Modern central bank has evolved step by step

Establishment of central banks, in many cases, is the actual outcome of the politicians' acts which are quite different from their intentions. Most politicians in the 18th and 19th centuries did not plan to establish a central bank at all. They simply wanted to secure credit for the government on more favourable terms. The obvious way to get it (at least from their perspective) was to give some bank privileges or even monopoly power. Such a bank would be both willing and able to offer cheaper credit to the government in return.
The modern central bank has evolved step by step from these privileged banks. As Bagehot (1873, ch. 3) said: "Thus our one reserve system of banking was not deliberately founded upon definite reasons; it was the gradual consequence of many singular events, and of an accumulation of legal privileges on a single bank which has now been altered, and which no one would now defend."
To put it in a different way, a central bank is neither a product of a spontaneous evolution, nor an outcome of economic reasoning and planned governmental policy. It is a product of a 'political evolution'. Thus the origin of a central bank shows us that it is an organisation with quite different characteristics from organisations that have evolved spontaneously. It was given many privileges. Note-issue monopoly, power to set either monetary base or interest rates, and the right to regulate commercial banks can be mentioned as the most important ones. These privileges are granted and protected by the government. Without its power these could be neither established, nor preserved. In this sense, the central bank shares the part of the governmental power while it is, because of its banking origin (at least from the legal point of view), a separate organisation.
Most historians identify the following functions as being historically essential to the operations of central banks: (1) issuing the country's bank notes, (2) acting as the government's bank, (3) acting as the commercial banks' bank, (4) serving as a lender of last resort to the banking and even the financial system as a whole, (5) framing and enforcing monetary policy to manage foreign exchanges and stabilise price level, (6) conducting monetary policy to manage the overall level of economic activity and (7) allocating credit to promote national goals. This list is contentious with historians, with many claiming that one or the other of these is the sine qua non of central banking, and with most authorities ultimately throwing up their hands and declaring that maybe they cannot agree on how to define a central bank, but they know one when they see it (Capie 1999).
There are at least three other roles of central banks that are less considered. One is the distributive role of central bank policies. Central banks' policies can have differential impacts on different classes and groups: workers and capitalists, debtors and creditors, finance and industry, those operating in traded and non-traded goods. Linking this to the political economy of central banking, for example, bankers may oppose expansionary monetary policy because it might lower real interest rates and raise inflation, whereas workers and industrialists may prefer loose policy. A second less-known role is the political role of central banks. These days, this role is primarily discussed in the context of whether or not the central bank is independent of the government (as opposed to being integrated into the government) with a focus, primarily, on the impact of central bank's 'independence' on inflation. But the political role of central banks is much more multi-faceted than this. During the period of decolonisation following the Second World War, it was recognised that by promoting financial unification, central banks can play an important political role in helping establish national sovereignty and unity.
More recently, central banks which are relatively independent from government often represent and promote particular interests, constituencies and ideologies in the public and private spheres and thereby affect the colour and tenor of overall political debate over economic policy (Epstein, 1982). In recent times, these have often been aligned with those in financial circles, including external actors like the IMF, in promoting financial liberalisation, inflation targeting and the elimination of capital controls. By contrast, central banks that are more integrated into government are more likely to promote policies and procedures that are framed more closely by government priorities and reigning ideologies. A third underappreciated role is the allocative role: central bank policy can deliberately or inadvertently affect the profitability and access to credit of different industries. This developmental role is currently under-emphasised, relatively to the other two. In short, historically, central banks have played many and diverse roles: Central banks have accumulated these roles in fits and starts, some first as private, government connected banks, some as 'proper' public institutions. In any event, it is clear that the neo-liberal version of central banking has picked a highly truncated version of this list.
AGENTS OF DEVELOPMENT: This brings us finally to the question: Where is the role of the central bank as an agent of development? The term 'agent' implies that the central bank sees itself as trying to promote development. The current fashion is for central banks to take a narrow view of this: the only roles it can play as an agent of development is to create a context of 'macroeconomic stability', including financial stability through financial regulations. We find in history that many central banks have aspired to do much more than that, with a number of them even seeing themselves as 'agents of development' in the meaning of the term.
