Download the Full Ebook and Access More Features - ebooknice.

com

(Ebook) Introduction to Central Banking by Ulrich

Bindseil, Alessio Fotia ISBN 9783030708832,
3030708837

https://ebooknice.com/product/introduction-to-central-
banking-46363036

OR CLICK HERE

DOWLOAD EBOOK

Download more ebook instantly today at https://ebooknice.com

 Instant digital products (PDF, ePub, MOBI) ready for you
Download now and discover formats that fit your needs...

Start reading on any device today!

(Ebook) Introduction to Central Banking by Ulrich

Bindseil; Alessio Fotia ISBN 9783030708849, 3030708845

https://ebooknice.com/product/introduction-to-central-banking-51698042

ebooknice.com

(Ebook) Biota Grow 2C gather 2C cook by Loucas, Jason;

Viles, James ISBN 9781459699816, 9781743365571,
9781925268492, 1459699815, 1743365578, 1925268497
https://ebooknice.com/product/biota-grow-2c-gather-2c-cook-6661374

ebooknice.com

(Ebook) Matematik 5000+ Kurs 2c Lärobok by Lena

Alfredsson, Hans Heikne, Sanna Bodemyr ISBN 9789127456600,
9127456609
https://ebooknice.com/product/matematik-5000-kurs-2c-larobok-23848312

ebooknice.com

(Ebook) Risk Management for Central Banks and Other Public

Investors by Ulrich Bindseil, Fernando Gonzalez, Evangelos
Tabakis ISBN 9780511480836, 9780521518567, 0521518563,
0511480830
https://ebooknice.com/product/risk-management-for-central-banks-and-
other-public-investors-1649060

ebooknice.com
(Ebook) SAT II Success MATH 1C and 2C 2002 (Peterson's SAT
II Success) by Peterson's ISBN 9780768906677, 0768906679

https://ebooknice.com/product/sat-ii-success-
math-1c-and-2c-2002-peterson-s-sat-ii-success-1722018

ebooknice.com

(Ebook) Master SAT II Math 1c and 2c 4th ed (Arco Master

the SAT Subject Test: Math Levels 1 & 2) by Arco ISBN
9780768923049, 0768923042
https://ebooknice.com/product/master-sat-ii-math-1c-and-2c-4th-ed-
arco-master-the-sat-subject-test-math-levels-1-2-2326094

ebooknice.com

(Ebook) Cambridge IGCSE and O Level History Workbook 2C -

Depth Study: the United States, 1919-41 2nd Edition by
Benjamin Harrison ISBN 9781398375147, 9781398375048,
1398375144, 1398375047
https://ebooknice.com/product/cambridge-igcse-and-o-level-history-
workbook-2c-depth-study-the-united-states-1919-41-2nd-edition-53538044

ebooknice.com

(Ebook) The Bitcoin Standard: The Decentralized

Alternative to Central Banking. by Ammous, Saifedean. ISBN
9781119473916, 1119473918
https://ebooknice.com/product/the-bitcoin-standard-the-decentralized-
alternative-to-central-banking-56335666

ebooknice.com

(Ebook) Central Banking in Eastern Europe (Routledge

International Studies in Money and Banking) by Nigel
Healey , Barry Harrison ISBN 9780203465240, 9780415226196,
0203465245, 0415226198
https://ebooknice.com/product/central-banking-in-eastern-europe-
routledge-international-studies-in-money-and-banking-1886844

ebooknice.com
SpringerBriefs in Quantitative Finance

Series Editors
Peter Bank
Insitut für Mathematik, TU Berlin, Berlin, Germany

Pauline Barrieu
Department of Statistics, London School of Economics, London, UK

Lorenzo Bergomi
Société Générale, Paris-La Défense, Paris, France

Rama Cont
Mathematical Institute, University of Oxford, Oxford, UK

Jakša Cvitanic
Division of Humanities and Social Sciences, California Institute of
Technology, Pasadena, CA, USA

Matheus R. Grasselli
Department of Mathematics and Statistics, McMaster University,
Hamilton, ON, Canada

Steven Kou
Department of Mathematics, National University of Singapore, Singapore,
Singapore

Mike Ludkowski
Department of Statistics and Applied Probability, University of California
Santa Barbara, Santa Barbara, CA, USA

Vladimir Piterbarg
Rokos Capital Management, London, UK
Nizar Touzi
Centre de Mathématiques Appliquées, École Polytechnique, Palaiseau
Cedex, France

SpringerBriefs present concise summaries of cutting-edge research and

practical applications across a wide spectrum of fields. Featuring
compact volumes of 50 to 125 pages, the series covers a range of
content from professional to academic. Briefs are characterized by fast,
global electronic dissemination, standard publishing contracts,
standardized manuscript preparation and formatting guidelines, and
expedited production schedules.
Typical topics might include:
A timely report of state-of-the art techniques
A bridge between new research results, as published in journal
articles, and a contextual literature review
A snapshot of a hot or emerging topic
An in-depth case study
SpringerBriefs in Quantitative Finance showcase topics of current
relevance in the field of mathematical finance in a compact format.
Published titles will feature both academic-inspired work and more
practitioner-oriented material, with a special focus on the application
of recent mathematical techniques to finance, including areas such as
derivatives pricing and financial engineering, risk measures and risk
allocation, risk management and portfolio optimization, computational
methods, and statistical modelling of financial data.
More information about this series at http://​www.​springer.​com/​
series/​8784
Ulrich Bindseil and Alessio Fotia

Introduction to Central Banking

1st ed. 2021
Ulrich Bindseil
Institute of Economics and Law, Macroeconomics, Technical University
Berlin, Berlin, Germany

Alessio Fotia
School of Business and Economics, Freie Universitä t Berlin, Berlin,
Germany

ISSN 2192-7006 e-ISSN 2192-7014

SpringerBriefs in Quantitative Finance
ISBN 978-3-030-70883-2 e-ISBN 978-3-030-70884-9
https://doi.org/10.1007/978-3-030-70884-9

Mathematics Subject Classification (2010): 91-xx, 91-01

This book is an open access publication. We acknowledge support by

the Open Access Publication Fund of Technische Universitä t Berlin.

This book is an open access publication.

© The Author(s) 2021
Open Access This book is licensed under the terms of the Creative
Commons Attribution 4.0 International License (http://​
creativecommons.​org/​licenses/​by/​4.​0/​), which permits use, sharing,
adaptation, distribution and reproduction in any medium or format, as long as you
give appropriate credit to the original author(s) and the source, provide a link to the
Creative Commons license and indicate if changes were made.
The images or other third party material in this book are included in the book's
Creative Commons license, unless indicated otherwise in a credit line to the material.
If material is not included in the book's Creative Commons license and your intended
use is not permitted by statutory regulation or exceeds the permitted use, you will
need to obtain permission directly from the copyright holder.

The use of general descriptive names, registered names, trademarks,

service marks, etc. in this publication does not imply, even in the
absence of a specific statement, that such names are exempt from the
relevant protective laws and regulations and therefore free for general
use.

The publisher, the authors and the editors are safe to assume that the
advice and information in this book are believed to be true and accurate
at the date of publication. Neither the publisher nor the authors or the
editors give a warranty, expressed or implied, with respect to the
material contained herein or for any errors or omissions that may have
been made. The publisher remains neutral with regard to jurisdictional
claims in published maps and institutional affiliations.

