Central Banks Are Creatures of Financial Crises

Crowds gather near Wall Street on Oct. 24, 1929, the first day of the stock-market crash that preceded the Great Depression.

The Wall Street Journal - Since the beginning of the financial crisis in 2007, the Federal Reserve has come to the rescue so many times that even seasoned central-bank watchers have trouble keeping track.

It has injected more than $1 trillion into the financial system. It has backstopped corporate short-term lending. It has cut its overnight target rate from 5.25% in August 2007 to between zero and 0.25% -- the lowest level in the Fed's 95 years. Since it can't lower rates any more, it has begun effectively to print money in an attempt to bolster the economy.

But its actions don't seem so extraordinary from the perspective of three centuries of central-banking history. Central banks have been built on financial crises, with each major tremor expanding their role. And today's economic convulsions foreshadow more changes to come at the Fed.

If it wasn't for crises, central banks might not exist. In Britain, after years of civil war and the ouster of King James by William III in 1688, the country's public finances were in tatters, with tax collection falling short of what the government needed to pay its bills and lenders unsure about the stability of the government. The Bank of England, one of the first central banks and for centuries the most important one, was founded in 1694 to purchase government debt and curtail the funding crisis.http://online.wsj.com/article/SB123302236816918321.html?mod=article-outset-box