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After it successfully shifted to democracy, the reintegration of South Africa into the global markets in 1994 ensued about ten years of restricted access to capital markets and international money. After access to these markets were again granted, this led to the rise of capital inflows which posed problems that were similar to those experienced by other developing market economies. Although constraints were relaxed and opportunities for the Reserved Bank to regain its stock of foreign exchange reserves came about, the surge of capital inflows were short-lived because of the problems encountered. In January 1997, however, foreign capital flows in South Africa experienced a significant increase that led to the appreciation of the rand. As such, various macroeconomic policies and those of liberalization affected capital flows to South Africa. This chapter examines how these policies involve the Reserve Bank’s exchange rate policy which favours strong and almost overvalued currency in reducing inflation.

This chapter examines the cyclical behaviour of financing activities by Islamic banks as well as the cyclicality behaviour of fixed-rate financing. More specifically, it investigates the impact of aggregate economic activity fluctuations on Islamic bank lending. Analysis of panel data for the period 1998–2008 for twenty-four Islamic banks shows that strong GDP growth accelerates financing growth, a trend that is also observed in conventional banks. Financing is positively correlated with bank reserves, capital and loan loss provision, but weakly related to money supply. The chapter suggests that financing may be less pro-cyclical if Islamic banks would rely more on profit and risk sharing.

The first global financial crisis of the twenty-first century originated in the United States and spread around the world in September 2008. Like most other emerging economies, India also experienced an economic slowdown in 2008–2009 as export growth and domestic demand declined. The Reserve Bank of India (RBI) pursued two strategies to mitigate the impact of the financial crisis: it pumped liquidity into the banking system to ease the liquidity constraint and lowered the cost of bank loans to boost private demand. RBI succeeded in easing the liquidity constraint, but not in lowering lending rates despite sharp cuts in short-term policy rates. This chapter examines India's monetary policy accommodation during the global financial crisis and discusses why policy rate cuts did not result in a rapid decline of the banks' lending rates.

Competitive private banking is modeled in the presence of a central bank. We open with a discussion of questions our simple constructs can answer, noting why in our models the competitive banks’ profits are cycled back to the traders. We discuss the role of the central bank. Two simple models are sketched and solved. In both of them the objective of the corprate banks is to maximize monetary profit. The first model is a sell-all model with no reserve requirements for the banks, while the second has reserve requirements. Much of this chapter is devoted to a verbal discussion of the problems faced in varying the money supply over several periods and considering reserve ratio lending. Satisfactory formal mathematical models of reserve ratio banking cannot be built without adding a multiperiod structure. An adequate mathematization of commercial banking remains to be done.

Similar to large-scale industry, plantations, mines, and banking and insurance in India used relatively new forms of organization, were more or less global, and had to adapt in varying degrees to conditions of work throughout the country. Most of the plantations and mines were European-owned, but utilized Indian customary forms of hierarchy in dealing with labour. In banking, operations and performance were influenced by the nature of the Indian clients. Within plantations and mining, two specific businesses can be identified, namely tea and coal. This chapter describes the plantation, mining, and banking sectors in India, looking first at tea and coffee plantations before turning to banking and insurance. It also discusses the establishment of the Reserve Bank of India in 1935.

This chapter provides an overview of the Fed's policy structure. It addresses the following questions: Where does responsibility for monetary policy decisions reside in the Fed? What does the Federal Open Market Committee do and how is it organized? And how are other monetary policy instruments controlled? It also looks at how the politically appointed Board of Governors is chosen, how the Reserve Banks is governed, and the role of the Reserve Banks in the policy process. It also asks: should the regional structure of the Fed be modified for today's world? Should Reserve Bank presidents be politically appointed? Do member banks and directors of Federal Reserve Banks unduly profit or exert influence? It also examines what happens to the profits from Fed operations, the underlying connection between the government and the Fed, and how the government keeps tabs on the Fed. What does it mean in practice to say the Fed is independent?

Goldsmith banks achieved stability after the South Sea Bubble and grew without major problems for most of the eighteenth century. This chapter follows the growth of five goldsmith banks whose records have survived. They all show steady growth and high reserves to protect the banks from sudden withdrawals. The banks also had to maintain their growing organizations and the records of Hoare's Bank show how careful they were in managing staff as well as cash. The bank wanted employees of good character to forestall theft, and they used a variety of direct and indirect means, including what economists call “efficiency wages” to get good clerks. The chapter contains both statistics about bank growth in this placed period and examples that illustrate the bank's difficulties with customers and employees.