This Springer imprint is published by the registered company Springer

Nature Switzerland AG
The registered company address is: Gewerbestrasse 11, 6330 Cham,
Switzerland
Acknowledgements
We would like to thank Matheus Grasselli and two anonymous
reviewers for thorough comments on an earlier draft of this text, which
allowed us to remove mistakes and improve the presentation. All
remaining errors are ours. We would also like to thank the Library Fund
of the Technical University of Berlin for providing financial support for
open access to this text, as well as Ute McCrory from Springer for
efficient and pleasant discussions on this project. Ulrich Bindseil would
like to thank the students of TU Berlin who, since 2010, have been
asking the right questions and who have spotted many mistakes in the
lecture notes that were used as input to this book. He would also like to
thank many kind ECB colleagues for explaining to him since 1997
financial markets, payment systems, market infrastructures, and central
bank operations. The views expressed are not necessarily those of the
ECB.
About This Book
In view of the scale and scope of central bank operations over the last
two decades, and the rich academic literature on monetary macro-
economics, the title of this short book may appear pretentious. Aiming
to deliver what the title suggests, while covering material that would
usually fit into a one semester course, led to a focus on basic conceptual
frameworks for understanding practical central banking, and in
particular how we have seen it since the beginning of the millennium.
While the burst of the dot.com bubble around 2000 led to a short
preview on the zero lower bound problem, the years between 2002 and
2006 briefly restored what we call with some nostalgia “normal” times.
Since 2007, central banking in developed economies has felt un-normal
and uncomfortable, as most of the time it struggled with the zero lower
bound (some central banks entering the underworld of negative
interest rate policies), had to engage in large-scale asset purchase
programs and lender of last resort (LOLR) operations, and as a
consequence witnessed an unprecedented ballooning of central bank
balance sheets. While forceful central bank measures certainly made a
crucial difference for economies over the last 14 years, they have not
yet necessarily been successful in terms of restoring full confidence
that normality of inflation and interest rates will return in the coming
years. This text is unavoidably inspired by the particularities of this
period and aims at providing the basic tools for understanding what
happened.
Amongst other content, two types of content were sacrificed in
the endeavour to keep the text short. First, we rarely provide
examples, real world numbers, or insights into public debates
surrounding our conceptual framework for central banking. In view of
the sheer endless diversity of actual central bank measures,
experiences and debates over the last few decades, examples would
probably have focused again and again on the few central banks of large
developed monetary areas, although the experience of more than
hundred other central banks has been as rich and interesting.
Moreover, in the age of the internet and of a high degree of
transparency in central banking, the facts and numerous debates are
easily accessible to everyone, while what may be missing is a
parsimonious conceptual framework. Therefore, instead of illustrating
our book with selective examples and numbers (lengthening the text),
we tried to present the material in a way that the reader can match
herself with the easily accessible central banking reality in its full
variety. In terms of overviews of actual measures and frameworks, and
empirical analysis, a number of freely available publications can be
recommended, also as they refer to further literature: Markets
Committee (2019b) and Cap, Drehmann and Schrimpf (2020) both
provide recent overviews of monetary policy implementation
frameworks. CGFS (2019), and Markets Committee (2019a) review
unconventional monetary policies and their effects on market
functioning. The actual monetary policy operations of the ECB
(conventional and unconventional) have been described in a series of
occasional papers by the ECB, notably the ECB Occasional Papers Nr.
135, 188, 209, 245 (for example Sylvestre and Coutinho 2020). The Fed
New York has published for many years an annual report on its market
operations and balance sheet evolution (e.g. Fed 2020b). Financial
stability issues are regularly reviewed in regular publications by
various central banks and e.g. IMF (2020a). Central banks’ lender-of-
last-resort operations are less transparent, but there are a number of
papers discussing policy issues relating to the LOLR function broadly,
such as Domanski and Sushko (2014), or Dobler et al. (2016), while
also providing some insights into actual cases. Bindseil (2014) is also a
more comprehensive treatments of related issues, including examples
and historical illustrations, and less condensed to the essential
mechanics of central banking (although not covering international
monetary frameworks).
Second, we do not aim at reviewing modern monetary macro-
economics, although this could be considered as one major field of
central banking, if not the field of central banking for the academic
economic profession. Instead, we only refer to monetary
macroeconomics briefly, and recall some of its basic conclusions, with a
view to explaining how these matter for actual central bank operations.
This seemed justifiable for three particular reasons (beyond that of
keeping this text short): (i) the basic intuition of the links between
macro-economic ideas and central bank operation is relatively
straightforward, while the state-of-the art models used in today’s
macro-economic debates is not; (ii) there are good textbooks on
modern macroeconomic theory, undergraduate introductions can be
found in Burda and Wyplosz (2017), or Blanchard (2017), while more
advanced texts are Woodford (2003), Lavoie (2014), Galí (2015),
Heijdra (2017), or Walsh (2017); (iii) theory seemed to have been
lagging practice since 2007, i.e. central bankers under stress needed to
act with little help from academic literature to solve their urgent issues.
Therefore, sometimes, new monetary macro-economic models
encompassing non-conventional measures seemed to be ex post
rationalizations for the academic world of what central banks were
observed to be doing.
This book addresses economists, students and central bankers
who would like to be introduced in a concise manner to actual central
bank operations, i.e., real-world central banking as determining the
central bank balance sheet, the flow of funds in the financial accounts of
the economy, and central banks’ related interest rate and lender of last
resort policies. While the text has been kept simple and accessible, and
the models remain basic, the readership who may benefit from the
book goes beyond undergraduate students, as knowledge on central
bank operations, financial accounts, and their relation to better known
policy fields, is sometimes limited also amongst research-oriented
central bankers and post-graduate economists interested in monetary
policy. What is relevant in real-world central banking has also been
inspired by the practical experience of one of us having worked in four
different central bank departments over the last 27 years (the
Bundesbank’s Economics department, and subsequently the ECB’s DG
Market operations, Financial Risk Management, and DG Market
Infrastructure and Payment Systems).
This text tries to be comprehensive in terms of reviewing how
central banks interact with the real world in general, and financial
systems in particular. Central bank balance sheets and the financial
flows driving their evolution across time (and simultaneously the
evolution of the accounts of the other financial sectors, as every
financial asset is also a financial liability of someone else, and vice
versa) cover an important part of this interaction. Therefore,
throughout this book, we use the key conceptual tool of financial
accounts capturing financial systems and allowing us to represent both
passive and active central bank operations (“active” operations being
those initiated by a central bank, such as open market operations, and
“passive” being those initiated by other sectors, such as the recourse of
banks to standing facilities offered by a central bank, the withdrawal of
banknotes by households via banks, or the in- and outflow of foreign
reserves in a fixed exchange rate system). However, financial accounts
do not capture the entire reality of central bank operations. First,
interest rates are crucial for monetary policy transmission, and this text
will therefore also explain why and how operations and financial
accounts, together with the interest rates set on central bank
operations, determine market interest rates (Chap. 3). Second, the
distance to default of private sector debtors, and what it implies for
financial stability and central bank operations, depends not only on
balance sheet figures, but also on a number of parameters outside
balance sheets, such as asset price volatility, information asymmetries,
and liquidity buffers of firms as determined by asset liquidity and the
central bank collateral framework. Therefore, this text also includes a
number of basic partial equilibrium models of financial stability and
related liquidity flows and central bank operations (Chaps. 5 and 6).
Central banking practice since 2007 has frequently been determined by
such financial stability issues.
The book is structured through its chapters as follows:
Chapter 1 provides the necessary basic concepts, such as the
system of accounts of the economy, the main sectors, and the way
these sectors are interrelated through financial claims and liabilities.
A central bank is defined first by its balance sheet and central bank
money is the central bank’s basic liability. It is explained how both
monetary policy implementation and lender of last resort issues
relate to liquidity flows or “flows of funds” across balance sheets.
Recalling the logic of financial flows at the most basic level is
therefore the basis for the subsequent chapters.
Chapter 2 develops further the role of a central bank and its
interplay with commercial banks. Together, the two ensure the
provision of liquidity to the economy, such that the real sectors are
shielded, if possible, from portfolio re-allocations by households and
institutional investors. We also disaggregate the banking system into
two banks to represent deposit flows between banks and their
impact on the central bank’s balance sheet, and to distinguish
between what we call “relative” and “absolute” central bank
intermediation. We then integrate deposit money creation by
commercial banks into our system of financial accounts, and revisit
some old debates, such as the limits of such “inside” money creation.
We then explain the ideas of “sovereign money” and “full reserve
banking” within our financial accounts, and discuss the recent
proposals regarding central bank digital currency (CBDC).
Chapter 3 provides an introduction to conventional monetary
policy, i.e. monetary policy central banks pursue during periods of
economic and financial stability and when short-term interest rates
are not constrained by the zero lower bound. We sketch how central
banks should set their operational target (short term interest rates)
across time to achieve their ultimate target (e.g. price stability), and
we acknowledge the multiple complications in doing so. We explain
how balance sheet quantities relate to short term interest rates, and
how the central bank can rely on this to steer its operational target.
Finally, we explain the importance of the collateral framework and
related risk control measures (e.g. haircuts) for the liquidity of banks
and for central bank credit operations.
Chapter 4 introduces the reader to unconventional monetary
policy, i.e. monetary policy using instruments other than interest rate
policies as described in the previous chapter, i.e. pursuing an
effective monetary policy when conventional policies are not able to
provide the necessary monetary accommodation because of the zero
lower bound problem. We then discuss negative interest rate policies,
and the debate around its possible unintended side-effects. We
continue with a discussion of non-conventional credit and securities
purchase programmes, and finally revisit the classification of central
bank instruments in three categories: conventional, unconventional,
and lender of last resort.
In Chap. 5, central banks are put aside for a moment as we review
simple models of financial instability, which will be the basis for the
subsequent chapter explaining the role of central banks as lenders of
last resort. We first recall that financial instability is mostly triggered
by a negative shock on asset prices, which sets in motion a liquidity
crisis with vicious circles. We develop the concepts of solvency
“conditional” and “unconditional” on liquidity, apply these concepts
to the stability of bank funding, and introduce the problem of bank
runs. We subsequently show why asset liquidity in a dealer market
deteriorates during a financial crisis; how asymmetric information
can lead to a freeze of credit markets; how declining and more
volatile asset prices drive increases of haircuts and margin
requirements, and how these can force fire sales and defaults of
borrowers. We finally discuss the interaction between these various
crisis channels and the implied role of central bank liquidity.
Chapter 6 reviews on this basis the function of a central bank as
lender of last resort (LOLR). We recall some long-established
principles of the LOLR and explain how the systemic role of a central
bank creates risk endogeneity and validates Bagehot’s intuition that
for the Bank of England, “only the brave plan was the safe plan” in a
crisis. We develop the main reasons why a central bank should act as
LOLR: compensation of negative externalities, unique role of a central
bank as an institution with unlimited liquidity, unique status as risk
free counterparty making others accept to deliver collateral to it even
at high haircuts, and its mandate to preserve price stability. Last but
not least, we develop a bank-run model which highlights the role of
asset liquidity and central bank eligible collateral. We calculate
through a model variant with binary asset liquidity and uniform
central bank collateral haircut, but then also introduce the case of
continuous asset liquidity and haircuts.
Chapter 7 turns to international monetary frameworks, and what
global liquidity these different frameworks provide. We first recall
arguments in favour of and against fixed exchange rate systems and
then introduce two international monetary arrangement of the past
which implied fixed exchange rates, namely the gold standard and
the Bretton Woods system, and explain why both eventually failed.
We then turn to international frameworks in the context of the
current paper standard: fixed exchange rates, flexible exchange rates,
and European monetary union. We explain the role of an
international lender of last resort and how it provides more leeway
in running fixed exchange rate systems. We show throughout the
chapter how bank and central bank balance sheets are affected by
international flows of funds and the balance of payments.
 Although this is only an introductory, conceptual text, it is tempting
to think about what to expect from its perspective for central banking
in the coming years. Central banking in the coming decades will
remain challenging. First, according to market predictions, central bank
interest rates could remain close to zero (above or below) for several
years, suggesting also that nonconventional measures will continue to
be necessary, most of which will contribute to preserve or even extend
the current scale and scope of a central bank balance sheet. The ability
to provide monetary policy accommodation will remain crucial, and so
will understanding monetary policy instruments and their mechanics,
and how they affect an entire financial system.
Second, the future seems as vulnerable to financial crises as the past
decades: after Covid-19, Governments will remain indebted, and
solvency of parts of the financial and real sectors will be precarious,
despite all the important monetary, economic, and regulatory measures
taken. The combination of supportive central bank monetary and LOLR
policies, expansionary fiscal spending, and temporary softening of
obligations for companies to file for bankruptcy, were all strictly
necessary, but will also come with future challenges, in particular if the
recovery would be sluggish. Lender of last resort policies of central
banks will remain important in the years to come, even in a favourable
scenario. The framework provided by Chapters 5 and 6 on how
liquidity and solvency interact, and why central banks matter for it, will
thus remain relevant for years to come.
Last but not least, it is increasingly believed that central bank digital
currencies (CBDC) will materialise (if this word is suitable for digital
innovations) as a major innovation in central banking over the next
decade (see e.g. BIS 2019), and that it may have pervasive implications
for financial systems, that will have to be managed through adequate
CBDC functionality. The financial accounts framework provided in this
book is a good basis for understanding both the impact of CBDC on a
financial system, and how to address related risks (Bindseil 2020). The
previous major innovation in the form of central bank liabilities, the
introduction of banknotes, brought with it great gains in financial
efficiency, but also initially quite some financial chaos, as in the cases of
Stockholm Banco in 1656, and John Law’s Banque Royale in 1720. To
end with an optimistic note, this can be avoided with the introduction
of CBDC, thanks to our better understanding of central banking today,
including how it interacts with financial systems.

Symbols in Balance Sheets and Tables

Sometimes capitalisation slightly changes the meaning of the symbol
(e.g. upper case usually indicates stocks, and lower case indicates
flows/shock of the same quantity), subscripts mostly denote
ownership: e.g. E means equity, CO means corporate and ECo corporate
equity. The cases in which subscripts denote a time point are explicitly
listed here.

A, At (Real) assets value (at time t)

B Banknotes (“Bad” in Chap. 5)
Ba (Commercial) bank
C Credit, claim
Co Corporate
ca Capital account transaction
cu Current account transaction
CB Central bank
D, d Deposit (aggregate), single deposit or deposit shock
E Equity
i Nominal interest rate
F(·), f(·) Fire sale loss cumulative distribution and density functions
Fr Foreign reserves
G Gold (“Good” in Chap. 5)
Hh Household
h Haircut
L Liquidity
n Number of goods
m Number of households
P Price vector
p(a,b) Price of a in terms of b
pi Price of good i in terms of the numeraire
Pr(·) Probability of ·
RR Required reserves/reserve requirements
r Real interest rate
S, s Securities (state or corporate bonds), stocks and flows
St State/government
U Utility
W Quantity of white-noise traded securities
X, xi Commodity vector, i-commodity within the vector
Y, y Interbank lending, stock and flow
z Bid-ask spread
εt Standard normally distributed shock in time t
λ Liquidity spread
πt Inflation in time t
σ Standard deviation
τ Term spread
σε Standard deviation of random variable ε
Φ Cumulative distribution function of the normal distribution
Abbreviations
CBDC Central-bank digital currency
ELB Effective lower bound, see ZLB
IOU I owe you
LGD Loss given default
LOLR Lender of last resort
NFC Non-financial corporation
OMO Open market operation
QE Quantitative easing
SOE State-owned enterprise
VaR Value-at-risk
ZLB Zero lower bound
Contents
1 Economic Accounts and Financial Systems
1.​1 Real Economic Sectors and Basic Types of Transactions
1.​2 The Financial Sector and Financial Transactions
1.​2.​1 Commodity Money, Financial Assets and IOU Economy
2 Central Banks
2.​1 Central Banks in a Paper Standard
2.​2 Changes to the Demand of Financial Assets in a Paper
Standard
2.​2.​1 If Financial Sectors not Ready to Compensate Missing
Demand for Securities
2.​2.​2 Commercial Banks Absorb Security Flow
2.​2.​3 The Central Bank Absorb Flows and Acts as Market
Maker of Last Resort
2.​3 Interbank Flows
2.​4 Role of Commercial Banks in Money Creation
2.​4.​1 Credit Money Created by Banks
2.​4.​2 “Sovereign Money” and “Full Reserve Banking”
2.​4.​3 “Central Bank Digital Currency” (CBDC) Accessible to
Non-Banks
3 Conventional Monetary Policy
3.​1 Short-Term Interest Rates as the Operational Target of
Monetary Policy
3.​1.​1 The Targets of Monetary Policy
3.​1.​2 The Basic Natural Rate Logic of Monetary Policy
3.​1.​3 Complicating the Basic Natural Rate Logic
3.​1.​4 Transmission Channels of Monetary Policy
 3.​2 Composition of the Central Bank Balance Sheet
3.​2.​1 Autonomous Factors
3.​2.​2 Monetary Policy Instruments
3.​2.​3 Liquidity Providing and Liquidity Absorbing Items
3.​3 Monetary Policy Implementation Techniques
3.​3.​1 The Ceiling Approach
3.​3.​2 The Floor Approach
3.​3.​3 The Symmetric Corridor Approach
3.​4 The Central Bank Collateral Framework
3.​4.​1 Why Collateral?​
4 Unconventional Monetary Policy
4.​1 Rationale and Definition of “Unconventional” Monetary
Policy
4.​2 Negative Interest Rate Policy (NIRP)
4.​2.​1 Reasons for a Lower Bound
4.​2.​2 Criticism of the Negative Interest Rate Policy
4.​3 Non-Conventional Credit Operations
4.​4 Outright Purchase Programmes
4.​5 Distinguishing Between Conventional, Non-Conventional,
and LOLR Policies
5 Financial Instability
5.​1 Liquidity, Asset Prices, and Default
5.​2 Conditional and Unconditional Insolvency, and Bank Runs
5.​3 Illiquidity in Credit and Dealer Markets
5.​3.​1 Credit Markets
5.​3.​2 Dealer Markets
5.​4 Increasing Haircuts and Margin Calls
 5.​5 Interaction Between Crisis Channels
6 The Central Bank as Lender of Last Resort
6.​1 Principles and Rationale for the Central Bank Acting as
Lender of Last Resort
6.​1.​1 Origin and Principles of LOLR
6.​1.​2 Why Should Central Banks Be Lenders of Last Resort?​
6.​2 Forms and Propensity to Act as LOLR
6.​2.​1 Forms of LOLR
6.​2.​2 Overall Propensity of a Central Bank to Act as LOLR
6.​3 Central Bank Collateral as a Key LOLR Parameter in a
Simple Bank Run Model
6.​3.​1 A Bank Run Model with Binary Levels of Asset
Liquidity
6.​3.​2 The Model with Continuous Asset Liquidity
6.​4 Conclusions
7 International Monetary Frameworks
7.​1 Why Do Fixed Exchange Rates Persist?​
7.​2 Past International Monetary Frameworks
7.​2.​1 The Gold Standard
7.​2.​2 The Bretton Woods System
7.​3 International Monetary Frameworks of the Present
7.​3.​1 Fixed Exchange Rate System—Paper Standard
7.​3.​2 Flexible Exchange Rate Systems
7.​3.​3 The European Monetary Union
7.​3.​4 Foreign Reserves
References
List of Figures
Fig.​3.​1 Arbitrage diagram with real and nominal rates

