CommentaryÂ
The view was generally held that centralization of banking would inevitably result in one of two alternatives: either complete government control, which meant politics in banking, or control by âWall Street,â which meant banking in politics.
â Paul Warburg, 1930
The idea of the central bank was born in the Middle Ages, when failures of the largest merchant banks of that era, founded by the Bardi and Peruzzi families, shocked the Italian City-State of Florence in 1343 and 1346. These financial crises gave birth to the idea that the commercial banking sector would need a âliquidity backstop,â i.e., an entity that could lend to private financial institutions in trouble. This was the original aim of central banks: to act as piggy banks for solvent commercial banks with temporary liquidity problems…