This chapter discusses Federal Reserve support of the Treasury market during World War I, which was founded on two statutory credit facilities: the original power of the Reserve Banks to discount, or purchase, loans made by member banks to their customers; and the subsequently added power of the Reserve Banks to lend to member banks. Reserve Bank discounts were limited to short-term loans “arising out of actual commercial transactions” and short-term loans to purchase or carry Treasury securities.

Banking services have been far more limited in Global South countries than in Global North countries due to resource-constrained infrastructure and inadequate investment and economic incentives in banking infrastructure and banking services. In Global South countries, people with disabilities are often “unbanked” and largely absent from national society. For Global South countries like India with resource-constrained infrastructure, the authors argue that mobile banking accessibility is best addressed through a combination of national accessibility laws and sector-specific regulations that include technology-neutral legal mandates that easily leverage the increase of accessibility in new information and communications technologies, such as speech-to-text or text-to-speech functionality. Regulatory agencies such as the Reserve Bank of India have been more responsive to local best practices and customer desires through prompt incorporation of national accessibility laws into sector-specific regulations. This chapter argues that regulatory agencies can further improve their regulations through mandates for accurate customer- and accessibility-focused metrics so that banks under their jurisdiction can measure and identify accessibility gaps that can be rapidly addressed to improve services for customers with disabilities.

This chapter examines how central bank cooperation became a multilateral enterprise during the opening weeks of the First World War. It was the Bank of England that took the initiative to establish a network of Allied central banks. The US Federal Reserve System was framed in 1913 and went into operation shortly after the war began in Europe. The Federal Reserve Bank of New York (FRBNY) also joined the Allied central bank network as soon as it could, well before the US government entered the war. In early 1915, backed by the FRBNY, US private banks began to finance the enormous military purchasing programs run by the British and French governments in the United States.

This chapter examines the issuers of monetary instruments. The goal here is to shed light on the business model of money creation, which for our purposes is synonymous with “banking” (or shadow banking, as the case may be). The chapter begins with a stylized account of the emergence of this business model. The account departs from the conventional textbook story in important ways. In particular, rather than depicting fractional-reserve banks as institutions that “take funds” from depositors and then “lend them out,” the account depicts banks more realistically as issuers of monetary instruments. (In this respect, John Maynard Keynes was an important precursor; it turns out that his insights on banking have not been absorbed by the mainstream academic literature.) The chapter then illustrates the instability of the banking business model through a simple (and novel) game-theoretic analysis. It argues that existing “toy game” accounts of banking and bank runs have chosen the wrong toy game—and that, from a conceptual standpoint, this mistake matters. The chapter concludes that it is doubtful that there is a market solution to the coordination problem that is inherent in the banking business model.

This chapter examines the issuers of monetary instruments. The goal here is to shed light on the business model of money creation, which for our purposes is synonymous with “banking” (or shadow banking, as the case may be). The chapter begins with a stylized account of the emergence of this business model. The account departs from the conventional textbook story in important ways. In particular, rather than depicting fractional-reserve banks as institutions that “take funds” from depositors and then “lend them out,” the account depicts banks more realistically as issuers of monetary instruments. (In this respect, John Maynard Keynes was an important precursor; it turns out that his insights on banking have not been absorbed by the mainstream academic literature.) The chapter then illustrates the instability of the banking business model through a simple (and novel) game-theoretic analysis. It argues that existing “toy game” accounts of banking and bank runs have chosen the wrong toy game—and that, from a conceptual standpoint, this mistake matters. The chapter concludes that it is doubtful that there is a market solution to the coordination problem that is inherent in the banking business model.

During the 18th century, the English erected the basic structure of modern money. Beginning with the Great Recoinage, the government committed itself to guarantee coin of a certain metal content. The guarantee was incompatible with the commodity money and that medium broke down over the century. According to the new architecture, the government supported the gold guinea and the Bank of England’s notes at the center. A wider tier of London banks created credit cleared in those media. A third tier of country banks, also dependent on the public anchor at the center, issued currency in the provinces. The modern design introduced fractional reserve banking, legalizing money creation by private banks under the English common law. That arrangement produced unprecedented amounts of currency; it also introduced tremendous fragilities into the system.

