The institutional evolution of central banks

Abstract

This article contributes to the literature on central banks’ institutional rationale and evolution by analyzing the early development of the Bank of England as a case study. The history of the Bank is scrutinized under the framework of entangled political economy, revealing its origins in a process of bank and political bargains. The account clarifies the process by which the political and economic order becomes increasingly intertwined throughout the banking system, via political bargains under incomplete contracts. The analysis suggests that entanglement allows governments and non-profit organizations to transmit some of their features to banking organizations in exchange for financial benefits. Transmitting nonmarket characteristics through recurrent bargains leads a for-profit bank to gradually transform into a central bank. The article proposes an alternative rationale for the unintended emergence of central banks, providing evidence in favor of their politically oriented development, rather than their alleged intrinsic nature.