as well as the state's demand for credit. If the central bank increases z. B. Their interest rates to reduce price increases in the boom , the commercial banks will also increase the interest that they charge their customers. Higher interest rates result in lower demand for loans for investments, for example, as companies' profit prospects decrease. The result is a reduced demand for credit and the price level stabilizes. Interest rate hikes have a similar effect on household demand for consumer goods. Falling interest rates then have the opposite effect and lead to a higher supply of credit .
- With the Lombard policy, the central bank grants a Lombard loan against pledging of eligible collateral ( government bonds and other marketable securities ) on the part of the credit institutions and against payment of a loan interest (the Lombard rate ).
- standing facilities
- The standing facilities are used to create overnight liquidity ( marginal lending facility ) or to withdraw it ( deposit facility ). They are offered in unlimited amounts and send signals regarding the general course of a central bank's monetary policy. Since they are permanently available to the banks, they set the limits of the money market rates for overnight money. The marginal lending facility also serves to ensure the liquidity of commercial banks.
Open market policy
- The open market operations are monetary policy instruments of the central banks and enable them to pursue both an expansive and a restrictive monetary policy. In the tight monetary policy, the central bank withdraws the markets of central bank money by selling securities in the open market. The expansionary monetary policy is the opposite. The central bank returns central bank money to the market by buying securities. The open market operations are one of the refinancing instruments of the central banks. Open market operations are often carried out as securities repurchase agreements.
- The minimum reserve policy is, in contrast to z. B. Open market operations, not a refinancing instrument. Your job is just the opposite. Minimum reserve means that the commercial banks have to deposit a compulsory deposit in central bank money in the amount of the minimum reserve ratio, which determines the ratio between deposits and minimum reserves, with the central bank. The amount of the minimum reserve to be paid depends on the deposits . If someone - whether a private person or a company - brings money into the bank in order to invest this money in a saving manner, the bank is obliged to deposit part of this money with the central bank.
The subject of monetary policy is the regulation of the relationship between the national economy's own currency and the currencies of other currency areas. The choice of monetary policy depends on the exchange rate system into which the currency is tied. In a fixed exchange rate system , regular intervention is required. Once a currency board has been installed, the central bank no longer has any freedom in its monetary policy.
- Forex market intervention
- In the case of foreign exchange market intervention , the central bank acts as a buyer or supplier of foreign currency in order to achieve the exchange rate it is aiming for. The ability to intervene in the foreign exchange market depends on the existence of sufficient currency reserves. In a currency system with fixed exchange rates as agreed , the central bank has an obligation to intervene. This means that it has to intervene as soon as the exchange rate on the currency exchange has reached a certain point of intervention . This system is mandatory for fixed exchange rates, but not for free exchange rates.
- Interest rate policy
- The exchange rate can also be influenced by the interest rate policy . A higher interest rate makes the currency more attractive on the international capital markets and leads to an appreciation , lower interest rates correspondingly to devaluations .
- Verbal market interventions
- Since central banks are usually able to exert a fundamental influence on exchange rates, a public declaration is often sufficient to move rates in the desired direction. On the market, the likelihood of using other instruments is then assessed to be higher and priced in accordingly.
A central bank holds the currency reserves of a currency area , it regulates the money supply , influences the creation of money by lending the commercial banks and refinances them and the state. In order to fulfill its goals and tasks, the central bank has a number of instruments at its disposal, which the various central banks use to varying degrees. A coordination of several central banks on a synchronous monetary and currency policy such as between the ECB and the Federal Reserve System is only in the beginning.
The degree of dependency of the central banks on other state institutions depends on the economic and political ties of the respective country. Since there are national and supranational currency areas , central banks can be found at the national level ( Federal Reserve System , Swiss National Bank , Bank of England etc.) and supranational (e.g. European Central Bank or BIS ).
Instrument dependence ( English instrument dependence ), says the extent to which the government influences the central bank in achieving objectives. If the central bank is dependent on instructions in the choice of its monetary policy instruments, i.e. the government decides which instruments are used to achieve monetary stability, this is instrument dependency. If the central bank can choose its monetary policy instruments without being influenced, it acts independently of the instruments.
