Typography

In places like the U.S. and Europe, it is actually difficult—if not impossible—for a government to have its central bank pay for government programs. All government spending must be financed by issuing bonds to the public or collecting taxes. Canada, my home country, is an interesting counter-example. The financial relationship between the Federal government and the Bank of Canada—our central bank—is fairly permeable. The government has the authority to ask the Bank of Canada to directly fund a portion of its spending. This avenue is rarely taken, however. Justin Trudeau, our current Prime Minister, currently uses bonds and taxes to fund almost all of the Federal government's spending. Just one small and unknown government program is directly funded by the Bank of Canada: the prudential liquidity management plan , an old Stephen Harper-era program. (I wrote about it here and here ). The goal of the prudential liquidity plan is to provide a cash cushion that the Federal government...

50 SEK banknote issued by the Riksbank in 1960 "Do we need an eKrona?" asks Stefan Ingves, the Governor of the Riksbank, Sweden's central bank. The Riksbank is probably the central bank that has advanced the furthest in discussions surrounding the introduction of a central bank-issued digital currency (CBDC)—a new form of risk-free digital money for use by the public. Canada , New Zealand , Australia , the ECB , and China are also dissecting the idea, with more central banks to come in 2018. Sweden is approaching the issue from a unique angle, says Ingves. It is the only country in the world showing a consistent decline in cash and coin usage. I've written about this interesting pattern here , here , and here . Below is a chart: Ingves floats two theories. Either the Swedish public no longer wants central bank money, or alternatively they do want central bank money but not the type that is "made of pieces of paper," preferring instead an as-yet non-existen...

2010 Bank of England note signed by Andrew Bailey , former Chief Cashier of the Bank. A few years ago, Peter Stella and Åke Lönnberg conducted a study that classified national banknotes by the signatories on that note's face. They found some interesting results. Of the world's 177 banknotes with signatures (10 had no signature whatsoever), the majority (119) were signed by central bank officials only. Just four countries issue notes upon which the sole signature was that of an official in the finance ministry: Singapore, Bhutan, Samoa, and (drum roll) the United States. Stella and Lönnberg hypothesize that the signature(s) on a banknote indicate the degree to which the issuing central bank's is financially integrated with its government. The lack of a signature from a nation's finance ministry might be a symbol of a more independent relationship between the two, the central bank's balance sheet being somewhat hived off from the government's balance sheet and vi...

James Gillray, a popular caricaturist, drew the above cartoon in 1797. In it, England's Prime Minister William Pitt the Younger is fishing through the pockets of the Old Lady on Threadneedle Street -- the Bank of England -- for gold. At the time, England was in the middle of fighting the Napoleonic wars and its bills were piling up. According to its original 1694 charter, the Bank of England was prohibited from lending directly to the Treasury without the express authority of Parliament. Over the years, the Bank had adopted a compromise of sorts in which it provided the government with limited advances without Parliamentary approval, as long as those amounts did not exceed £50,000. In 1793 Pitt had this prohibition removed and in formalizing the Bank's lending policies, imposed no limit on the amounts that could be advanced by the Bank. Thenceforth Pitt made large and continuous appeals to the Bank for loans. Without the traditional Parliamentary check, there was little the Ban...

There's been a steady hum of articles that either worry about the Fed's potential QE-related capital losses or entirely discount them. Are central bank losses irrelevant or important? In this post I'll make the case that we should not discount losses as meaningless. Let's say that year over year a central bank operates at a loss. It is unable to fund ongoing operations from cashflow, and to compound problems, the central bank is already operating with a bare bones staff and can't slim down. One way to plug the funding gap is to get a capital injection. Who would do the injecting? The government, of course. This answer comes easily, since economists tend to build models that assume the consolidation of the government and its central bank. By tying them together with a nice red bow, the math and logic are made much simpler. Thus a central bank can easily run at a loss since it is really just a department within a larger consolidated entity. Let's adopt the per...

Most people don't realize that the central banks of Belgium, Japan, Greece, Switzerland, and South Africa are all publicly-traded. In times past, central clearinghouses were typically privately-owned while the issuance of bank-notes was the domain of competing banks. The fact that a few central banks still retain traces of their former private nature is a good reminder that centralized banking isn't necessarily the domain of the public sector. The Swiss National Bank , for instance, was founded in 1907 to take upon itself the issuance of national bank notes, hitherto provided by private banks. According to Hübscher and Kuhn ( pdf ), efforts to establish a wholly government-owned central bank were defeated in an 1897 national referendum. Opponents of the plan drew up an alternative proposal for a privately owned bank the structure of which would, according to Bordo, "not allow for state socialism or the public control of credit policy." One fifth of the new bank's ...