1836, United Kingdom.

The directors of the Bank of England received an anonymous letter that made them spill their tea. The sender claimed he could enter the vault where the Crown gold was stored, and offered to prove it that very night. The directors, convinced it was a prank or an extortionist, decided to go anyway, more out of curiosity than fear.

They went down to the vault. They waited. And at midnight, a floor slab lifted from below, and a man covered in grime emerged from the opening. He was a sewer worker who, during repairs in the London sewers, had discovered that a forgotten tunnel connected to the most guarded basement in the empire.

The man could have taken all the gold in the known world, but he didn't take a single penny, and the bank, grateful (and probably terrified), gave him a reward of 800 pounds, a fortune for the time. Approximately 138,000 euros at current exchange rates.

I tell this story because it illustrates something that few people understand: central banks are very strange institutions. They guard the nations' gold, decide how much money circulates in your country, can bring down a government with a single action, and yet, most people wouldn't be able to explain what they do or what they are for.

Let's fix that.

Illustration of the worker entering the Bank of England in 1836

What is a central bank?

The first surprising thing when looking at the map: each country calls its central bank by a different name, and the name sometimes says more about the national character than about the institution itself.

In Spain, there is the Bank of Spain, founded in 1782 as the National Bank of San Carlos, a direct and unadorned name. The United States, always so fond of wrapping power in euphemisms, calls it the Federal Reserve System (the famous Fed), which doesn't even contain the word "bank." Germany named its own Bundesbank, "federal bank," with that Germanic verbal economy. In the United Kingdom, there's the Bank of England, without adjectives, because when you're the first (founded in 1694), you don't need a surname. France has the Banque de France, Italy the Banca d'Italia, and Japan the Nippon Ginkō, which literally translates to "Bank of Japan," plain and simple.

Then there are the countries that complicated things a bit more. Switzerland has the Schweizerische Nationalbank (or Banque Nationale Suisse, or Banca Nazionale Svizzera, depending on which canton you ask). Brazil uses Banco Central do Brasil. Mexico, the Banco de México (Banxico for friends). And in Peru, Banco Central de Reserva del Perú.

The most peculiar case is the European Central Bank, a creature without its own country that manages the monetary policy of twenty nations at once from a glass tower in Frankfurt.

Unique in history.

European Central Bank. Frankfurt

National functions of central banks

Within its borders, a central bank basically has three jobs, and all of them are enormous.

• The first is to issue currency. Every banknote in your wallet literally came from a printing press controlled by your country's central bank (or the eurozone, if you're reading this from Spain, Germany, or Portugal). No one else can legally do it. If you print a 50-euro bill at home, you're a counterfeiter. If the European Central Bank prints it, it's monetary policy.

• The second is to set interest rates, which is the tool they use to cool or heat up the economy. When prices rise too much (inflation), the central bank raises rates so that borrowing money becomes expensive, people consume less, and prices slow down. When the economy is in a slump, it lowers rates so that everyone rushes to borrow money, buy houses, and set up businesses. It's a gigantic thermostat, and every time someone like Jerome Powell (Fed chair) or Christine Lagarde (ECB president) utters a sentence at a press conference, stock markets around the world tremble.

• The third job is to supervise commercial banks, the ones where you keep your salary. The central bank is the boss of bosses. It imposes rules on them, requires them to maintain reserves, and if one of them misbehaves or is about to collapse, it decides whether to bail it out or let it fail. In 2008, that decision was literally the difference between Lehman Brothers (they let it fail, global crisis) and AIG (they rescued it, collapse averted).
  

International functions of central banks

Externally, central banks play a completely different league. They manage the country's international reserves, those enormous amounts of foreign currency (especially dollars), gold, and bonds that serve as a cushion against the rest of the world. China, for example, has about three trillion dollars in reserves, a figure so absurd that it's hard to visualize. Spain has around 90 billion.

They also intervene in foreign exchange markets when the exchange rate goes haywire. If the Japanese yen plummets, the Bank of Japan can start buying yen with its dollar reserves to stop the fall. It's a cannon battle, and sometimes they win, and sometimes they lose with a tremendous roar, as we will see shortly.

And they cooperate with other central banks through organizations such as the Bank for International Settlements (BIS) in Basel, a kind of very private club where central bankers from around the world meet once a month behind closed doors to decide, among themselves, things that affect the entire planet. Yes, it exists. Yes, it is as opaque as it sounds.

