Webinar for law students, posted on the website of the Faculty of Law and Administration of Cardinal Stefan Wyszyński University in Warsaw (as teaching material used as part of a lecture on public finance and a monograph lecture on central banking).
Full text of the lecture:
Contemporary functions of the central bank in Poland
The lecture was prepared as part of the Central European Professors’ Network, coordinated by the Central European Academy.
The functions of modern central banks are closely related to their history and evolution. Since the establishment of the first issuing banks in the second half of the 17th century to the present times, the functions of the central bank have changed significantly, and we define them completely differently. Initially, they were associated primarily with issuing activities, granting loans to cover the needs of the state, and providing banking services to the state authorities.
At the turn of the 19th and 20th centuries, central banks operating in individual European countries had common features that were related to performing the issuing function and subordinating the issue of money to the rules of the gold currency system – as the basis for full convertibility of banknotes into full-value money. Common features of the functioning of this type of institutions also concerned the functions of the so-called government banker, related to the financing of state expenditures and the function of a lender in relation to commercial banks. The differences included the issue of involvement in direct lending to industry and individual sectors of the economy.
The creation of the Federal Reserve System in the United States in 1913 was important for the development of central banks. Since then, the central bank’s activities aimed at shaping the money supply have become particularly important. This was related to granting it regulatory, supervisory and control powers over banks. Then, the central bank was entrusted with foreign exchange services, shaping exchange rates and managing foreign exchange reserves. It should be added that the creation of the Federal Reserve System – taking into account the adopted institutional solutions and organization – was associated with the transition from classic issuing banking to central banking.
Returning to the issue of issuance and the changes that took place in this respect at various stages of the development of central banking, it should be noted that until World War I, in most capitalist countries, banknotes were fully exchangeable for gold. Therefore, at that time, the central bank’s tasks related to regulating monetary circulation as well as lending activities were only related to adjusting the issue to the size of gold reserves. The gold reserve at the disposal of the central bank was a determinant of the volume of issuance while maintaining the constant gold parity.
The outbreak of World War I resulted in a general suspension of convertibility, and changes in the global economy did not allow a return to the previous solutions. Instead of a system based on full convertibility into gold, a new system was introduced, the so-called gold exchange standard, which assumed the convertibility of paper money into gold or into the currencies of countries that retained the principles of convertibility of their money into gold. During this period, attention was also paid to the creation of new central banks of countries that had not yet decided to establish this type of institution – which also concerned many European countries. This was primarily related to the need to organize the international banking and financial system and the new so-called foreign exchange and gold system introduced in individual countries.
The changes that took place in the field of finance highlighted the importance of the institution of the central state bank. Its responsibilities also included the management of foreign reserves, relations between currencies and exchange rate stabilization. It should also be emphasized that this initiated changes in the field of monetary policy and the development of new methods and tools in this area. The above changes also had an immense impact on the shape and development of the international banking system. At that time, the need for international financial cooperation was recognized, and this was expressed, among others, by: the establishment of the International Bank for Settlements in Basel in 1930, which, being a joint-stock company of central banks in Europe and North America, was to perform – in accordance with the orders of the central banks of individual countries – settlement activities, credit operations and gold operations.
Another significant change in views on the functioning of the economy was brought by the Great Depression of 1929–1933. It was then noticed that there was a need to adopt the doctrine of state interventionism, instead of the doctrine of economic liberalism, which was to ensure the intervention of the state in situations indicating the need to eliminate or alleviate the deficiencies of the market mechanism. The mentioned changes also concerned the field of central banking. For the central bank institution, this involved a change in its basic functions and scope of activities.
First of all, more attention was paid to issues related to monetary policy, which began to be treated as an important element of economic policy. Its strong connection with the general economic policy of the state was emphasized. The central bank was also to take actions aimed at ensuring balance of payments balance and price stability. Ensuring financial security and stability of the banking system has also become its important function.
The catalogue of monetary policy implementation tools used by central banks was then significantly expanded. In particular, open market operations were widely used. In addition to market tools, administrative tools for implementing monetary policy were also used.
More and more attention was paid to issues related to the relations of the central bank of the state with the government and its independence in shaping and implementing monetary policy was emphasized.
After World War II – in addition to the tendency to shape the principles of operation of central banks in accordance with the general pattern, which was in turn related to the process of internationalization of banking, including central banking – there was also a clear division into two systems: the socialist and the capitalist.
The socialist system – also adopted in Poland – assumed a significant limitation of the role of the central bank of the state. The central bank was subordinated to the government and carried out all its functions in accordance with the assumptions of the central plan. Therefore, the concept of a central bank that had been shaped and adopted in Poland since the establishment in 1828 of the first institution of this type, which was Bank Polski (the Bank of Poland). The introduction of the indicated changes in the field of central banking was related to the adoption of the principles of a centrally managed economy.
Quite quickly, however, individual socialist countries initiated actions aimed at bringing the central banking model closer to that adopted by capitalist countries. These trends intensified in particular in the 1980s and 1990s. It was also related to changes in the economy, where the principles of the market economy began to be of leading importance.
In the following years, an increase in the importance of the institution of the central state bank could be observed. This was manifested in significant changes in the scope of its competences and basic functions, a significant impact on the development of the economy and the increasingly raised issue of independence in relations with other state bodies.
Nowadays, the functions of the central bank are much different, primarily regarding their scope. However, it should be noted that they do not go beyond those that were formed at individual stages of the operation and development of central banking, i.e.: the issuing bank, the state bank and the bank of banks. However, the basic objective of the modern central bank is to ensure the stability of the national currency.
The development of central banking in Poland is a very broad issue and has an almost 200-year-old tradition. The first institution of this type established in Poland in 1828 – Bank Polski (the Bank of Poland) – carried out tasks that went beyond the scope of the issuing function, which was the first to take shape in the development of these institutions. Central banking in Poland developed in close connection with historical conditions, which strongly determined the development of the classic functions of individual institutions performing the functions of a central bank. Even before Poland regained independence, Polska Krajowa Kasa Pożyczkowa (the Polish National Loan Fund) was established, which in 1918 came under Polish management and performed its functions until the establishment of the Bank of Poland in 1924 – the first institution of this type in independent Poland. With the outbreak of World War II, the occupation authorities established Bank Emisyjny w Polsce (the Issuing Bank in Poland). However, from January 1945 to the present, the functions of the central bank of the state have been performed by the National Bank of Poland, and the principles of its operation have changed many times during this time. Currently, the basis for its operation is defined by the Act of 1997, the provisions of which fully reflect the classic functions assigned to this type of institutions and the related catalog of tasks.
However, it should be noted that the role of the central bank is currently becoming more and more supranational – also in the context of adopting a common currency and Poland’s accession to the euro zone. This will mean significant changes for this institution, including art. 227 of the Constitution of the Republic of Poland and the provisions of individual banking acts – including the Act on the National Bank of Poland. The rules for implementing the basic objective of the National Bank of Poland and classic functions and tasks will change, including primarily those related to the issuance function and the shaping and implementation of monetary policy assumptions. Due to the transfer of certain competences to the European Central Bank, the competences of individual National Bank of Poland bodies will also change.
