eli5: what is central banking and how does it differ from other types of banking?


i always hear people talking about how america should switch from its central banking system but i am confused on what other types there are and why this system isn’t great

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The exact details of what a central bank does will depend on the country. The general idea though is that a central bank is the institution that manages the currency of the country, and often participates in regulating commercial banks.

Money is ultimately totally made up. The United States made up the U.S Dollar and therefore can make more of it whenever it wants. However we have wisely decided that giving that power to politicians is not a good move, so we give it to the central bank which is nominally independent.

Sometimes, the economy needs more cash to function properly. Sometimes, like right now, there’s too much cash and some needs to come out of the system. It’s up to the central bank to make those calls. Because it has the power to create money, it can never run out of cash to put in the system

Whether or not this is a “good” system is definitely not an objective fact though.

Central banking is where a singular entity serves as a lender of last resort, as well as a source and backer of currency. For obvious reasons, this tends to be something done by governments, rather than businesses, but also for obvious reasons the central bank tends to be dissociated from the political side of governments to make it rather difficult for people to simply vote for more money for themselves.

People who want to move away from central banking are the kinds of people who idolize the finance scene of the early 1800s, or who want to go back to commodity-backed currency (typically, gold). They also don’t seem to realize that the world is very different from the 1800s, and we can’t simply go back without, in effect, removing a few billion people from the international financial system.

They do this because they’re deeply uncomfortable with the idea that currency isn’t “backed” in anything, when in reality they just don’t understand that the backing of a currency is entirely dependent on the strength of the economy in which that particular currency has a government-enforced monopoly.