Chapter 1 introduces the unrivaled political and economic power of America’s Central Bank, the Federal Reserve System. The Federal Reserve Bank is a mutant institution of government. It has enjoyed anonymity from Americans for most of its history even though it wields unparalleled power on domestic policy that is largely free of the traditional system of checks and balances, which routinely grind down presidential and congressional proposals. The exceptionalism of Fed power stands out among the three branches of government within the United States and among democratic capitalist countries. Instead of studying the Federal Reserve as merely a state agency implementing technical monetary and interest rate policy, this book analyzes the Fed as a powerful political institution with its own interests (and market favorites), which its leaders pursue and which contribute to rising economic inequality and racial disparities. The Fed’s exceptional independent capacity and favoritism were spotlighted in its responses to the 2008–2009 Great Recession and the economic and financial turmoil created by the start of the coronavirus in 2020.

This chapter begins with a discussion of the Federal Reserve and the Federal Reserve Banking System. The Federal Reserve System was created by Congress under the Federal Reserve Act “to provide for the establishment of federal reserve banks, to furnish an elastic currency, to afford means of rediscounting commercial paper, to establish a more effective supervision of banking in the United States and for other purposes.” The Federal Reserve System comprises a central Board of Governors appointed by the president of the United States and confirmed by the Senate, and 12 regional Reserve banks. Monetary policy is set by the Federal Open Market Committee (FOMC). The remainder of the chapter covers monetary policy, quantitative easing, balance sheet normalization and the FOMC minutes.

William McChesney Martin Jr., who served as chairman of the Federal Reserve System from 1951 to 1970, is the son of Rebecca Woods and William McChesney Martin Sr. The elder Martin's father, Thomas L. Martin, was a co-owner of the McChesney and Martin Grain Company, which went bankrupt in 1894 due to a nationwide financial panic that often struck Americans in the second half of the nineteenth century. Thomas's bankruptcy convinced William McChesney Martin Sr. and his younger brother, Louis, to seek greener pastures in Missouri. Martin would become chairman of the board and agent of the St. Louis Federal Reserve Bank in 1914 at a time when the burning issue was the proposal for a National Reserve Association to strengthen the nation's banking system.

The global recession in 1980–82 led to a sharp downturn in Hong Kong's external trade. Together with the delayed adjustments in Hong Kong Association of Banks (HKAB) interest rates, these conditions explain the sharp downswing in Hong Kong's money growth in 1982. This chapter discusses three main avenues of approach to the problem of controlling monetary growth: (1) direct control of bank reserves; (2) managing the exchange rate; and (3) controlling interest rates.

This chapter evaluates the usage of regulatory risk constraints as an antidote to banking panics. In particular, it considers two forms of substantive risk constraint that are widely used in financial regulation: portfolio constraints and capital requirements. It finds that these techniques, standing alone, do not provide a satisfactory answer to the panic problem. The chapter demonstrates that, at some level of stringency, such risk constraints will compromise the banking system’s ability to assist the state in achieving its monetary objectives. Furthermore, there can be no assurance that any set of risk constraints that is compatible with the state’s monetary objectives will succeed in stabilizing banking. This analysis forms the basis for a critique of various “narrow banking” proposals, which continue to claim very prominent adherents in the economics profession. The chapter also finds problems with recent proposals to impose extremely high capital requirements on banking firms. Finally, the chapter identifies serious shortcomings in laissez-faire approaches to banking, including so-called “mutual fund banking” proposals.

This chapter evaluates the usage of regulatory risk constraints as an antidote to banking panics. In particular, it considers two forms of substantive risk constraint that are widely used in financial regulation: portfolio constraints and capital requirements. It finds that these techniques, standing alone, do not provide a satisfactory answer to the panic problem. The chapter demonstrates that, at some level of stringency, such risk constraints will compromise the banking system’s ability to assist the state in achieving its monetary objectives. Furthermore, there can be no assurance that any set of risk constraints that is compatible with the state’s monetary objectives will succeed in stabilizing banking. This analysis forms the basis for a critique of various “narrow banking” proposals, which continue to claim very prominent adherents in the economics profession. The chapter also finds problems with recent proposals to impose extremely high capital requirements on banking firms. Finally, the chapter identifies serious shortcomings in laissez-faire approaches to banking, including so-called “mutual fund banking” proposals.