Banco de España: History and Central Bank Functions
History and Functions of the Banco de España
In all modern nations, the central bank is an institution of notable importance for a country’s economic and social life. However, its functions are not widely known by the public.
There is a set of functions currently common to all central banks. A central bank is a public institution that issues and administers a country’s currency with the fundamental aim of maintaining economic stability and controlling inflation. Furthermore, it is the Treasury’s financial agent, acts as the bankers’ bank, and controls the country’s monetary, credit, and foreign exchange systems. Another function common to most central banks was maintaining the stability of the financial system, in which capacity the central bank performs regulatory and supervisory functions.
In Spain, the existence of the central bank dates back to 1782, when the Banco de San Carlos was created. It was the third oldest central bank in Europe (at that time, only the central banks of Sweden and England existed).
The Banco de San Carlos (1782-1829)
The creation of a central bank was the idea of the French financier Francisco Cabarrús, linked to the support Spain provided to the 13 US colonies during the American Revolutionary War. Spain declared war on Britain in 1779. These events entailed sizeable expenditure for Spain; to finance it, resort was made to successive public debt issues in the form of bonds called vales reales. To attract investors, Cabarrús proposed creating a national bank to manage a secondary market, provide liquidity to the bondholders, and thus enable their convertibility into cash at any time. He convinced the then Minister of Finance, the Count of Floridablanca, and the Banco de San Carlos came into being as a result.
Functions
- Facilitate the circulation of the vales reales and convert them into cash at the request of their holders.
- Make Crown payments abroad.
- Provide supplies and uniforms to the Spanish Army and Navy.
- Provide credit for trade and industry, and combat usury.
In exchange, the bank received the exclusive privilege to export gold and silver, and the non-exclusive right to issue banknotes (bond certificates) that did not pay interest but were convertible on demand.
The bank was established as a private company whose capital was divided into shares. Shareholders were entitled to receive dividends and were convened at shareholders’ meetings. A Board comprising four directors (two chosen by the government from the shareholders) was in charge of management.
For the first 10-12 years, much of the Bank’s profit arose from the privilege of exporting precious metals, but problems began to arise owing to:
- Difficulties in managing supplies to the Army.
- The diminished attractiveness of bond certificates (banknotes) due to their high denomination, which hindered circulation.
- Frequent confrontations with finance ministers, with whom it had to maintain a close relationship.