The role of central banks. Now, first of all central banks are a relatively new institution. You know, in the 1900's there are only about 10 central banks throughout the world. By 1940, it grew to about 40. And today we're looking at close to 170, if not over 170, of these private state owned institutions. So their presence and significance has grown throughout the world over the last century for sure. Now, the most widely known and maybe the most important role of a central bank is to formulate monetary policy. So what does that mean? Well, a central bank's activities are directed towards influencing the quantity of money in the economy and the credit, the level of credit in the economy. And they can do that mainly because they are the supplier of the country's currency. And in fact, central banks are designated by law, in most cases, to be a monopoly in terms of supply and currency for that nation. And initially, they supplied money that could be converted into a pre-specified amount of a commodity, gold was usually used. You may have heard the term gold standard but today money's not converted into any type of commodity and is simply known as fiat money. And as economies moved into an economy based around fiat money, the importance of central banks as a supplier grew even more crucial. Now let's take a look at the stated mandates of two of the biggest central banks in the world, being the the US Federal Reserve System and the European Central Bank. First of all for the US, the Federal Reserve has been tasked to promote maximum employment, stable prices, and moderate long-term interest rates. These are the three economic goals that Congress has instructed the Federal Reserve to pursue in their monetary policy. And this is generally known as a dual mandate for the Fed for their monetary policy. Now, dual mandate doesn't exactly match the three goals listed there, but that's because stable prices, also known as inflation, and moderate long-term interest rates can be combined to be one mandate. And that's because long-term nominal rates are set with inflation expectations in mind. The European Central Bank, very similar, but their stated goal is to maintain price stability to safeguard the currency because price stability is essential for economic growth. And that's truly encompasses the role of monetary policy is to create an environment, an economic environment that's conducive to long-term growth. And again, because central banks have a monopoly on supplying currencies for a specific country, they are at the center of the economic life of that country. And because of that, they assume other roles, in addition to being the supplier and the guardian of value of their currencies. And we'll go through a couple more. Banks to banks and the government. The discount window, which many of you have probably heard of, is where banks can go to the Federal Reserve and borrow funds on a short term basis. And this helps relieve liquidity strains for individual banks or the banking system as a whole and provides a reliable backup source for funding. Lender of last resort. Now, because the central banks essentially have an unlimited capacity to print money, they're in a position to be able to supply funding to the banking system, and in some cases governments to cover any short term damaging shortfall. And that very fact gives depositors confidence to leave their money within these institutions and avoid potential bank runs. However during the recent financial crisis, we saw that this knowledge is not enough in some cases to always deter a bank run. And we saw many bank runs here in the US. And another important role is a regulator, both of the banking systems and the payment systems within it. Now, in some countries these roles are undertaken by the central bank alone. While in other country's essential bank jointly shares a responsibility with another body within the government and the US is one example of that.