CENTRAL BANKING IN US, UK, EUROPE AND JAPAN:
Financing the state: Historians of development of financial institutions in general and central banks in particular increasingly emphasise the role of the state as being critical in the development of banking and central banking. Among the most important aspects is the impact of the state's need for finance. According to three of the most prominent historians of banking, the more one studies the historical origins and development of modern financial systems, the more it becomes apparent that at most of the critical points when financial systems changed, sometimes for the better, sometimes for the worse, the role of the state was of paramount importance.
 Long before private economic entities came to require financing on a scale beyond the capabilities of individual proprietors and partners, governments had needs for large-scale finance. Among the needs for which states needed financing were solidifying and extending their authority, unifying the disparate components of their states under a central administration, promoting state-led and state-financed economic development projects as means of increasing state power, and, perhaps most important of all, waging wars against other competing states. (Sylla et al. 1999: 1).
Among the ways states found to raise funds for these purposes, the most important included making arrangements with or creating special banks, typically by issuing a bank charter. In exchange for giving these banks monopoly over note issue and other privileges, the bank would promise to finance the state. Among other means, the bank would then generally take the debt issue of the government and distribute it among a decentralised group of lenders. This would facilitate the government's borrowing, and would also allow the lenders to create a 'lender's cartel' thereby improving their enforcement of debt repayment by the government (North and Weingast 1989). It is these banks that often evolved into central banks.
The initial creation of the Bank of England in 1694, in the midst of a major war with France, is, perhaps, the classic example of this role of central banking. In effect, a deal was struck: the state would get badly needed loans at a preferential rate in exchange for granting extensive legal privileges to a private banking corporation, a corporation that eventually became the Bank of England (Broz, 1997: 215). The role of the Bank of England in financing the Crown is commonly cited as an important factor in the war-making prowess of Britain and, particularly, in its success in the Napoleonic Wars. While the Bank of England is the best-known case of the fiscal role in central bank development, there are many other prominent examples: the first two banks of the United States in the nineteenth century, the Bank of France (1800), the National Bank of Belgium (1850), the Bank of Spain (1874) and the Reichsbank (1876) (Capie et al. 1994: 1-231; Broz 1997: ch. 6).
Central banks,  at their inception, were designed to finance the state. How ironic it is, then, that the current fashion in central banking is to severely limit the ability of central banks to carry out this function, especially when state capacities in developing countries have been eviscerated by years of structural adjustment.
CONTINENTAL EUROPEAN CENTRAL BANKS: Central banks in Europe were not only important lenders to the state, many of them were also very involved in lending to industry (Capie et al. 1999: 69; Cameron and Neal 2003). For example, the Bank of France, the Bank of the Netherlands, and the Bank of Italy all had widespread branch networks, and had very close relationships with industry. The Reichsbank of Germany also had important industrial customers. It is important to remember in this discussion that these 'central' banks were private banks with special government privileges. Hence, they were profit-oriented. But the fact that these were private institutions should not lead us to underestimate the 'public' role they played in helping to direct credit. Because these banks had special monopoly privileges from the government, including a monopoly on note issue and, in some cases, the requirement that the government and even other banks place reserves with them, these banks had subsidised access to credit. The fact that they, then, loaned this subsidised credit to industry, likely played an important role in the development of industry in these economies (Cameron and Neal 2003). Knodell reports that countries that had central banks during this period had, on average, lower nominal and real interest rates, than countries that did not (Knodell 2004). This resulted presumably from both the efficiencies of these institutions and also the subsidies created by the state in their formation and operations.
The point is that there was a government/central bank financial structure that was able to mobilise credit, both for state activities as we saw earlier, and also for industry. And, in many cases, this was accomplished while countries remained on the gold standard, perhaps with the help of 'gold devices' that served to some extent as exchange controls to give central banks some freedom to pursue domestic goals. And this was all happening during the so-called 'laissez-faire' period of European capitalism in the nineteenth century. One should not overestimate the extent to which these central banks were 'agents' of development in the sense of having a developmental 'vision' and intent. These central banks were private, not public. As a result, their interest was in making a profit. At times, this concern even conflicted with their activities as central banks. Still, however imperfectly, these central banks helped mobilise and allocate finance to industry and to government in the service of economic development, sometimes directed by a developmental vision from the state.

Jamaluddin Ahmed PhD FCA, a former President of the Institute of Chartered Accountants of Bangladesh (2010) and General Secretary of the Bangladesh Economic Association, is Chairman, Emerging Credit Rating Limited.
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