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  • Published: 1 Sep 2017
  • DOI: 10.4324/9781138201521-HET1-1


  • Abstract
  • Theories of money and central banking
  • The first steps of central banking
  • The quantity theory approach to central banking: from ) to , 1823)
  • From Smith’s real bills theory (1776) to Thornton’s lender in last resort theory (1802)
  • Bagehot’s lender in last resort theory (1873): flight to credit versus flight to money
  • From Clearing House (1873) to ‘Federal Reserve’ (1913)
  • Conclusion
  • References

Central Banking


A central bank is a bank that can issue a debt instrument, a note or a deposit account, which is, de jure or de facto, a legal means of payment that is called ‘central bank money’. The central bank issues this debt by granting loans to other banks. The central bank is thus a multifunctional institution that has been built in stages and in close association with monetary controversies. There are three main approaches: first, the quantity theory approach to central banking of David Hume, David Ricardo and the Currency School; second, the ‘real bills’ doctrine introduced by Smith and the lender of last resort analysis outlined for the first time by Henry Thornton and the Banking School; third, the original developments of Walter Bagehot. We discuss the nature of the Clearing House Loans Certificates issued by US national banks before 1913, when, to prevent bank panics, the Federal Reserve System was created.