As part of monetary policy, the Eurosystem, as an association of all national central banks of the EU member states, primarily pursues the goal of price level stability ( TFEU ). To ensure this in the medium term, a “two-pillar concept” is being pursued. Since inflation is caused by excessive growth in the money supply - measured by the growth in production - the ECB publishes an annual reference value as a benchmark for all economic agents . The second pillar consists of the inflation forecast published twice a year.(2 )
In the statutes of many countries, the main goal of monetary policy is to maintain price level and monetary stability . In addition (or subordinate in the case of the ECB ), further macroeconomic goals such as economic growth , economic or exchange rate stability are to be pursued.
Often other macroeconomic goals of monetary policy such as economic growth , economic or exchange rate stability are described in the respective central bank statutes. In countries with a pegged currency , the central banks are obliged to keep the rate of the currency medium stable by buying and selling the same.
The following table shows examples of the statutory goals of some of the major central banks:
|European Central Bank
|Bank of England
|Federal Reserve System (USA)
|Bank of Japan
- Debate about the goals of the central banks
What goals a central bank should pursue has long been a point of contention in the economic debate. The focus was on the question of whether there can be an exchange relationship between employment and inflation as shown in the Phillips curve . Keynesians held the view that monetary policy can also influence growth and employment in the long term, while monetarists assume that monetary policy cannot have such effects and should therefore limit itself to ensuring price stability. As a result of the experience with stagflation in the 1970s, the monetarist view has largely prevailed, even if Keynesian voices are never completely silent. However, it is undisputed that an expansionary monetary policy leads to higher output and higher employment in the short term .
Target dependency ( English goal dependence ) means that the government can affect the objectives of the Central Bank. If, for example, price stability is prescribed by law as the central bank's primary goal, there is a target dependency. If, on the other hand, the central bank can determine its tasks and goals itself, the central bank acts independently of goals.
The independence of a central bank is often impaired by the diverse economic and political interdependencies of an economic system. A central bank can be independent of instructions from the government (such as the Deutsche Bundesbank or the American Federal Reserve System), but it can also be bound by instructions from the state government (such as the Banque de France, the Banca d'Italia or the People's Bank of China ). If a central bank is dependent on instructions from the government, the state is actually responsible for monetary policy.
The independence of the central bank serves to prevent the government from pursuing an overly expansionary monetary policy. Governments tend to adopt expansionary monetary policies because they can get better economic data in the short term and thus gain more approval. The government is usually not blamed for the negative consequences of an expansionary monetary policy. Some monetary effects of different institutional arrangements of the central banks, especially with regard to inflation , are empirically understandable. If the central bank profit is to contribute significantly to the financing of the state, it is helpful to subordinate the central bank directly to the government.
With regard to the degree of (in) dependence of a central bank on the government, a wide range of structures can be observed internationally. The reasons for this are on the one hand the different definitions of independence , on the other hand the historical experience of the respective countries with their central banks. The supranational ECB plays a special role in this: its primary goal is price level stability. Since this task is prescribed by the Maastricht Treaty , the ECB is dependent on goals. With regard to the realization of this goal through the use of various monetary policy instruments, however, it is independent of instructions. i.e., it is instrument-independent.
In Germany the word “central bank” is a legal term . The German Bundesbank , according to of the Bundesbank Act a Federal legal entity under public law , whose share capital in the hands of the Federal Republic of Germany is. It is a supreme federal authority ( BBankG) that is not considered a credit institution ( (1) no. 1 KWG ) and is independent of instructions from the federal government ( BBankG). It is considered a state-independent institution under public law because it has no compulsory membership and is therefore not a corporation under public law .
According to European System of Central Banks ( Eurosystem ). It participates in the fulfillment of its tasks with the primary goal of price stability, holds and manages the currency reserves of the Federal Republic, ensures the bank-based processing of domestic and international payment transactions and contributes to the stability of the payment and clearing systems . It also performs the tasks assigned to it in accordance with the BBankG or other legal provisions. Its only body is the board of directors ( BBankG) after the Central Bank Council was abolished in April 2002 .BBankG, as the central bank of the Federal Republic of Germany, it is an integral part of the
The most important international central banks apart from the German Bundesbank are:
|National Bank of Austria
|Swiss National Bank
|Joint stock company (Switzerland)
|Banco Central do Brasil
|People's Republic of China
|Central Bank of China
|Banque de France
|Public company (France)
|Bank of England
|Hong Kong Monetary Authority
|Institute of public right
|Bank of Japan
|Bank of Canada
|Federal Reserve System
|Public Company (United States)
Central banks in central administrative economies
In central administration economies , the mono-banking system usually took on the functions of a central bank. In accordance with socialist programs, money and credit were largely monopolized. A mono-banking system consists of a central bank called the state bank, which is usually directly subordinate to the Ministry of Finance and the highest planning authorities, and a few commercial banks that are directly subordinate to it. The state-owned companies were provided with clearing money and households with cash through the monobank system . The monopoly banking system also took on tasks that went beyond those of a central bank. It was responsible for distributing the credit funds provided for by the central plan to the companies, handling international payment transactions including foreign trade finance and foreign exchange transactions, and collecting the savings of the population and forwarding them to the Ministry of Finance.