Do all central banks operate in the same way?

Here comes a surprise for many: the world's central banks are not identical twins; they are distant cousins with very distinct personalities.

The European Central Bank has an almost obsessive mandate: to keep inflation close to 2%. Period. Don't ask it to worry about employment or growth, because its founding treaty forbids it from having other objectives (a direct inheritance from the German trauma with the hyperinflation of the 1920s).

The US Federal Reserve, on the other hand, has a dual mandate: to control inflation and maximize employment. This forces it to perform impossible balancing acts when the two goals pull in opposite directions, which is almost always.

The People's Bank of China is something entirely different. Formally, it is a central bank, but it is subordinate to the Communist Party and executes policies that have nothing to do with those of its Western counterparts. It fixes the yuan's exchange rate almost by hand, controls capital flows with an iron fist, and functions as another tool of the state, not as an independent institution.

And then there are the extreme cases, central banks that have lost control of their currencies and function as firefighters in a permanently burning house. Argentina, Turkey, Venezuela, Zimbabwe. There, the central bank doesn't set the pace; it suffers it.

Stories the textbooks don't tell

This is where things get interesting, because central banks have starred in episodes that seem straight out of a Netflix script.

The day Switzerland made the planet tremble. On January 15, 2015, the Swiss National Bank unexpectedly removed the cap that pegged the Swiss franc to the euro. The franc shot up 30% in a matter of minutes. Brokers worldwide went bankrupt live, fortunes evaporated, and thousands of people were ruined. All because of one sentence from an institution that no one outside of Zurich knew exactly what it did.

Zimbabwe and the 100 trillion dollar banknotes. In 2008, inflation in Zimbabwe reached 89,700,000,000,000,000,000,000% annually. Yes, you read that right. The Reserve Bank of Zimbabwe even issued a one hundred trillion Zimbabwean dollar banknote that, at the time, wasn't enough to buy a loaf of bread. Today, that banknote sells as a souvenir on Amazon for about 15 US dollars, and is infinitely more valuable as a curiosity than as currency.

The most absurd vault in the world. Beneath the Federal Reserve Bank of New York building in Manhattan, twenty-five meters underground, there is a vault containing approximately 5% of all the gold ever mined in human history. About 6,000 tons. Not all of it belongs to the United States: dozens of countries store their gold there because they trust Wall Street's foundations more than their own. When Germany requested to repatriate some of its gold a few years ago, the operation lasted seven years and generated tremendous controversy.

When a central banker bankrupts his own bank. In 1995, a single trader named Nick Leeson, operating from an office in Singapore, brought down Barings Bank, England's oldest institution (founded in 1762, it financed the Napoleonic Wars). The Bank of England, which had saved Barings from previous bankruptcies, this time decided to let it fail. One of the world's most respected institutions disappeared over a weekend, bought for a symbolic euro.

Urban legends. For decades, suspicions circulated that some of the gold held in certain European central banks had been lent, sold, or simply lost in opaque operations. Public audits of gold are very rare, almost taboo. The Bank of England, for example, keeps some 400,000 gold bars in its vault, but access to verify it is so restricted that entire conspiracy theories have been built on this secrecy.

2008. 100 trillion Zimbabwean dollar banknote

Central banks and stock exchanges

Officially, central banks do not manage stock exchanges (that's the job of regulators like CNMV, SEC, FCA) nor do they decide which companies are listed. But in practice, they influence stock markets so much that every time Jerome Powell sneezes, Wall Street opens an umbrella.

I'll explain the mechanisms by which they do this, from the most subtle to the most blatant.

The classic lever: interest rates

This is the indirect but brutal channel. When a central bank lowers interest rates, it is doing three things at once that push the stock market up.

• First, borrowing money becomes cheaper, so companies invest more, grow more, and their future profits increase.

• Second, bonds (public debt) yield less, which causes investors to move their money into stocks in search of returns.

• And third, the mathematical calculation used to value a company (discounting its future profits) yields higher figures when rates are low.

Result: every time the ECB or the Fed announce a rate cut, stock markets rise almost by Pavlovian reflex. And vice versa, a hike causes them to plummet.

That's why Fed meeting days (the famous "FOMC meetings") are major events for traders. The sentence Powell utters at 8:30 PM Spanish time can move trillions in a matter of minutes.

