Banking Panics and the Origin of Central Banking

Abstract

INTRODUCTION Central banking is a twentieth-century phenomenon. According to Capie (1997), there were only 18 central banks at the beginning of the twentieth century. By 1950, there were 59 central banks, and by 1990 there were 161. At the beginning of the twentieth century, the U.S. Federal Reserve System had not yet been established; this would occur in 1914. The Bank of Canada came into being after the Great Depression, in 1934. Prior to the twentieth century, central banks were established as institutions with monopoly rights over money issuance. But if a critical element of central banking is the function of lender of last resort, then these institutions generally did not become central banks until later, typically during the twentieth century. For example, although the Bank of England was established in 1694, it did not behave as a lender of last resort until much later (Lovell 1957). Explicit government deposit insurance is an even later development than the lender-of-last-resort role of government central banks. In 1980, only 16 countries had explicit deposit insurance programs; by 1999, 68 countries had such programs (Garcia 1999; Demirguc-Kunt and Sobaci 2000). Deposit insurance was adopted in the United States in 1934 and in Canada in 1967. In Germany, deposit insurance remains a private scheme, set up and run by the banks themselves. As with central banking generally, not only is deposit insurance late in developing, but also there is substantial cross-sectional variation as to whether it is private or public.