Fig.​4.​1 Instruments and types of central bank policies

Fig.​5.​1 Liquidity generation and losses due to fire sales—example with

F(x) =​x

Fig.​5.​2 Marginal fire sales loss curve for alternative liquidation

horizons

Fig.​6.​1 Liquidity generation in a binary level of liquidity.​Left:​by

liquidating all assets.​Centre:​by pledging all assets with the central
bank.​Right:​liquidity-maximising combination

Fig.​6.​2 Three representations of fire sale losses and liquidity

generation assuming that marginal fire sale losses f(x) are a power
function with exponent theta

Fig.​6.​3 Liquidity structure of corporate bond funds, according to Dö tz

and Weth (2019, 12)

Fig.​6.​4 Liquidity generation and fire sales in a model of continuous

asset liquidity.​Left:​using fire sales, centre:​using pledging at the
Central Bank, right:​using box
List of Tables
Table 1.​1 The household’s balance sheet

Table 1.​2 A financial accounts system with the three real sectors

Table 1.​3 A financial account systems with a full reserve deposit bank

Table 1.​4 A financial account system with a fractional reserve bank

Table 1.​5 A full reserve central bank

Table 1.​6 A central bank diversifying its assets into government bonds
and credit

Table 2.​1 Counterparties for financial operations for central banks

Table 2.​2 Financial accounts in a paper standard

Table 2.​3 Parsimonious financial accounts representation through

financial exposure matrix

Table 2.​4 Real sector when fire sales are inevitable

Table 2.​5 Flow of funds if financial system absorbs flows and shields
real sectors
Table 2.​6 Flow of funds if central bank absorbs all shocks

Table 2.​7 Household deposit and interbank lending shifts—with two

separate banks

Table 2.​8 Financial accounts with two banks and credit money creation
(assuming │C2 – C1│ < B)

Table 2.​9 Plain money in financial accounts with illustrative numbers

Table 2.​10 Full reserve money/​Chicago plan financial accounts with

illustrative numbers

Table 2.​11 Financial accounts with central bank digital currencies

Table 3.​1 Four concepts of the real rate of interest

Table 3.​2 Reichsbank discount rate and inflation in Germany, 1914–

1923

Table 3.​3 Reichsbank discount rate and inflation in Germany, 1929–

1932

Table 3.​4 Several autonomous liquidity factors in the accounts of the

bank and central bank
Table 3.​5 Overnight lending facility’s and deposit facility’s name in
selected central banks

Table 3.​6 The central bank balance sheet ordered according to the
monetary policy implementation perspective

Table 3.​7 The ceiling approach to monetary policy implementation

Table 3.​8 The floor approach to monetary policy implementation

Table 3.​9 The symmetric corridor approach to monetary policy

implementation

Table 3.​10 Bank balance sheet to illustrate collateral constraints

Table 4.​1 Banknotes hording under negative interest rate policies of the
central bank

Table 5.​1 Balance sheet of an indebted firm

Table 5.​2 Annual default probability of rated debtors according to

Standard and Poor’s S&​P 2020

Table 6.​1 A stylised bank balance sheet to analyse funding stability of a

bank
Table 6.​2 Equilibrium decision of depositors depending on liquidity and
solvency of the bank

Table 6.​3 Pay-offs to depositors if L ≥ 2d and e ≥ 0

Table 6.​4 Pay-offs to depositors if d ≤ L < 2d and e ≥ 0

Table 6.​5 Bank’s balance sheet at the moment of default in the non-
equilibrium run scenario L =​Λ + (1 – Λ)(1 – h)

Table 6.​6 Pay-offs to depositors if L < d and e ≥ 0

Table 6.​7 Pay-offs to depositors if L ≥ 2d and e < 0

Table 6.​8 Pay-offs to depositors if d ≤ L < 2d and e < 0

Table 6.​9 Pay-offs to depositors if L < d and e < 0

Table 6.10 Utility of depositor 1 depending on own and depositor 2’s

decisions: U1(D1D1)

Table 6.​11 Effectiveness of collateral policies at the zero lower bound

Table 6.​12 Bank financed only by short term debt and equity
Table 7.​1 Two countries’ financial accounts, gold standard

Table 7.​2 Two countries’ financial accounts, gold standard, matrix

representation

Table 7.​3 A balance of payment equilibrium within the corporate

sectors of two countries

Table 7.​4 Central banks’ accounts in gold standard with claims on gold
instead of shipments

Table 7.​5 Accounts of financial sectors if deposits with foreign banks

replace gold shipment

Table 7.​6 Two countries’ financial accounts under the Bretton Woods
system

Table 7.​7 Bretton Woods financial accounts if surplus countries hoard

gold instead of USD

Table 7.​8 Two countries’ financial accounts in paper standard with

fixed exchange rates

Table 7.​9 Financial accounts, fixed exchange rate, with IMF providing
additional foreign reserves obtained by credit line
Table 7.​10 Financial accounts, fixed exchange rate, with IMF providing
additional foreign reserves obtained by pre-paid capital

Table 7.​11 Central bank accounts when currency 2 is devalued

Table 7.​12 Two countries’ accounts in a flexible exchange rate system

Table 7.​13 Two countries’ accounts in the European Monetary Union

exchange rate system

Table 7.​14 Eurosystem consolidated balance sheet

© The Author(s) 2021
U. Bindseil, A. Fotia, Introduction to Central Banking, SpringerBriefs in Quantitative
Finance
https://doi.org/10.1007/978-3-030-70884-9_1

1. Economic Accounts and Financial

Systems
Ulrich Bindseil1, 2 and Alessio Fotia3
(1) Institute of Economics and Law, Macroeconomics, Technical
University Berlin, Berlin, Germany
(2) Market Infrastructures and Payments, European Central Bank,
Frankfurt, Germany
(3) School of Business and Economics, Freie Universitä t Berlin, Berlin,
Germany

Ulrich Bindseil
Email: ulrich.bindseil@ecb.int

This chapter introduces the system of accounts of the main sectors of

the economy (households; non-financial corporations, the government;
banks, and the central bank), describing how these sectors are
interrelated through financial claims and liabilities. A financial system,
consisting of commercial banks and the central bank, manages flows of
funds originating from households, without these flows causing a need
for the real sectors to liquidate illiquid real assets. The basic types of
assets and liabilities are: real goods, gold, banknotes, deposits, bonds,
loans, and equity. We explain how the shortcomings of both IOU and
commodity-money based financial systems can be solved via
establishing a central bank. A central bank is defined here by its balance
sheet and central bank money is the central bank’s basic liability. Both
monetary policy implementation and lender of last resort issues relate
to liquidity flows within balance sheets. Understanding the logic of
basic financial flows is therefore the basis for understanding central
banking.

1.1 Real Economic Sectors and Basic Types of

Transactions
The first economic sector is the household. According to the United
Nations (UN and EC 2009), a household is a group of persons who
share the same living accommodation, who pool some, or all, of their
income and wealth and who consume certain types of goods and
services collectively, mainly housing and food. We can characterise this
household in terms of its holdings in the n real assets of the economy.
Assets are resources controlled by an entity as a result of past events
and from which future economic benefits or service potential are
expected to flow to the entity (EC 2011). Assets can be represented by a
vector X’ = {x1, x2, …xn}, in which gold coins are the n-th asset, i.e. xn. For
example, the household owns: X = {x1 chicken, x2 cows, … xn gold coins}.
To express the aggregate wealth of the household a unit of account is
necessary.
In principle every pair of goods has one relative price, namely a
price in terms of the other good. For example, say p(Chicken, Cow) is
the number of Chickens needed to buy one cow. Obviously p(cow,
chicken) = 1/p(chicken, cow). Also p(chicken, cow) = p(gold coin,
cow)/p(gold coin, chicken). Assume now that we chose the n-th good, a
well-specified gold coin (like the Florentine ducat with a fine gold
content of 3.44 grams), as unit of account. Let’s simplify our notation,
writing the relative price P(Gold coin, chicken) simply as p1 and P(Gold
coin, cow) as p2, etc. In this case we have used gold as a numeraire.
A numeraire is a commodity whose price is used as unit of account.
Dividing the price of the n goods by the price of the numeraire we
obtain n − 1 independent prices, while the price of the numeraire in
terms of itself is by definition one. We can represent all these prices by
a vector of prices P’ = {p1, p2, … 1} in which each good is expressed in
terms of the n-th good, in this case gold. The total value of the
households’ assets is then P’X and we can represent the balance sheet
of the household as in Table 1.1.
 The left of the balance sheet contains the assets of the household,
and the right its liabilities, which actually consist only in the
household’s own equity.

Table 1.1 The household’s balance sheet

Household accounts
Real Assets Household Equity

One heroic implicit assumption in the above approach (but common

in economics) is that of universal and immediately executable prices.
Reality differs from this ideal for two main reasons.
The first is illiquidity. Some assets are rarely traded, and to
purchase a certain asset in a relatively short period of time (within a
minute, within a day, etc.), one will normally have to pay (significantly)
more than if there were a lot of time to purchase it. Similarly, or often
even worse, to sell the good in a short period of time, one will have to
accept a significant price reduction, relative to the price that could have
been achieved with more time. Immediacy of execution has a price,
measurable, for example, in the form of bid-ask spreads, offered by
dealers, namely the difference between the price the dealer requires for
buying a stock and the price at which the dealer sells the same stock.
For this reason, one says that the dealer offers “immediacy services”. As
everyone can easily verify, in many used good markets (antiques, cars
and other consumer durables), dealer bid-ask quotes are around 30–
50%. In the most efficient parts of financial markets, e.g. US
Government “on the run” bonds, bid-ask spreads are below 1 basis
point (0.01%). Most other markets are somewhere in between.
The second main reason is asset specificity. A machine may have
been tailor-made to exactly fit into the production process of a unique
factory. Therefore, the value of the machine for the factory is much
higher than for any other use, even with an unlimited time to sell. For
instance, a very expensive and sophisticated machine used to test
aerodynamics in the aerospace industry could also be used in the car
industry, but with a more limited scope, as a much less sophisticated
and expensive machine could fulfil the same function. A car
manufacturer would buy such a machine only for the price of a machine
fulfilling the functions it needs, as it does not need the most
sophisticated functions used in the aerospace industry. Also human
capital may be specific, as an employee may be an expert in a certain
unique production process, or a manager in terms of knowing and
being able to manage the psychological idiosyncrasies of the members
of a specific team. The crucial role of asset specificity for economic
organisation was worked out, in particular, by Williamson (1985).
Both distinct matters will play a key role in Chapters 5 and 6.
We now introduce two other sectors which we treat most of the
time as one: corporates and the government. In the definition of the
United Nations (UN and EC 2009), corporations are “legal or social
entities […] whose existence is recognized by law or society
independently of the persons, or other entities, that may own or control
it. Such units are responsible and accountable for the economic
decisions or actions they take, although their autonomy may be
constrained to some extent by other institutional units; for example,
corporations are ultimately controlled by their shareholders”. The
simplified financial accounts of an economy with a corporate and
government sector are shown in Table 1.2. The corporate sector will
hold real assets, and as counterpart financial liabilities, representing
the means through which the corporates have been funded. There is
one major difference between the corporate and the government
sector: in the case of the corporate sector, equity is also a financial
liability, i.e. the equity is owned by e.g. households. In the case of the
government, equity is a genuine own equity and not an external capital
owned by another party (like household equity).
Table 1.2 A financial accounts system with the three real sectors

Household
Real Assets Household Equity EHh

Gold G
Company ECo
Equity
Company Debt DCo
State Debt DSt
 Corporates
Real assets Corporate Equity ECo