The direct lever: buying assets in person (QE)

This is where things get serious. Since the 2008 crisis, central banks discovered a new tool called Quantitative Easing or quantitative expansion.

It basically consists of the central bank, instead of just moving rates, directly entering financial markets and buying assets with newly created money. In most cases, they buy government bonds and corporate bonds. The ECB, the Fed, and the Bank of England have been doing this since 2008, with moments of brutal acceleration during the pandemic, when they printed figures that would make any Marshall Plan look ridiculous.

The effect on stock markets is indirect but devastating. By flooding the system with liquidity, that money eventually filters into all markets, including stocks. The correlation between central bank balance sheets and stock market indices over the last decade is almost obscenely perfect.

Many economists openly speak of the "Fed put," an idea according to which investors act with the conviction that, if stock markets fall too much, the Fed will intervene to save them. And indeed, every time things have gotten ugly (2008, 2018, March 2020), the Fed has lowered rates or launched new buying programs. This expectation creates an artificial psychological floor that pushes investors to take on more risk than they would in a market without a safety net.

And now for the good part: when the central bank directly buys shares

Some central banks have crossed the red line of directly buying listed shares, and the most spectacular case is the Bank of Japan.

The BoJ has been buying Nikkei index ETFs (exchange-traded funds) since 2010 as part of its monetary policy. The scale of the operation is surreal: in 2021, the Bank of Japan became the largest single shareholder in the Japanese stock market, surpassing even the country's public pension fund. At certain times, it held about 7% of the total Tokyo stock exchange.

Read that again: the country's central bank was the largest owner of the country's private companies. Toyota, Sony, Nintendo, Mitsubishi, all with a common and silent shareholder who printed yen to buy them. The operation was so blatant that many economists describe it as "de facto market socialization," and the BoJ has had trouble exiting that position without causing a cascading fall.

The other impressive case is the Swiss National Bank (SNB), which manages its international reserves by partially investing them in foreign equities.

Result? The SNB is one of the world's largest shareholders in companies such as Apple, Microsoft, Amazon, and Alphabet. A small European central bank, headquartered in Bern, systematically appears in the top 20 shareholders of the planet's largest tech companies. Literally, a part of your iPhone belongs to the Swiss in the name of their monetary policy. When US stock markets rise, the SNB earns billions. When they fall, it loses them.

In 2022, the Swiss central bank recorded the largest annual loss in its history, some 132 billion Swiss francs, basically because its international stock portfolio plummeted. More than the GDP of several countries.

Live rescues and circuit breakers

When things get really bad, central banks become stock market firefighters. In October 2008, after the collapse of Lehman Brothers, the Fed coordinated emergency liquidity operations with its counterparts around the world to prevent markets from going into a freefall. In March 2020, when the pandemic sent Wall Street down 30% in three weeks, the Fed did something unprecedented: it announced that it would buy corporate bonds directly, including some speculative-grade ones. The mere announcement stopped the fall dead in its tracks, even before they executed the first purchase. The word, from the mouth of a central banker, is worth more than money.

The curious fact

There is a concept called the "Greenspan put," named after Alan Greenspan, Fed chairman from 1987 to 2006. The idea is that Greenspan rescued markets so many times (Black Monday of 1987, Russian crisis of 1998, dot-com bubble of 2000) that investors began to take for granted that, no matter what happened, the Fed would be there to prevent disaster. This expectation, according to several economists, contributed to inflating the housing bubble that burst in 2008, because everyone assumed excessive risks, convinced that the safety net was in place. That is, a central bank, by being too protective of stock markets, can end up causing the next crisis. A beautiful example of what in incentive theory is called "moral hazard," and a paradox that still fuels academic debate today.

Central banks and the rise of cryptocurrencies

Central banks have been watching an adversary grow in their backyard for more than a decade now.

The first thing to understand is that cryptocurrencies directly attacked a central bank's most sacred monopoly: that of deciding what money is.

For centuries, the answer to "who issues money" was "the state, through its central bank." Bitcoin, appearing in 2009, for the first time in modern history proposed a viable alternative answer: "a computer protocol, ownerless, that no one can stop or corrupt." For an institution like the ECB or the Fed, that's not a technical detail. It's an existential threat, even if they initially laughed.

They stopped laughing a long time ago.