The central banks implement their monetary policy objectives directly by concluding transactions with the commercial banks on the money, capital, credit or foreign exchange markets. These transactions are called "instruments", "instruments" or "measures" and are for the most part - with the exception of the minimum reserve policy - provided without any obligation to contract for the commercial banks. Indirectly, moral appeals - also to all other economic subjects - serve to implement the goals. The instruments must have three properties:
- Flexible : every measure must be able to be implemented at short notice - depending on the market development - without any major delay effect . An increase in interest rates, for example, can be countered immediately by lowering the minimum reserves and vice versa.
- Repeatable : Measures must be able to be used repeatedly at any time. Measures such as the open market policy can be repeated indefinitely, such as the Eurosystem's securities purchase programs .
- Reversible : the opposite of a measure must also be possible. A spot transaction in foreign currency is possible when buying or selling a repurchase agreement is a repurchase agreement undone.
Measures based on voluntary contracting by commercial banks with their central bank are more likely to have a restrictive monetary policy than an expansive one. The only measure of the minimum reserve policy based on the obligation to contract has an immediate effect both restrictive and expansionary.
According to Ulrich Bindseil , the usual understanding of central banks should be checked, because the term is considered difficult to define, the Swedish Reichsbank and the Bank of England are the first real central banks, and early central banks had no mandate for society as a whole and no public function, the early banks the central bank lacked the understanding that they had developed slowly from the commercial banks, and that the central banks' main characteristic of being the lender of last resort developed very late. In contrast to this, Bindseil sees three characteristic properties of all central banks: issuing money, state monopoly, goals for society as a whole ( English public policy ).
- Criticism of the central bank concept
Critics believe that the current mixed-money banking system, in which commercial banks and a central bank are involved, lead to worse results in terms of monetary stability and the inflation rate than a model of market-based money creation . According to the market economy model of the multi-banking system without a central bank, on the other hand, there is a system-based control of money creation. The current restrictions by
- Cash reserves of the commercial bank, which must expect a disbursement of the granted loans and which must make this disbursement in the form of the legal tender, since other currencies are displaced from the market according to Gresham's law , and
- Minimum reserve , i.e. the amount of central bank money that the central bank prescribes for commercial banks depending on their lending,
In 1994, economist Kevin Dowd argued that without government intervention, the financial system would be more stable than it is today. Contrary to popular belief, it is inherently stable and does not need a lender of last resort or a state deposit insurance system. One source of instability in the current system is that central banks are not receiving enough signals to establish policies that work, and so policies that are actually implemented have detrimental effects. As an example, he cites the Federal Reserve System , which failed to fulfill its role as the lender of last resort in the 1930s.
In his 1949 work Human Action , Ludwig von Mises took the view that the cyclical ups and downs of the economy, and with them the emergence of depressions , are the result of the lowering of the interest rate due to the expansion of credit on the part of the banks. This is known as overinvestment theory . The additional loans that are thus available are attempting to artificially stimulate the economy. Von Mises sees the danger that this will cause credit to flow into industries and businesses that appeared unprofitable before the interest rate cut. He believes that the economy that has been stimulated in this way must collapse sooner or later. The credit expansion policy of banks is thus a misdirection of corporate activity . Von Mises comes to the conclusion that periodically recurring economic crises can only be prevented if one refrained from stimulating the economy through banking policy. Rather, the rate of interest should be regulated by the market mechanism.
Friedrich August von Hayek , like Mises a representative of the Austrian School , saw the reason for the instability of the economy in 1976 in the fact that an expansive monetary policy leads to investments in projects that are unprofitable in themselves and that sooner or later have to be cleaned up. In a later creative period he identified the reason for the expansionary monetary policy that the availability of money is not determined by market developments , but rather regulated by the central banks. Hayek calls for the tasks of the central banks to be put into private hands and decentralized. Such a system is known as free banking . The interest rate, like any other price, would then be determined by the demand for and supply of money in the market. Even among the laissez-faire advocates, only a minority is in favor of realizing free banking.
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