Debt DCo
State
Real assets State Equity ESt

Debt DSt
Why is there a separate corporate sector, separated from
households? Economic production and therefore welfare has been
spectacularly expanded by the establishment “capitalist” firms, which
have as liability both debt and equity (held by investors), and that as
counterpart own a part of the real assets of the economy.
The reason for the existence of “capitalist” firms is discussed in
Coase (1937) and Williamson (1985). Alternatives to pool ownership
for larger scale industrial endeavours would be, for instance, the
labour-owned firm (cooperative) or state-owned enterprises (SOEs).
Both alternatives work to some extent, but up to now the capitalist
firm has overshadowed its alternatives in efficiency for a large part
of productive activity.
We can disregard growth, and assume that the amount of real assets
in the economy does not change (except if asset value is destroyed
through disorderly asset liquidation). A part of the real assets moves
into the ownership of the corporate sector, and the household is
compensated by receiving financial claims such that neither the net
wealth nor the balance sheet length of the household changes. Of
course, over time the creation of the corporate sector will make a
difference: (i) it leads to a higher productivity and therefore to a
steeper growth trend of the real assets held by the corporate sector
(and hence the total amount of real assets of society); (ii) individual
households will have different individual exposures to real assets, to
equity and to debt, and therefore also their wealth will evolve over time
differently, depending on how they positioned themselves.
The corporate sector’s need for real assets is obvious as far as
traditional industries are concerned. For example, nineteenth century
growth industries like mining, canal transportation, railways,
clothing, breweries, etc. all obviously had needs to heavily invest into
real assets. In the financial accounts, we assume for the sake of
simplicity that these real assets are transferred from households to the
corporate sector. In reality, most of these assets are actually produced
over time by the corporate sector itself. In the case of sectors like IT or
services, the financing needs arise for the purpose of establishing
intellectual assets or the necessary brand name capital. Significant
work is needed before the assets obtain value (e.g. thousands of
programming hours before a complex software runs smoothly and can
be deployed to clients). In these cases, it is not physically existing real
assets that are transferred from the household to the corporate.
Instead, the firm uses its funds to rent “real” human capital and to
transform it into intellectual assets.
The raison-d’être of the government, and how to design it, are the
subjects of Public Economics. Generally speaking, the government
should provide “public goods”, i.e. goods with natural monopoly
properties in which economies of scale in production are positive
without limits, such as for security and defence, the legal system, the
core of the monetary system, and some parts of the infrastructure.
Moreover, the state may regulate market failures (externalities in
production and consumption) and address acknowledged irrationality
in human behaviour (e.g. enforce education and prohibit drugs). All this
requires a stock of assets and employees. While the feudal state can
really be considered as one enormous rich and powerful household,
democracies could be considered being “owned” in a non-financial
sense by the people. In the definition of the United Nations (UN and EC
2009, 62): “Government units are unique kinds of legal entities
established by political processes that have legislative, judicial or
executive authority over other institutional units within a given area.
The principal functions of government are to assume responsibility for
the provision of goods and services to the community or to individual
households and to finance their provision out of taxation or other
incomes; to redistribute income and wealth by means of transfers; and
to engage in non-market production.” The financial accounts of the
government are less obvious than those of the corporate sector, as
many of the assets of the government are intangibles, and its equity is
not really measurable. Moreover, the government is often composed of
various heterogenous entities (central government, regional
government, local utilities run by municipalities, etc.).

1.2 The Financial Sector and Financial

Transactions
We now introduce banks into the financial accounts. What do banks
do? They undertake various activities, as summarised in the following
list. Some banks were specialized to a subset of these activities, while
others cover many of them (“universal banks”). The historical origins of
banks and of the various banking functions are explained, for example,
in Kindleberger (1984, 71–152).
The United Nations (UN and EC 2009, 76) uses for banks in our
sense the term “Deposit-taking corporations except the central bank”
and defines those as entities with “financial intermediation as their
principal activity. To this end, they have liabilities in the form of
deposits or financial instruments (such as short-term certificates of
deposit) that are close substitutes for deposits. The liabilities of
deposit-taking corporations are typically included in measures of
money broadly defined.”
Table 1.3 introduces a deposit and a note issuing bank into the
financial accounts, which however only holds the gold in custody (i.e.
this bank offers payment and security services). The two liabilities are
identical in terms of financial accounts representation—they are only
distinct in terms of technicalities of transfer and earmarking of bank
liabilities to the claim holders (for deposits, a central ledger is
maintained and the bank can see who holds what amount of bank
deposits; for banknotes, there is no central ledger can be maintained).
Such a bank would have to finance its running costs through fees it
imposes on its clients.

Table 1.3 A financial account systems with a full reserve deposit bank

Household
Real Assets Household Equity EHh

Gold
Bank deposits D
Banknotes B
Claims to corporates C
Corporate/State
Real assets C Liabilities to households C
Banks
Gold Deposits of Household D
Banknotes issued B
In Table 1.4, banks can use the assets obtained through deposit and
banknote issuance to finance investments. Assume here for the moment
that (i) banks only lend to corporates and the state, and not back to
households; (ii) banks still hold gold at a certain ratio α of their total
assets, essentially as a self-chosen or imposed liquidity reserve; (iii)
corporates and the state do not hold deposits. Assume moreover that
the gained ability of the banks to provide credit creates new
opportunity for the corporate balance sheet to expand, say because
bank credit can finance projects that direct financing from the
household can not because of the insufficient monitoring expertise of
households. In Table 1.4 the corporate uses the fresh bank credit to
partially acquire more real asset from the household.

Table 1.4 A financial account system with a fractional reserve bank

Households
Real Assets Household Equity EHh
Gold

Bank deposits D
Banknotes B
Claims to corporates C
Corporates/State
Real assets Liabilities to C
households
 Bank credit
Bank
Gold Deposits of HH D

Credit to Banknotes issued B

corporates/state

1.2.1 Commodity Money, Financial Assets and IOU

Economy
To understand the origins of central banking, it is worth recalling the
merits of money in general and of financial money, in particular from
the perspective of contemporaneous authors. Already Aristotle (1998,
book I chapter IX) had noted that the inefficiencies of a barter economy
can be overcome to some extent by the designation of one real asset as
the medium of exchange—typically coined silver or gold. In the early
eighteenth century, this was described for instance by John Law (1705,
chap. 1) as follows:
Before the use of money was known, goods were exchanged by
barter, or contract; and contracts were made payable in goods.
This state of barter was inconvenient, and disadvantageous… In
this state of barter there was little trade, and few arts-men….
Silver as a metal had a value in barter, as other goods; from the
uses it was then applied to. … … What is meant by being used as
money, is, that silver in bullion was the measure by which goods
were valued: the value by which goods were exchanged: and in
which contracts were made payable. He who had more goods
than he had use for, would choose to barter them for silver…
Silver being capable of a stamp, princes, for the greater
convenience of the people, set up mints to bring it to a standard,
and stamp it; whereby its weight and finesse was known,
without the trouble of weighting or fining…. As money
increased, the disadvantages and inconveniences of barter were
removed; the poor and idle were employed, more of the land
was laboured, the product increased, manufactures and trade
improved, the landed-men lived better, and the people with less
dependence on them.
 As there is little evidence of societies really being based on barter,
or in which money evolved from barter (Humphrey 1985; Graeber
2012, chap. 2), this should not be seen as a historical account, but
rather as a reason why mankind developed other means to make trade
possible. The use of a precious metal as money solved the problem of
enforcement, but had various efficiency limitations, in particular for
larger scale payments: structural and cyclical scarcity of the precious
metal, heterogeneity due to imperfect coinage and usage, fragmentation
of units used, weight, risk of theft and therefore cost of storage and
transport. Therefore, credit instruments were soon developed to
support trade. A financial asset is a claim of one economic subject
towards another, for whom it is a financial liability. Financial
contracts typically refer to unconditional or conditional cash flows to
be paid in the future, whereby “cash flow” meant in the past settlement
with species. The most basic financial asset is an “IOU” for “I owe
you”—i.e. a promise to pay, which can be expressed in a numeraire
good or any other specific good. IOUs can help to partially address the
inefficiency of both a barter and of a species-based economy. In the
words of Thornton (1802a, 75) the benefits of credit are many:

“The day on which it suits the British merchant to purchase and

send away a large quantity of goods may not be that on which he
finds it convenient to pay for them.” Without credit, “he must
always have in his hands a very large stock of money; and for the
expense of keeping this fund (an expense consisting chiefly in
the loss of interest) he must be repaid in the price of the
commodities in which he deals.” Credit sets him “at liberty in his
speculations: his judgement as to the propriety of buying or not
buying, or of selling or not selling… may be more freely
exercised”.

The problems of an IOU-financial system with many agents and

therefore multiple claims and liabilities lengthening agents’ balance
sheet are: (i) Complexity to keep a record of all the claims and
liabilities; (ii) Credit risk and costs to monitor all claims; (iii) Possible
contagion in case of late payments or credit events. This raises the
question of netting claims, and/or eventually settling them in money.
Two steps have to be distinguished: financial claims netting without any
increases of exposures to specific names and financial claims with
“novation”, namely the possibility to transfer a claim on one debtor
from one creditor to another creditor, which implies such increases of
claims to specific debtors. The potentials of netting without and with
novation have been described for example by Kindleberger (1984, 440)
in the specific context of the European Payments Union (EPU) but apply
universally to any multilateral netting and settlement issue. Multilateral
netting is in any case a complex practical issue, and it is unlikely that
many agents can spontaneously coordinate on it in a pre-modern
environment. Netting through novation moreover requires that agents
are willing to accept changes to the identity of their debtors—which
will only be the case if the new debtors are systematically better than
the old ones. If there is enough species to settle transactions, then of
course such a situation would not arise. But merchants may have
insufficient species reserves or transferring species as a means of
payment may be very costly.
A way to avoid both the problems of species payments and of an IOU
system, is to create financial liquidity through a single high credit
quality, multiple-unit IOU which is accepted by all as means of
payment and store of value, and which therefore plays the same role as
species in achieving settlement finality of bilateral trades, without
however any of its inconveniences. If this IOU has the highest possible
credit quality, then novating financial claims towards it is always an
improvement, i.e., can be regarded as “settlement” of the claim. Issuing
these universal prime IOUs can be done in various ways, the only
constraint being that the issuer must be considered to be of the highest
achievable credit quality (such that novation is always accepted). The
status of having the highest possible credit quality can be supported by
a credible commitment of convertibility into species (i.e. into a real
good), and this was considered necessary throughout most of the early
history of central banking. The issuer of this universal prime IOU may
be the state, a public bank, or possibly a state-sponsored private bank.
In the words of Aglietta and Mojon (2014, 432–33):

Because debts have to be settled in other forms of debts, there is

a hierarchy of debts and, indeed, of the institutions that issue
 them. The central bank is the bank that issues the debt in which
all other debts are settled. … the ultimate liquidity in a payment
system can be a commodity minted by the sovereign (or a
foreign currency), or it can be the liability of a financial
institution empowered by society as a whole or by its highest
political authority—the sovereign. This institution is a central
bank.
To illustrate the mechanics of central financial money creation,
Table 1.5 shows a simple economy with m households (or m
“merchants”), each of which initially have equity A and real asset
holdings A. Assume the households initially do not have a suitable
medium of exchange, which limits their ability to trade with each other.
The central bank is a 100% reserve bank, i.e. all its assets are in the
form of precious metal coins.

Table 1.5 A full reserve central bank

Household i’s accounts (i = 1…m)

Real Assets A Household Equity

Gold

Banknotes/Deposits B
Full reserve central bank
Gold mB Banknotes/Deposits mB

While this scheme may improve the convenience of payments, it

does not solve the issue of netting and settling the multiple cross
household IOUs if the amount of precious metals in the economy is
structurally insufficient or subject to cyclical fluctuations. The
availability of medium of exchange to ensure efficient payment and
settlement is only increased if the central bank extends its balance
sheet further by adding non-money assets, be they real or financial, i.e.
by mixing into its assets elements of the previous schemes. The scheme
shown in Table 1.6 assumes that the central bank in addition purchases
some government securities (amounting to S per household) and by
providing some collateralised credit to each household (C).
Table 1.6 A central bank diversifying its assets into government bonds and credit

Household/Merchant i’s accounts (i = 1…m)

Real Assets Household Equity

Gold Credit from central C

bank
Banknotes/Deposits

Government
Real assets mS Government debt mS
Central bank expanding the monetary base
Gold mB Banknotes/Deposits m (B + S +
C)
Government debt mS
Collateralised lending to mC
privates
The asset mix and total amount of assets will have to respect the
need of the central bank to remain solvent and liquid, implying that the
share of liquid assets should be sufficiently large (i.e. nothing is as
liquid in this context as gold species, as this is what the central bank
commits to pay out to its creditors any time) and that the credit
riskiness of the portfolio should be contained—through an adequate
average quality of non-gold assets, and sufficient diversification.
Open Access This chapter is licensed under the terms of the
Creative Commons Attribution 4.0 International License (http://​
creativecommons.​org/​licenses/​by/​4.​0/​), which permits use, sharing,
adaptation, distribution and reproduction in any medium or format, as long as you
give appropriate credit to the original author(s) and the source, provide a link to the
Creative Commons license and indicate if changes were made.
The images or other third party material in this chapter are included in the
chapter's Creative Commons license, unless indicated otherwise in a credit line to
the material. If material is not included in the chapter's Creative Commons license
and your intended use is not permitted by statutory regulation or exceeds the
permitted use, you will need to obtain permission directly from the copyright holder.
© The Author(s) 2021
U. Bindseil, A. Fotia, Introduction to Central Banking, SpringerBriefs in Quantitative
Finance
https://doi.org/10.1007/978-3-030-70884-9_2

2. Central Banks
Ulrich Bindseil1, 2 and Alessio Fotia3
(1) Institute of Economics and Law, Macroeconomics, Technical
University Berlin, Berlin, Germany
(2) Market Infrastructures and Payments, European Central Bank,
Frankfurt, Germany
(3) School of Business and Economics, Freie Universitä t Berlin, Berlin,
Germany