During the early years (2010 to 2015), central banks treated the issue with condescension. Jamie Dimon called Bitcoin "a fraud," and central bankers dismissed it as a libertarian toy. That phase ended. Today, out of 93 central banks surveyed by the BIS in 2024, 91% are actively exploring a central bank digital currency (CBDC), be it retail, wholesale, or both. As a global defensive move.

The 3 fronts where crypto presses them

• The first is the loss of control over monetary policy. If a significant part of the economy starts moving in bitcoins or stablecoins, the central bank loses the ability to influence interest rates, the amount of money in circulation, and therefore inflation. It's like trying to regulate the temperature of a room where someone has opened a window you don't control.

• The second is the flight of deposits from the traditional banking system. This is less evident but equally concerning. If citizens start storing their money in stablecoins or crypto wallets, commercial banks lose deposits, and with them the cheap funding base with which they grant loans. The domino effect reaches the central bank, because its main tool (moving interest rates) works through commercial banks. If banks empty out, the lever breaks.

• The third, and what has most accelerated concern in Frankfurt and Washington, are stablecoins. Bitcoin is volatile and no one uses it to pay rent, but dollar-pegged stablecoins (USDT, USDC) already move gigantic volumes and effectively function as a private digital dollar. The problem is that they are issued by private companies (Tether, Circle), backed by assets that the central bank does not control, and circulate globally without borders. For the ECB, seeing millions of Europeans paying in digital dollars issued by a New York company is a monetary sovereignty nightmare.

The answer: CBDCs, with two speeds

Here's the curious part. The unanimous reaction has been "if you can't beat them, join them, but in your own way." CBDCs are the establishment's answer: a digital version of the euro, dollar, or yuan, issued directly by the central bank, with all the technological advantages of crypto (instant, programmable, disintermediated payments) but with the stability of fiat currency behind it.

The problem is that not all countries are moving at the same speed, and some have taken opposite directions. So far, only three countries have fully launched a CBDC: the Bahamas, Jamaica, and Nigeria Atlantic Council.

China has the digital yuan in massive trials with hundreds of millions of users. The ECB has been working on the digital euro for years, with a launch planned for this decade. And the United States, under the Trump administration, has done the exact opposite: an executive order prohibits the establishment, issuance, circulation, and use of a Mastercard CBDC. Washington has decided that the way forward is to let private dollar stablecoins dominate the world, instead of competing with them from the state. A risky bet, because it leaves the digital dollar infrastructure in private hands.

The side effect nobody saw coming: systemic risk

And here is the most beautiful paradox of the matter. If a CBDC works too well, it can sink the traditional banking system. Imagine this: in a financial crisis, people panic and flee from their commercial bank to the CBDC, which is literally central bank money and therefore the safest possible asset. What used to be a queue in front of a branch is now a button on a mobile phone. IMF simulations suggest that a zero-interest CBDC that captures a small percentage of deposits can significantly reduce lending activity. A 21st-century "bank run" can happen in seconds. That's why the designs being studied include balance limits, tiered rates, and other artificial brakes. It's fascinating: central banks are designing their own digital currency with deliberate limitations so as not to destroy the system they manage.

Extreme and curious cases

El Salvador adopted bitcoin as legal tender in 2021, the first country in the world to do so, with Nayib Bukele personally pushing the operation and buying BTC from his Twitter account. The IMF cried foul, warned of systemic risks, and in 2025 the country had to partially backtrack as a condition for receiving international funding. The experiment left half the world wondering whether a central bank could coexist with a crypto as an official currency. Spoiler: it's extremely complicated.

Nigeria launched the eNaira in 2021 with huge expectations, and adoption was a fiasco. Less than 0.5% of the population actively uses it. Meanwhile, the country leads the world in peer-to-peer adoption of Bitcoin and stablecoins. It's the perfect example of how a poorly designed CBDC can lose to private alternatives even on home turf.

China went in the opposite direction and banned crypto almost completely in 2021, while accelerating its digital yuan. The bet is radical: it's either ours or nothing. And it has the scale to enforce it.

And a final twist: central banks as Bitcoin buyers

The ultimate irony is that some central banks are quietly considering Bitcoin as a reserve asset. The Czech Republic officially began exploring it in 2025. The Central African Republic briefly had it as official currency. And there is an open debate in several central banks of countries with dollar reserves about whether diversifying into BTC would make sense given the dollar's loss of value and geopolitical risks. The institution that for a decade disparaged "magical internet money" is now considering putting it alongside gold in its vault. Few things are more eloquent about how the landscape has changed.

