...I have to disagree with Greg Mankiw that we have no explanation of why we have central banks. Central banks as public entities really began with the Bank of England. Why did it exist? To provide loans to the government engaged in colonial expansion and war. Why did the first two Banks of the United States exist? To provide loans to a government that was new and in a war with a bigger power.

Each government, early in its development, found it desirable to expand without resort to taxation. Often that's due to war, but not always.

What's more interesting is the evolution of central banks after they stop being useful for raising funds for government spending. What do they do then? Who are their supporters? The bankers? The bond markets?

There are lots of answers in Mankiw's comments that sniff around this answer. But we've had these answers for a long time.

Labels: economics, Federal Reserve