Ulrich Bindseil
Email: ulrich.bindseil@ecb.int

This chapter develops further the role of a central bank and its
interplay with commercial banks. Together, the two ensure the
provision of liquidity to the economy, such that the real sectors are
shielded from flows of funds originating from household and investors.
We also disaggregate the banking system into two banks to represent
deposit flows between banks and their impact on the central bank’s
balance sheet, and to distinguish between what we call “relative” and
“absolute” central bank intermediation. We then integrate deposit
money creation by commercial banks into our system of financial
accounts, and revisit some old debates, such as the limits of bank
money creation and the role of related parameters that the central bank
can set (not only the reserve requirement ratio, but also the collateral
framework). Finally, we explain the concepts of “plain money” and “full
reserve banking” within the financial accounts, and also discuss in this
framework the recent proposals regarding central bank digital currency
(CBDC).
2.1 Central Banks in a Paper Standard
Since their origins (Bindseil 2019), central banks have evolved
considerably. Today, they have most of the time the following set
of common characteristics: (i) monopoly over the issue of the legal
means of payment; (ii) public control and in most cases state
ownership; (iii) a clear public mandate; (iv) possibility to create the
legal means of payment without any liquidity risk or risk of default; (v)
deal only with banks and the government and not with corporates and
households.
Table 2.1 summarises the financial relationships of a modern
central bank with the other sectors. Practices changed over time:
modern central banks withdrew from accepting deposits from
corporates and households, and they normally do not provide directly
credit to governments.
Table 2.1 Counterparties for financial operations for central banks

CB Assets CB liabilities
Sector↓ CB Credit CB Securities CB Banknotes
provision holdings deposits
Households No No No Yes
NFC No Yes (rarely) No Yes
Government No Yes Yes Yes
Banks Yes Yes (rarely) Yes Yes

A paper standard is a monetary arrangement in which the central

bank does not promise convertibility of its monetary liabilities into
precious metal coins. Issuance of monetary liabilities is therefore less
constrained, and the central bank cannot default on a convertibility
promise, as there is none. In a pure paper standard, the central bank
does not need to hold gold nor silver. If it also does not need to stabilise
its exchange rate to any other currencies, then its assets may consist
only in domestic financial claims, such as loans to banks and domestic
securities.
 Table 2.2 provides a stylized representation of the balance sheets of
the different economic sectors. It does not distinguish between
financial equity and debt. However, it distinguishes between financial
equity and real equity (equity that is the financial asset of no-one).
Table 2.3 shows an alternative representation of the financial
accounts shown in Table 2.2. It avoids the redundancy inherent in
financial accounts shown in balance sheet format as it shows every
financial position only once in a matrix, and not twice, i.e. not
separately as a financial claim and as a financial liability. The first
column shows the economic sectors from which to see each row a list of
assets. The row with the list of financial sectors shows, in each column
below the sectors, the liabilities. Besides the matrix of financial claims
and liabilities, there is one column showing all the real assets of the
sectors (second column) and one row showing the real
equity positions of the sectors, i.e. the equity not being a liability to any
other sector (second but last row). Some positions will be zero by
definition: for example F(5,1) should be zero, because the central bank
should never have any direct claims towards households.

Table 2.2 Financial accounts in a paper standard

Household
Real Assets Household EH
Equity
Gold G
Bank deposits D
Banknotes B
Corporate/state SH
bonds
Corporate equity Ec
Corporate/State
Real assets Debt securities

Bank credit

Corporate equity Ec
 Bank
Lending to corporates Deposits Hh D

Credit CB

Central Bank
Corporate/state SCB Banknotes issued B
bonds
Credit to banks

Table 2.3 Parsimonious financial accounts representation through financial

exposure matrix

Real (financial liabilities of ↓)

assets
1. 2. 3. 4. 5. Total
Household Corporate Government Banks Central assets
Bank
1. RA(1) F(1,1) F(1,2) F(1,3) F(1,4) F(1,5)
Household
2. RA(2) F(2,1) F(2,2) F(2,3) F(2,4) F(2,5)
Corporates
3. RA(3) F(3,1) F(3,2) F(3,3) F(3,4) F(3,5)
Government
4. Banks RA(4) F(4,1) F(4,2) F(4,3) F(4,4) F(4,5)
5. CB RA(5) F(5,2) F(5,3) F(5,4)
Real equity RE(1) RE(3) RE(5)
Total
liabilities
We should always remember that the following equalities hold:
Σ real assets = Σ real equity, i.e. total real assets of economy are
equal to total real equity
Σ Σ financial assets = Σ Σ financial liabilities (sum of all financial
assets across all sectors equals sum of all financial liabilities across
all sectors)
 Σ assets of one sector = Σ liabilities of one sector.

2.2 Changes to the Demand of Financial Assets in a

Paper Standard
In this section we will review what happens if households adjust
their demand for financial assets in a paper standard. Two of
the sectors shown in Tables 2.2 and 2.3 are assumed to make
choices: first the household chooses to diversify its real assets into
financial assets and determines the extent of this diversification, as well
as the reliance on each of the three types of financial assets: bonds,
deposits, banknotes; second the central bank decides on the split up of
its monetary policy operations between outright (i.e. direct) securities
holdings SCB and credit provision to banks (as residual, B − SCB). All
other balance sheet positions are expressed in terms of these four
choice variables, plus the initial household endowment EH.
The household demand for specific financial assets is
potentially unstable, as households may want to reduce their
exposition to a debtor whose solvency they no longer trust by holding
more liquid and safe assets. In the following representation gold is
merged into real assets. Households could refuse to roll over debt
securities and reduce their related positions (which we will identify in
the subsequent financial account tables as flow s) and hold more
deposit. Alternatively, households may withdraw deposits from banks
(which we will identify as flow d) and hold more banknotes if they fear
banks may be insolvent.
The effects of these flows will depend on the reaction of the banks
and the central bank. If the financial sector is ready to provide the
necessary elasticity, then the financial flows related to changing
financial asset demand of household can be absorbed without damage.
If however the financial sectors do not provide the necessary elasticity,
then the financial flows triggered by the households can cause
economic damage.

