How Banks of Issue Became Central Banks

An explanation of the central bank’s balance sheet is given, with emphasis on the channels through which the bank “creates” money, and on the critical role of the bank’s gold reserve in a gold standard system. This system is the focal point of central banks’ operations over an extended period of time that ends in the interwar period of the twentieth century. The focus is on the central banks of the United Kingdom (the Bank of England has been for long a “role model” of central banking), of Italy, and of the United States. The dynamics of credit in ever enlarging banking systems is the main reason that explains the evolution of these institutions from “banks of issue” to modern “central banks”. By manoeuvring the amount and the cost of credit (the interest rate) they operate to achieve price and financial stability.