Why you should care about central banks

You might think all of this is far removed from your life. That central banks are for economists, politicians, people in grey suits in carpeted rooms. But every time you pay your mortgage, every time the price of coffee goes up at the cafe downstairs, every time your savings earn less than you expected, there's a decision made in some fortified building in Frankfurt, Washington, Tokyo, or London that is shaping your personal life.

The money you carry isn't valuable just because. It's valuable because an institution with a solemn name has decided it's valuable, and because we've all collectively agreed to believe it. It is, if you think about it, one of the greatest acts of faith in modern humanity. And central banks are the priests of that strange, silent, and incredibly powerful cult.

Next time you see Christine Lagarde give a press conference and all the financial press goes hysterical over a word change in her speech, you'll know why. Behind that sentence are trillions at stake, governments falling, jobs being created or disappearing, and a global system held together by threads so fine that sometimes one marvels that it works at all.

Although, as we saw at the beginning, sometimes all it takes is a sewer worker to remind us how fragile everything is.

Infographic

FAQs. Frequently Asked Questions about Central Banks

What exactly is a central bank and why does it hold so much power?

A central bank is the public institution that issues a country's currency, sets interest rates and supervises commercial banks. Its power comes from a legal monopoly over money creation and from the ability to move interest rates, choices that shape mortgages, savings, jobs and inflation for millions of people.

What are the main functions of a central bank inside its own country?

It has three core jobs. Issuing legal tender notes and coins, setting the interest rates that cool or warm the economy and supervising commercial banks, including the decision to rescue them or let them fail, as seen in 2008 with Lehman Brothers and AIG.

What role do central banks play on the international stage?

Abroad they manage the country's foreign reserves (currencies such as the US dollar, gold and foreign bonds), intervene in currency markets to stabilise the exchange rate and cooperate with peers through the Bank for International Settlements (BIS) in Basel, where they meet monthly behind closed doors.

Why do the ECB, the Fed and the People's Bank of China work so differently?

Because their mandates differ. The ECB has a single mandate centred on keeping inflation close to 2%, a legacy of Germany's trauma with the hyperinflation of the 1920s. The Fed has a dual mandate, combining price stability with maximum employment. The People's Bank of China, by contrast, answers to the Communist Party and works as another tool of the state.

How do central banks influence stock markets if they do not run them?

They act through interest rates, which make credit cheaper or more expensive and shift money between bonds and shares, and through quantitative easing, buying assets with newly created money. Some, like the Bank of Japan, have even bought listed equities, becoming in 2021 the single largest shareholder of the Tokyo stock market.

What is Quantitative Easing and why did it change the global economy?

Quantitative Easing means that a central bank buys government or corporate bonds with money created on demand, flooding the system with liquidity. The Fed scaled it up after 2008 and again during the pandemic, producing an almost perfect correlation between central bank balance sheets and the main stock market indexes.

How do cryptocurrencies and stablecoins challenge the power of central banks?

Cryptocurrencies, especially dollar stablecoins like USDT and USDC, threaten the monopoly on money issuance and can drain deposits from traditional banks. According to the BIS, by 2024 around 91% of surveyed central banks were exploring their own digital currency or CBDC as a defensive global response.

How does the US Federal Reserve actually decide interest rates?

The Federal Reserve sets its policy rate through the Federal Open Market Committee (FOMC), which meets eight times a year. Twelve voting members, including the Chair and presidents of regional Reserve Banks, review data on inflation, jobs and growth, then vote on whether to raise, hold or cut the federal funds rate, a benchmark that ripples into mortgage rates, credit cards and global markets.

Is the Bank of England really independent from the UK government?

The Bank of England has been operationally independent on monetary policy since 1997, when the government handed rate decisions to its Monetary Policy Committee. Parliament still sets the inflation target (currently 2%), and the Treasury appoints senior officials, so independence is real but framed by a political mandate, with the Bank required to write a public letter to the Chancellor when inflation strays far from target.

How does the South African Reserve Bank fit into this picture?

The South African Reserve Bank (SARB) is one of the few central banks in the world with private shareholders, although its mandate is set by the constitution and its policy decisions are independent. It targets inflation within a 3% to 6% band, manages the rand's stability and supervises local banks, with rate decisions taken by its Monetary Policy Committee roughly every two months.