2.2.1 If Financial Sectors not Ready to Compensate

Missing Demand for Securities
Discovering Diverse Content Through
Random Scribd Documents
 In endeavouring by a few equally brief touches to give a sketch
of the natural features of North America, we must first glance at the
chain of the Andes, which, narrow at its origin, soon increases in
height and breadth as it follows an inclination from south-east to
north-west, passing through Panama, Veragua, Guatimala, and New
Spain. This range of mountains, formerly the seat of an ancient
civilization, presents a like barrier to the general current of the sea
between the tropics, and to a more rapid intercommunication
between Europe, Western Africa, and Eastern Asia. From the 17th
degree of latitude at the celebrated Isthmus of Tehuantepec, the
chain deflects from the shores of the Pacific, and inclining from
south to north becomes an inland Cordillera. In Northern Mexico,
the Crane Mountains (Sierra de las Grullas) constitute a portion of
the Rocky Mountains. On their western declivity rise the Columbia
and the Rio Colorado of California; on the eastern side the Rio Roxo
of Natchitoches, the Canadian river, the Arkansas, and the shallow
river Platte, which latter has recently been converted by some
ignorant geographers, into a Rio de la Plata, or a river yielding silver.
Between the sources of these rivers rise in the parallels of 37° 20′ and
40° 13′ lat., three huge peaks composed of granite, containing little
mica, but a large proportion of hornblende. These have been
respectively named Spanish Peak, James or Pike’s Peak, and Big
Horn or Long’s Peak.[K] Their elevation exceeds that of the highest
summits of the North Mexican Andes, which indeed nowhere attain
the height of the line of perpetual snow from the parallels of 18° and
19° lat., or from the group of Orizaba, (2717 toises, or 17,374 English
feet), and of Popocatepetl (2771 toises, or 17,720 English feet) to
Santa Fé and Taos in New Mexico. James’ Peak (38° 48′ lat.) is said
to have an elevation of 11,497 English feet. Of this only 8537 feet
have been determined by trigonometrical measurement, the
remainder being deduced in the absence of barometrical
observations, from uncertain calculations of the declivity or fall of
rivers. As it is scarcely ever possible, even at the level of the sea, to
conduct a purely trigonometrical measurement, determinations of
impracticable heights are always in part barometrical. Measurements
of the fall of rivers, of their rapidity and of the length of their course,
are so deceptive, that the plain at the foot of the Rocky Mountains,
more especially near those summits mentioned in the text, was,
before the important expedition of Captain Frémont, estimated
sometimes at 8000 and sometimes at 3000 feet above the level of
the sea.[L] From a similar deficiency of barometrical measurements,
the true height of the Himalaya remained for a long time uncertain;
now, however, science has made such advances in India, that when
Captain Gerard had ascended on the Tarhigang, near the Sutledge,
north of Shipke, to the height of 19,411 feet, he still had, after having
broken three barometers, four equally correct ones remaining.[M]
Frémont, in the expedition which he made between the years
1842 and 1844, at the command of the United States Government,
discovered and measured barometrically the highest peak of the
whole chain of the Rocky Mountains to the north-north-west of
Spanish, James’, Long’s, and Laramie’s Peaks. This snow-covered
summit, which belongs to the group of the Wind River Mountains,
bears the name of Frémont’s Peak on the great chart published under
the direction of Colonel Abert, chief of the topographical department
at Washington. This point is situated in the parallel of 43° 10′ north
lat., and 110° 7′ west long., and therefore nearly 5° 30′ north of
Spanish Peak. The elevation of Frémont’s Peak, which according to
direct measurement is 13,568 feet, must therefore exceed by 2072
feet that given by Long to James’ Peak, which would appear from its
position to be identical with Pike’s Peak, as given in the map above
referred to. The Wind River Mountains constitute the dividing ridge
(divortia aquarum) between the two seas. “From the summit,” says
Captain Frémont in his official report,[N] “we saw on the one side
numerous lakes and streams, the sources of the Rio Colorado, which
carries its waters through the Californian Gulf to the South Sea; on
the other, the deep valley of the Wind River, where lie the sources of
the Yellowstone River, one of the main branches of the Missouri
which unites with the Mississippi at St. Louis. Far to the north-west
we could just discover the snowy heads of the Trois Tetons, which
give rise to the true sources of the Missouri not far from the primitive
stream of the Oregon or Columbia river, which is known under the
name of Snake River, or Lewis Fork.”
To the surprise of the adventurous travellers, the summit of
Frémont’s Peak was found to be visited by bees. It is probable that
these insects, like the butterflies which I found at far higher
elevations in the chain of the Andes, and also within the limits of
perpetual snow, had been involuntarily drawn thither by ascending
currents of air. I have even seen large winged lepidoptera, which had
been carried far out to sea by land-winds, drop on the ship deck at a
considerable distance from land in the South Sea.
Frémont’s map and geographical researches embrace the
immense tract of land extending from the confluence of Kanzas River
with the Missouri, to the cataracts of the Columbia and the Missions
of Santa Barbara and Pueblo de los Angeles in New California,
presenting a space amounting to 28 degrees of longitude (about 1360
miles) between the 34th and 45th parallels of north latitude. Four
hundred points have been hypsometrically determined by
barometrical measurements, and for the most part, astronomically:
so that it has been rendered possible to delineate the profile above
the sea’s level of a tract of land measuring 3,600 miles with all its
inflections, extending from the north of Kanzas River to Fort
Vancouver and to the coasts of the South Sea (almost 720 miles more
than the distance from Madrid to Tobolsk). As I believe I was the
first who attempted to represent, in geognostic profile, the
configuration of entire countries, as the Spanish Peninsula, the
highland of Mexico, and the Cordilleras of South America (for the
half-perspective projections of the Siberian traveller, the Abbé
Chappe,[O] were based on mere and for the most part on very
inaccurate estimates of the falls of rivers); it has afforded me special
satisfaction to find the graphical method of representing the earth’s
configuration in a vertical direction, that is, the elevation of solid
over fluid parts, achieved on so vast a scale. In the mean latitudes of
37° to 43° the Rocky Mountains present, besides the great snow-
crowned summits, whose height may be compared to that of the Peak
of Teneriffe, elevated plateaux of an extent scarcely to be met with in
any other part of the world, and whose breadth from east to west is
almost twice that of the Mexican highlands. From the range of the
mountains, which begin a little westward of Fort Laramie, to the
further side of the Wahsatch Mountains, the elevation of the soil is
uninterruptedly maintained from five to upwards of seven thousand
feet above the sea’s level; nay, this elevated portion occupies the
whole space between the true Rocky Mountains and the Californian
snowy coast range from 34° to 45° north latitude. This district, which
is a kind of broad longitudinal valley, like that of the lake of Titicaca,
has been named The Great Basin by Joseph Walker and Captain
Frémont, travellers well acquainted with these western regions. It is
a terra incognita of at least 8000 geographical (or 128,000 English)
square miles, arid, almost uninhabited, and full of salt lakes, the
largest of which is 3940 Parisian (or 4200 English) feet above the
level of the sea, and is connected with the narrow Lake Utah,[P] into
which the “Rock River” (Timpan Ogo in the Utah language) pours its
copious stream. Father Escalante, in his wanderings from Santa Fé
del Nuevo Mexico to Monterey in New California, discovered
Frémont’s “Great Salt Lake” in 1776, and confounding together the
river and the lake, called it Laguna de Timpanogo. Under this name I
inserted it in my map of Mexico, which gave rise to much uncritical
discussion regarding the assumed non-existence of a large inland salt
lake,[Q]—a question previously mooted by the learned American
traveller Tanner. Gallatin expressly says in his memoir on the
aboriginal races[R]—“General Ashley and Mr. J. S. Smith have found
the Lake Timpanogo in the same latitude and longitude nearly as had
been assigned to it in Humboldt’s Atlas of Mexico.”
I have purposely dwelt at length on these considerations
regarding the remarkable elevation of the soil in the region of the
Rocky Mountains, since by its extension and height it undoubtedly
exercises a great, although hitherto unappreciated influence on the
climate of the northern half of the new continent, both in its
southern and eastern portions. On this vast and uniformly elevated
plateau Frémont found the water covered with ice every night in the
month of August. Nor is the configuration of the land less important
when considered in reference to the social condition and progress of
the great North American United States. Although the mountain
range which divides the waters attains a height nearly equal to that of
the passes of Mount Simplon (6170 Parisian or 6576 English feet),
Mount Gothard (6440 Parisian or 6863 English feet), and the great
St. Bernard (7476 Parisian or 7957 English feet), the ascent is so
prolonged and gradual that no impediments oppose a general
intercourse by means of vehicles and carriages of every kind between
the Missouri and Oregon territories, between the Atlantic States, and
the new settlements on the Oregon (or Columbia) river, or between
the coast-lands lying opposite to Europe on the one side of the
continent, and to China on the other. The distance from Boston to
the old settlement of Astoria on the Pacific at the mouth of the
Oregon when measured in a direct line, and taking into account the
difference of longitude, is 550 geographical, i.e., 2200 English miles,
or one-sixth less than the distance between Lisbon and
Katherinenburg in the Ural district. On account of this gentle ascent
of the elevated plains leading from the Missouri to California and the
Oregon territory (all the resting-places measured between the Fort
and River Lamarie on the northern branch of the Platte river to Fort
Hall on the Lewis Fork of the Columbia, being situated at an
elevation of from five to upwards of seven thousand feet, and that in
Old Park even at the height of 9760 Parisian or 10,402 English feet!),
considerable difficulty has been experienced in determining the
culminating point, or that of the divortia aquarum. It is south of the
Wind River Mountains, about midway between the Mississippi and
the coast line of the Southern Ocean, and is situated at an elevation
of 7490 feet, or only 480 feet lower than the pass of the Great
Bernard. The emigrants call this culminating point the South Pass.[S]
It is situated in a pleasant region, embellished by a profusion of
artemisiæ, especially A. tridentata (Nuttall), and varieties of asters
and cactuses, which cover the micaceous slate and gneiss rocks.
Astronomical determinations place its latitude in the parallel of 42°
24′, and its longitude in that of 109° 24′ W. Adolf Erman has already
drawn attention to the fact, that the line of strike of the great east-
Asiatic Aldanian mountain-chain, which separates the basin of the
Lena from the rivers flowing towards the Great Southern Ocean, if
extended in the form of a great circle on the surface of the globe,
passes through many of the summits of the Rocky Mountains
between 40° and 55° north lat. “An American and an Asiatic
mountain-chain,” he remarks, “appear therefore to be only portions
of one and the same fissure erupted by the shortest channels.”[T]
The western high mountain coast chain of the Californian
maritime Alps, the Sierra Nevada de California, is wholly distinct
from the Rocky Mountains, which sink towards the Mackenzie River
(that remains covered with ice for a great portion of the year), and
from the high table land on which rise individual snow-covered
peaks. However injudicious the choice of the appellation of Rocky
Mountains may be, when applied to the most northerly prolongation
of the Mexican central chain, I do not deem it expedient to substitute
for it the denomination of the Oregon Chain, as has frequently been
attempted. These mountains do indeed give rise to the sources of
three main branches constituting the great Oregon or Columbia river
(viz., Lewis’, Clarke’s, and North Fork); but this mighty stream also
intersects the chain of the ever snow-crowned maritime Alps of
California. The name of Oregon Territory is also employed, politically
and officially, to designate the lesser territory of land west of the
coast chain, where Fort Vancouver and the Walahmutti settlements
are situated; and it would therefore seem better to abstain from
applying the name of Oregon either to the central or to the coast
chain. This denomination, moreover, led the celebrated geographer
Malte-Brun into a misconception of the most remarkable kind. He
read in an old Spanish chart the following passage:—“And it is still
unknown (y aun se ignora) where the source of this river” (now
called the Columbia) “is situated,” and he believed that the word
ignora signified the name of the Oregon.[U]
The rocks which give rise to the cataracts of the Columbia at the
point where the river breaks through the chain, mark the
prolongation of the Sierra Nevada of California from the 44th to the
47th degree of latitude.[V] In this northern prolongation of the chain
lie the three colossal elevations of Mount Jefferson, Mount Hood,
and Mount St. Helen’s, which rise 14,540 Parisian (or 15,500
English) feet above the sea-level. The height of this coast chain or
range far exceeds therefore that of the Rocky Mountains. “During an
eight months’ journey along these maritime Alps,” says Captain
Frémont,[W] “we were constantly within sight of snow-covered
summits; and while we were able to cross the Rocky Mountains
through the South Pass at an elevation of 7027 feet, we found that
the passes in the maritime range, which is divided into several
parallel chains, were more than 2000 feet higher”—and therefore
only 1170 (English) feet below the summit of Mount Etna. It is also a
very remarkable fact, and one which reminds us of the relations of
the eastern and western Cordilleras of Chili, that volcanoes still
active are only found in the Californian chain which lies in the closest
proximity to the sea. The conical mountains of Regnier and of St.
Helen’s are almost invariably observed to emit smoke; and on the
23rd of November, 1843, the latter of these volcanoes erupted a mass
of ashes which covered the shores of the Columbia for a distance of
forty miles, like a fall of snow. To the volcanic Californian chain
belong also in the far north of Russian America, Mount Elias
(according to La Pérouse 1980 toises, or 12,660 feet, and according
to Malaspina 2792 toises, or 17,850 feet in height), and Mount Fair
Weather (Cerro de Buen Tiempo, 2304 toises, or 14,733 feet high).
Both these conical mountains are regarded as still active volcanoes.
Frémont’s expedition, which has proved alike useful in reference to
botany and geognosy, likewise collected volcanic products in the
Rocky Mountains (as scoriaceous basalt, trachyte, and true
obsidian), and discovered an old extinct crater somewhat to the east
of Fort Hall (43° 2′ north lat., and 112° 28′ west long.), but no traces
of any still active volcanoes emitting lava and ashes, were to be met
with. We must not confound with these the hitherto unexplained
phenomenon termed smoking hills, côtes brûlées, and terrains
ardens, in the language of the English settlers and the natives who
speak French. “Rows of low conical hills,” says the accurate observer
M. Nicollet, “are almost periodically, and sometimes for two or three
years continually, covered with dense black smoke, unaccompanied
by any visible flames. This phenomenon is more particularly noticed
in the territory of the Upper Missouri, and still nearer to the eastern
declivity of the Rocky Mountains, where there is a river named by the
natives Mankizitah-watpa, or the river of smoking earth. Scorified
pseudo-volcanic products, a kind of porcelain jasper, are found in the
vicinity of the smoking hills.”
Since the expedition of Lewis and Clarke an opinion has
generally prevailed that the Missouri deposits a true pumice on its
banks; but here white masses of a delicate cellular texture have been
mistaken for that substance. Professor Ducatel was of opinion that
the phenomenon which is chiefly observed in the chalk formation,
was owing to “the decomposition of water by sulphur pyrites and to a
reaction on the brown coal floetzes.”[X]
If before we close these general remarks regarding the
configuration of North America we once more cast a glance at those
regions which separate the two diverging coast chains from the
central chain, we shall find in strong contrast, on the West, between
that central chain and the Californian Alps of the Pacific, an arid and
uninhabited elevated plateau nearly six thousand feet above the sea;
and in the East, between the Rocky Mountains and the Alleghanies.
(whose highest points, Mount Washington and Mount Marcy, rise,
according to Lyell, to the respective heights, of 6652 and 5400 feet,)
we see the richly watered, fruitful, and thickly-inhabited basin of the
Mississippi, at an elevation of from four to six hundred feet, or more
than twice that of the plains of Lombardy. The hypsometrical
character of this eastern valley, or in other words, its relation to the
sea’s level, has only very recently been explained by the admirable
labours of the talented French astronomer Nicollet, unhappily lost to
science by a premature death. His great chart of the Upper
Mississippi, executed between the years 1836 and 1840, was based
on two hundred and forty astronomical determinations of latitude,
and one hundred and seventy barometrical determinations of
elevation. The plain which encloses the valley of the Mississippi is
identical with that of northern Canada, and forms part of one and the
same depressed basin, extending from the Gulf of Mexico to the
Arctic Sea.[Y] Wherever the low land falls in undulations, and slight
elevations which still retain their un-English appellation of côteaux
des prairies, côteaux des bois, occur in connected rows between the
parallels of 47° and 48° north lat., these rows and gentle undulations
of the ground separate the waters between Hudson’s Bay and the
Gulf of Mexico. Such a line of separation between the waters is
formed, north of Lake Superior or Kichi Gummi, by the Missabay
Heights, and further west by the elevations known as Hauteurs des
Terres, in which are situated the true sources of the Mississippi, one
of the largest rivers in the world, and which were not discovered till
the year 1832. The highest of these chains of hills hardly attains an
elevation of from 1500 to 1600 feet. From its mouth (the old French
Balize) to St. Louis, somewhat to the south of its confluence with the
Missouri, the Mississippi has a fall of only 380 feet, notwithstanding
that the itinerary distance between these two points exceeds 1280
miles. The surface of Lake Superior lies at an elevation of 618 feet,
and as its depth in the neighbourhood of the island of Magdalena is
fully 790 feet, its bottom must be 172 feet below the surface of the
ocean.[Z]
Beltrami, who in 1825 separated himself from Major Long’s
expedition, boasted that he had found the sources of the Mississippi
in Lake Cass. The river passes, in its upper course, through four
lakes, the second of which is the one referred to, while the outermost
one, Lake Istaca (47° 13′ north lat., and 95° west long.), was first
recognised as the true source of the Mississippi, in 1832, in the
expedition of Schoolcraft and Lieutenant Allen. This stream, which
subsequently becomes so mighty, is only 17 feet in width, and 15
inches deep, when it issues from the singular horse-shoe-shaped
Lake Istaca. The local relations of this river were first fully
established on a basis of astronomical observations of position by the
scientific expedition of Nicollet, in the year 1836. The height of the
sources, that is to say, of the last access of water received by Lake
Istaca from the ridge of separation, called Hauteur de Terre, is 1680
feet above the level of the sea. Near this point, and at the southern
declivity of the same separating ridge, lies Elbow Lake, the source of
the small Red River of the north, which empties itself, after many
windings, into Hudson’s Bay. The Carpathian Mountains exhibit
similar relations in reference to the origin of the rivers which empty
themselves into the Baltic and the Black Sea. M. Nicollet gave the
names of celebrated astronomers, opponents as well as friends, with
whom he had become acquainted in Europe, to the twenty small
lakes which combine together to form narrow groups in the southern
and western regions of Lake Istaca. His atlas is thus converted into a
geographical album, reminding one of the botanical album of the
Flora Peruviana of Ruiz and Pavon, in which the names of new
families of plants were made to accord with the Court Calendar, and
the various alterations made in the Oficiales de la Secretaria.
The east of the Mississippi is still occupied by dense forests; the
west by prairies only, on which the buffalo (Bos Americanus) and the
musk ox (Bos moschatus) pasture. These two species of animals, the
largest of the new world, furnish the nomadic tribes of the Apaches-
Llaneros and Apaches-Lipanos with the means of nourishment. The
Assiniboins occasionally slay from seven to eight hundred bisons in
the course of a few days in the artificial enclosures constructed for
the purpose of driving together the wild herds, and known as bison
parks.[AA] The American bison, called by the Mexicans Cibolo, is
killed chiefly on account of the tongue, which is regarded as a special
delicacy. This animal is not a mere variety of the aurochs of the old
world; although, like other species of animals, as for instance the elk
(Cervus alces) and the reindeer (Cervus tarandus), no less than the
stunted inhabitants of the polar regions, it may be regarded as
common to the northern portions of all continents, and as affording
a proof of their former long existing connection. The Mexicans apply
to the European ox the Aztec term quaquahue, or horned animal,
from quaquahuitl, a horn. The huge ox-horns which have been found
in ancient Mexican buildings near Cuernavaca, south-west of the
capital of Mexico, appear to me to belong to the bison. The Canadian
bison can be used for agricultural labour, and will breed with the
European cattle, although it is uncertain whether the hybrid thus
engendered is capable of propagating its species. Albert Gallatin,
who, before his appearance in Europe as a distinguished diplomatist,
had acquired by personal observation a considerable amount of
information regarding the uncultivated parts of the United States,
assures us that the fruitfulness of the mixed breed of the American
buffalo and European cattle is an undoubted fact: “the mixed breed,”
he writes, “was quite common fifty years ago in some of the north-
western counties of Virginia, and the cows, the issue of that mixture,
propagated like all others.” “I do not remember,” he further adds,
“that full-grown buffaloes were tamed; but dogs would at that time
occasionally bring in the young bison-calves, which were reared and
bred with European cows. At Monongahela all the cattle for a long
time were of this mixed breed. It was said, however, that the cows
yielded but little milk.” The favourite food of the buffalo is the
Tripsacum dactyloides (known as buffalo-grass in North Carolina)
and a hitherto undescribed species of clover allied to the Trifolium
repens, and designated by Barton as Trifolium bisonicum.
I have elsewhere[AB] drawn attention to the fact, that according
to a passage of the trustworthy Gomara[AC], there lived, as late as the
sixteenth century, an Indian tribe in the north-west of Mexico, in 40°
north lat., whose greatest wealth consisted in hordes of tamed
buffaloes (bueyes con una giba). Yet, notwithstanding the possibility
of taming the buffalo, and the abundance of milk it yields, and
notwithstanding the herds of Lamas in the Peruvian Cordilleras, no
pastoral tribes were met with on the discovery of America. Nor does
history afford any evidence of the existence, at any period, of this
intermediate stage of national development. It is also a remarkable
fact that the North American bison or buffalo has exerted an
influence on geographical discoveries in pathless mountain districts.
These animals advance in herds of many thousands in search of a
milder climate, during winter, in the countries south of the Arkansas
river. Their size and cumbrous forms render it difficult for them to
cross high mountains on these migratory courses, and a well-trodden
buffalo-path is therefore followed wherever it is met with, as it
invariably indicates the most convenient passage across the
mountains. Thus buffalo-paths have indicated the best tracks for
passing over the Cumberland Mountains in the south-western parts
of Virginia and Kentucky, and over the Rocky Mountains, between
the sources of the Yellowstone and Plate rivers, and between the
southern branch of the Columbia and the Californian Rio Colorado.
European settlements have gradually driven the buffalo from the
eastern portions of the United States. Formerly these migratory
animals passed the banks of the Mississippi and the Ohio, advancing
far beyond Pittsburgh.[AD]
From the granitic rocks of Diego Ramirez and the deeply-
intersected district of Terra del Fuego (which in the east contains
silurian schist, and in the west, the same schist metamorphosed into
granite by the action of subterranean fire,)[AE] to the North Polar Sea,
the Cordilleras extend over a distance of more than 8000 miles.
Although not the loftiest, they are the longest mountain chain in the
world, being upheaved from one fissure, which runs in the direction
of a meridian from pole to pole, and exceeding in linear extent the
distance which, in the old continent, separates the Pillars of Hercules
from the Icy Cape of the Tschuktches, in the north-east of Asia.
Where the Andes are divided into several parallel chains, those lying
nearest the sea are found to be the seat of the most active volcanoes;
and it has moreover been repeatedly observed that when the
phenomenon of an eruption of subterranean fire ceases in one
mountain chain, it breaks forth in some other parallel range. The
cones of eruption usually follow the direction of the axis of the chain;
but in the Mexican table-land, the active volcanoes are situated on a
transverse fissure, running from sea to sea, in a direction from east
and west.[AF] Wherever the upheaval of mountain masses in the
folding of the ancient crust of the earth has opened a communication
with the fused interior, volcanic activity continued to be exhibited on
the murally upheaved mass by means of the ramification of fissures.
That which we call a mountain chain has not been raised to its
present elevation, or manifested as it now appears, at one definite
period; for we find that rocks, varying considerably in age, have been
superimposed on one another, and have penetrated towards the
surface through early formed channels. The diversity observable in
rocks is owing to the outpouring and upheaval of rocks of eruption,
as well as to the complicated and slow process of metamorphism
going on in fissures filled with vapour, and conducive to the
conduction of heat.
The following have for a long time, viz., from 1830 to 1848, been
regarded as the highest or culminating points of the Cordilleras of
the new continent:—
The Nevado de Sorata, also called Ancohuma or Tusubaya (15°
52′ south lat.), somewhat to the south of the village of Sorata or
Esquibel, in the eastern chain of Bolivia: elevation, 25,222 feet.
The Nevado de Illimani, west of the mission of Yrupana (16° 38′
south lat.), also in the eastern chain of Bolivia: elevation, 24,000
feet.
The Chimborazo (1° 27′ south lat.), in the province of Quito:
elevation, 21,422 feet.
The Sorata and Illimani were first measured by the
distinguished geologist, Pentland, in the years 1827 and 1838; and
since the publication of his large map of the basin of the Laguna de
Titicaca, in June, 1848, we learn that the above elevations given for
the Sorata and Illimani are 3960 feet and 2851 feet too high. His map
gives only 21,286 feet for the Sorata, and 21,149 feet for the Illimani.
A more exact calculation of the trigonometrical operations of 1838
led Mr. Pentland to these new results. He ascribes an elevation of
from 21,700 to 22,350 feet to four summits of the western
Cordilleras; and, according to his data, the Peak of Sahama would
thus be 926 feet higher than the Chimborazo, but 850 feet lower than
the Peak of Aconcagua.

6. p. 2—“The desert near the basaltic mountains of Harudsch.”

Near the Egyptian Natron Lakes, which in Strabo’s time had not
yet been divided into the six reservoirs by which they are now
characterized, there rises abruptly to the north a chain of hills,
running from east to west past Fezzan, where it at length appears to
form one connected range with the Atlas chain. It divides in north-
eastern, as Mount Atlas does in north-western Africa the Lybia,
described by Herodotus as inhabited and situated near the sea, from
the land of the Berbirs, or Biledulgerid, famed for the abundance of
its wild animals. On the borders of Middle Egypt the whole region,
south of the 30th degree of latitude, is an ocean of sand, studded
here and there with islands or oases abounding in springs and rich in
vegetation. Owing to the discoveries of recent travellers, a vast
addition has been made to the number of the Oases formerly known,
and which the ancients limited to three, compared by Strabo to spots
upon a panther’s skin. The third Oasis of the ancients, now called
Siwah, was the nomos of Ammon, a hierarchical seat and a resting-
place for the caravans, which inclosed within its precincts the temple
of the horned Ammon and the spring of the Sun, whose waters were
supposed to become cool at certain periods. The ruins of Ummibida
(Omm-Beydah) incontestably belong to the fortified caravanserai at
the Temple of Ammon, and therefore constitute one of the most
ancient monuments which have come down to us from the dawn of
human civilization.[AG]
The word Oasis is Egyptian, and is synonymous with Auasis and
Hyasis.[AH] Abulfeda calls the Oases el-Wah. In the latter time of the
Cæsars, malefactors were sent to the Oases, being banished to these
islands in the sandy ocean, as the Spaniards and English transported
their malefactors to the Falkland islands and New Holland. The
ocean affords almost a better chance of escape than the desert
surrounding the Oases; which, moreover, diminish in fruitfulness in
proportion to the greater quantity of sand incorporated in the soil.
The small mountain range of Harudsch (Harudje[AI]) consists of
grotesquely-shaped basaltic hills. It is the Mons Ater of Pliny, and its
western extremity, known as the Soudah mountain, has been
recently explored by my unfortunate friend, the enterprising traveller
Ritchie. These basaltic eruptions in the tertiary limestone, and rows
of hills rising abruptly from fissures, appear to be analogous to the
basaltic eruptions in the Vicentine territory.
 Nature repeats the same phenomena in the most distant regions
of the earth. Hornemann found an immense quantity of petrified
fishes’ heads in the limestone formations of the White Harudsch
(Harudje el-Abiad), belonging probably to the old chalk. Ritchie and
Lyon remarked that the basalt of the Soudah mountain was in many
places intimately mingled with carbonate of lime, as is the case in
Monte Berico; a phenomenon that is probably connected with
eruptions through limestone strata. Lyon’s chart even indicates
dolomite in the neighbourhood. Modern mineralogists have found
syenite and greenstone, but not basalt, in Egypt. Is it possible that
the true basalt, from which many of the ancient vases found in
various parts of the country were made, can have been derived from
a mountain lying so far to the west? Can the obsidius lapis have come
from there, or are we to seek basalt and obsidian on the coast of the
Red Sea? The strip of the volcanic eruptions of Harudsch, on the
borders of the African desert, moreover reminds the geologist of
augitic vesicular amygdaloid, phonolite, and greenstone porphyry,
which are only found on the northern and western limits of the
steppes of Venezuela and of the plains of the Arkansas, and
therefore, as it were, on the ancient coast chains.[AJ]

7. p. 3—“When suddenly deserted by the tropical east wind, and

the sea is covered with weeds.”
It is a remarkable phenomenon, although one generally known
to mariners, that in the neighbourhood of the African coast, (between
the Canaries and the Cape de Verde islands, and more especially
between Cape Bojador and the mouth of the Senegal,) a westerly
wind often prevails instead of the usual east or trade wind of the
tropics. The cause of this phenomenon is to be ascribed to the far-
extending desert of Zahara, and arises from the rarefaction, and
consequent vertical ascent of the air over the heated sandy surface.
To fill up the vacuum thus occasioned, the cool sea-air rushes in,
producing a westerly breeze, adverse to vessels sailing to America;
and the mariner, long before he perceives any continent, is made
sensible of the effects of its heat-radiating sands. As is well known, a
similar cause produces that alternation of sea and land breezes,
which prevails at certain hours of the day and night on all sea-coasts.
The accumulation of sea-weed in the neighbourhood of the
western coasts of Africa has been often referred to by ancient writers.
The local position of this accumulation is a problem which is
intimately connected with the conjectures regarding the extent of
Phœnician navigation. The Periplus, which has been ascribed to
Scylax of Caryanda, and which, according to the investigations of
Niebuhr and Letronne, was very probably compiled in the time of
Philip of Macedon, contains a description of a kind of fucus sea, Mar
de Sargasso, beyond Cerne; but the locality indicated appears to me
very different from that assigned to it in the work “De Mirabilibus
Auscultationibus,” which for a long time, but incorrectly, bore the
great name of Aristotle.[AK] “Driven by the east wind,” says the
pseudo-Aristotle, “Phœnician mariners came in a four days’ voyage
from Gades to a place where the sea was found covered with rushes
and sea-weed (θρύον καὶ φῦκος). The sea-weed is uncovered at ebb,
and overflowed at flood tide.” Does he not here refer to a shoal lying
between the 34th and 36th degrees of latitude? Has a shoal
disappeared there in consequence of volcanic revolution? Vobonne
refers to rocks north of Madeira.[AL] In Scylax it is stated that “the sea
beyond Cerne ceases to be navigable in consequence of its great
shallowness, its muddiness, and its sea-grass. The sea-grass lies a
span thick, and it is pointed at its upper extremity, so that it pricks.”
The sea-weed which is found between Cerne (the Phœnician station
for merchant vessels, Gaulea; or, according to Gosselin, the small
estuary of Fedallah, on the north-west coast of Mauritania,) and
Cape Verde, at the present time by no means forms a great meadow
or connected group, “mare herbidum,” such as exists on the other
side of the Azores. Moreover, in the poetic description of the coast
given by Festus Avienus,[AM] in which, as Avienus himself very
distinctly acknowledges, he availed himself of the journals of
Phœnician ships, the impediments presented by the sea-weed are
described with great minuteness; but Avienus places the site of this
obstacle much further north, towards Ierne, the Holy Isle.
 Sic nulla late flabra propellunt ratem,
Sic segnis humor æquoris pigri stupet.
Adjicit et illud, plurimum inter gurgites
Exstare fucum, et sæpe virgulti vice
Retinere puppim ...
Hæc inter undas multa cæspitem jacet,
Eamque late gens Hibemorum colit.

When we consider that the sea-weed (fucus), the mud or slime

(πηλὸς), the shallowness of the sea, and the perpetual calms, are
always regarded by the ancients as characteristic of the Western
Ocean beyond the Pillars of Hercules, we feel inclined, especially on
account of the reference to the calms, to ascribe this to Punic
cunning, to the tendency of a great trading people to hinder others,
by terrific descriptions, from competing with them in maritime
trading westwards. But even in the genuine writings of the Stagyrite,
[AN]
the same opinion is retained regarding the absence of wind, and
Aristotle attempts to explain a false notion, or, as it seems to me,
more correctly speaking, a fabulous mariner’s story, by an hypothesis
regarding the depth of the sea. The stormy sea between Gades and
the Islands of the Blest (Cadiz and the Canaries) can in truth in no
way be compared with the sea, which lies between the tropics, ruffled
only by the gentle trade-winds (vents alisés), and which has been
very characteristically named by the Spaniards[AO] El Golfo de las
Damas.
From very careful personal researches and from comparison of
the logs of many English and French vessels, I am led to believe that
the old and very indefinite expression Mar de Sargasso, refers to two
fucus banks, the larger of which is of an elongated form, and is the
easternmost one, lying between the parallels of 19° and 34°, in a
meridian 7° westward of the Island of Corvo, one of the Azores; while
the smaller and westernmost bank is of a roundish form, and is
found between Bermuda and the Bahama Islands (lat. 25°–31°, long.
66°–74°). The principal diameter of the small bank, which is
traversed by ships sailing from Baxo de Plata (Caye d’Argent,)
northward of St. Domingo to the Bermudas, appears to me to have a
N. 60° E. direction. A transverse band of fucus natans, extending in
an east-westerly direction between the latitudes of 25° and 30°,
connects the greater with the smaller bank. I have had the pleasure
of seeing these views adopted by my lamented friend Major Rennell,
and confirmed, in his great work on Currents, by many new
observations.[AP] The two groups of sea-weed, together with the
transverse band uniting them, constitute the Sargasso Sea of the
older writers, and collectively occupy an area equal to six or seven
times that of Germany.
The vegetation of the ocean thus offers the most remarkable
example of social plants of a single species. On the main land the
Savannahs or grass plains of America, the heaths (ericeta), and the
forests of Northern Europe and Asia, in which are associated
coniferous trees, birches, and willows, produce a less striking
uniformity than do these thalassophytes. Our heaths present in the
north not only the predominating Calluna vulgaris, but also Erica
tetralix, E. ciliaris, and E. cinerea; and in the south, Erica arborea, E.
scoparia, and E. Mediterranea. The uniformity of the view presented
by the Fucus natans is incomparably greater than that of any other
assemblage of social plants. Oviedo calls the fucus banks “meadows,”
praderias de yerva. If we consider that Pedro Velasco, a native of the
Spanish harbour of Palos, by following the flight of certain birds from
Fayal, discovered the Island of Flores as early as 1452, it seems
almost impossible, considering the proximity of the great fucus bank
of Corvo and Flores, that no part of these oceanic meadows should
have been seen before the time of Columbus by Portuguese ships
driven westward by storms.
We learn, however, from the astonishment of the companions of
the admiral, when they were continuously surrounded by sea-grass
from the 16th of September to the 8th of October, 1492, that the
magnitude of the phenomenon was at that period unknown to
mariners. In the extracts from the ship’s journal given by Las Casas,
Columbus certainly does not mention the apprehensions which the
accumulation of sea-weed excited, or the grumbling of his
companions. He merely speaks of the complaints and murmurs
regarding the danger of the very weak but constant east winds. It was
only his son, Fernando Colon, who in the history of his father’s life,
endeavoured to give a somewhat dramatic delineation of the
anxieties of the sailors.
According to my researches, Columbus made his way through
the great fucus bank in the year 1492, in latitude 28½°, and in 1493,
in latitude 37°, and both times in the longitude of 38°–41°. This can
be established with tolerable certainty from the estimation of the
velocity recorded by Columbus, and “the distance daily sailed over;”
not indeed by dropping the log, but by the information afforded by
the running out of half-hour sand-glasses (ampolletas). The first
certain and distinct account of the log, (catena della poppa,) which I
have found, is in the year 1521, in Pigafetta’s Journal of Magellan’s
Circumnavigation of the World.[AQ] The determination of the ship’s
place during the days in which Columbus was crossing the great bank
is the more important, because it shews us that for three centuries
and a half the total accumulation of these socially-living
thalassophytes, (whether consequent on the local character of the
sea’s bottom or on the direction of the recurrent Gulf stream,) has
remained at the same point. Such evidences of the persistence of
great natural phenomena doubly arrest the attention of the natural
philosopher, when they occur in the ever-moving oceanic element.
Although the limits of the fucus banks oscillate considerably, in
accordance with the strength and direction of long predominating
winds, yet we may still, in the middle of the nineteenth century, take
the meridian of 41° west of Paris (or 8° 38′ west of Greenwich) as the
principal axis of the great bank. Columbus, with his vivid
imaginative force, associated the idea of the position of this bank
with the great physical line of demarcation, which according to him,
“separated the globe into two parts, and was intimately connected
with the changes of magnetic deviation and of climatic relations.”
Columbus when he was uncertain regarding the longitude, attempted
to determine his place (February, 1493,) by the appearance of the
first floating masses of tangled weed (de la primera yerva) on the
eastern border of the great Corvo bank. The physical line of
demarcation was, by the powerful influence of the Admiral,
converted on the 4th of May, 1493, into a political one, in the
celebrated line of demarcation between the Spanish and Portuguese
rights of possession[AR].

8. p. 3—“The Nomadic Tribes of Tibbos and Tuaryks.”

These two nations, which inhabit the desert between Bornou,
Fezzan, and Lower Egypt, were first made more accurately known to
us by the travels of Hornemann and Lyon. The Tibbos or Tibbous
occupy the eastern, and the Tuaryks (Tueregs) the western portion of
the great sandy ocean. The former, from their habits of constant
moving, were named by the other tribes “birds.” The Tuaryks are
subdivided into two tribes—the Aghadez and the Tagazi. These are
often caravan leaders and merchants. They speak the same language
as the Berbers, and undoubtedly belong to the primitive Lybian
races. They present the remarkable physiological phenomenon that,
according to the character of the climate, the different tribes vary in
complexion from a white to a yellow, or even almost black hue; but
they never have woolly hair or negro features.[AS]

9. p. 3—“The ship of the desert.”

In the poetry of the East, the camel is designated as the land-
ship, or the ship of the desert (Sefynet-el-badyet[AT]).
The camel is, however, not only the carrier in the desert, and the
medium for maintaining communication between different
countries, but is also, as Carl Bitter has shown in his admirable
treatise on the sphere of distribution of this animal, “the main
requirement of a nomadic mode of life in the patriarchal stage of
national development, in the torrid regions of our planet, where rain
is either wholly or in a great degree absent. No animal’s life is so
closely associated by natural bonds with a certain primitive stage of
the development of the life of man, as that of the camel among the
Bedouin tribes, nor has any other been established in like manner by
a continuous historical evidence of several thousand years.”[AU] “The
camel was entirely unknown to the cultivated people of Carthage
through all the centuries of their flourishing existence, until the
destruction of the city. It was first brought into use for armies by the
Marusians, in Western Lybia, in the times of the Cæsars; perhaps in
consequence of its employment in commercial undertakings by the
Ptolemies, in the valley of the Nile. The Guanches, inhabiting the
Canary Islands, who were probably related to the Berber race, were
not acquainted with the camel before the fifteenth century, when it
was introduced by Norman conquerors and settlers. In the probably
very limited communication of the Guanches with the coast of Africa,
the smallness of their boats must necessarily have impeded the
transport of large animals. The true Berber race, which was diffused
throughout the interior of Northern Africa, and to which the Tibbos
and Tuaryks, as already observed, belong, is probably indebted to the
use of the camel throughout the Lybian desert and its oases, not only
for the advantages of internal communication, but also for its escape
from complete annihilation and for the maintenance of its national
existence to the present day. The use of the camel continued, on the
other hand, to be unknown to the negro races, and it was only in
company with the conquering expeditions and proselyting missions
of the Bedouins through the whole of Northern Africa, that the useful
animal of the Nedschd, of the Nabatheans, and of all the districts
occupied by Aramean races, spread here, as elsewhere, to the
westward. The Goths brought camels as early as the fourth century to
the Lower Istros (the Danube), and the Ghaznevides transported
them in much larger numbers to India as far as the banks of the
Ganges.” We must distinguish two epochs in the distribution of the
camel throughout the northern part of the African continent; the first
under the Ptolemies, which operated through Cyrene on the whole of
the north-west of Africa, and the second under the Mahommedan
epoch of the conquering Arabs.
It has long been a matter of discussion, whether those domestic
animals which were the earliest companions of mankind, as oxen,
sheep, dogs, and camels, are still to be met with in a state of original
wildness. The Hiongnu, in Eastern Asia, are among the nations who
earliest trained wild camels as domestic animals. The compiler of the
great Chinese work, Si-yu-wen-kien-lo[AV], states that in the middle
of the eighteenth century, wild camels, as well as wild horses and
wild asses, still roamed over Eastern Turkestan. Hadji Chalfa, in his
Turkish Geography, written in the seventeenth century, speaks of the
very frequent hunting of the wild camel in the high plains of Kashgar,
Turfan, and Khotan. Schott finds in the writings of a Chinese author,
Ma-dschi, that wild camels exist in the countries north of China and
west of the basin of the Hoang-ho, in Ho-si or Tangut. Cuvier[AW]
alone doubts the present existence of wild camels in the interior of
Asia. He believes that they have merely “become wild;” since
Calmucks, and others professing kindred Buddhist doctrines, set
camels and other animals at liberty, in order “to acquire to
themselves merit for the other world.” The Ailanitic Gulf of the
Nabatheans was the home of the wild Arabian camel, according to
Greek witnesses of the times of Artemidorus and Agatharchides of
Cnidus.[AX] The discovery of fossil camel-bones of the ancient world
in the Sewalik hills (which are projecting spurs of the Himalaya
range), by Captain Cautley and Dr. Falconer, in 1834, is especially
worthy of notice. These remains were found with antediluvian bones
of mastodons, true elephants, giraffes, and a gigantic land tortoise
(Colossochelys), twelve feet in length and six feet in height.[AY] This
camel of the ancient world has been named Camelus sivalensis,
although it does not show any great difference from the still living
Egyptian and Bactrian camels with one and two humps. Forty camels
have very recently been introduced into Java, from Teneriffe[AZ]. The
first experiment has been made in Samarang. In like manner,
reindeer were only introduced into Iceland from Norway in the
course of the last century. They were not found there when the island
was first colonised, notwithstanding its proximity to East Greenland,
and the existence of floating masses of ice.[BA]

10. p. 3—“Between the Altai and the Kuen-lün.”

The great highland, or, as it is commonly called, the mountain
plateau of Asia, which comprises the lesser Bucharia, Songaria,
Thibet, Tangut, and the Mogul country of the Chalcas and Olotes, is
situated between the 36th and 48th degrees of north latitude and the
meridians of 81° and 118° E. long. It is an erroneous idea to represent
this part of the interior of Asia as a single, undivided mountainous
swelling, continuous like the plateaux of Quito and Mexico, and
situated from seven to upwards of nine thousand feet above the level
of the sea. I have already shown in my “Researches respecting the
Mountains of Northern India,[BB]” that there is not in this sense any
continuous mountain plateau in the interior of Asia.
My views concerning the geographical distribution of plants, and
the mean degree of temperature requisite for certain kinds of
cultivation, had early led me to entertain considerable doubts
regarding the continuity of a great Tartarian plateau between the
Himalaya and the chain of the Altai. This plateau continued to be
characterized, as it had been described by Hippocrates, as “the high
and naked plains of Scythia, which, without being crowned with
mountains, rise and extend to beneath the constellation of the
Bear.”[BC] Klaproth has the undeniable merit of having been the first
to make us acquainted with the true position and prolongation of two
great and entirely distinct chains of mountains,—the Kuen-lün and
the Thian-schan, in a part of Asia which better deserves to be termed
“central,” than Kashmeer, Baltistan, and the Sacred Lakes of Thibet
(the Manasa and the Ravanahrada). The importance of the Celestial
Mountains (the Thian-schan) had indeed been already surmised by
Pallas, without his being conscious of their volcanic character; but
this highly-gifted investigator of nature, led astray by the hypotheses
of the dogmatic and fantastic geology prevalent in his time, and
firmly believing in “chains of mountains radiating from a centre,”
saw in the Bogdo Oola (the Mons Augustus, or culminating point of
the Thian-schan,) such “a central node, whence all the other Asiatic
mountain chains diverge in rays, and which dominates over all the
rest of the continent!”
The erroneous idea of a single boundless and elevated plain,
occupying the whole of Central Asia, the “Plateau de la Tartarie,”
originated in France, in the latter half of the eighteenth century. It
was the result of historical combinations, and of a not sufficiently
attentive study of the writings of the celebrated Venetian traveller, as
well as of the naïve relations of those diplomatic monks who, in the
thirteenth and fourteenth centuries (thanks to the unity and extent of
the Mogul empire at that time), were able to traverse almost the
whole of the interior of the continent, from the ports of Syria and of
the Caspian Sea to the east coast of China, washed by the great
ocean. If a more exact acquaintance with the language and ancient
literature of India were of an older date among us than half a
century, the hypothesis of this central plateau, occupying the wide
space between the Himalaya and the south of Siberia, would no
doubt have sought support from some ancient and venerable
authority. The poem of the Mahabharata appears, in the
geographical fragment Bhischmakanda, to describe “Meru” not so
much as a mountain as an enormous swelling of the land, which
supplies with water the sources of the Ganges, those of the
Bhadrasoma (Irtysch), and those of the forked Oxus. These physico-
geographical views were intermingled in Europe with ideas of other
kinds, and with mythical reveries on the origin of mankind. The lofty
regions from which the waters were supposed to have first retreated
(for geologists in general were long averse to the theories of
elevation) must also have received the first germs of civilization.
Hebraic systems of geology, based on ideas of a deluge, and
supported by local traditions, favoured these assumptions. The
intimate connexion between time and space, between the beginning
of social order and the plastic condition of the surface of the earth,
lent a peculiar importance and an almost moral interest to the
Plateau of Tartary, which was supposed to be characterized by
uninterrupted continuity. Acquisitions of positive knowledge,—the
late matured fruit of scientific travels and direct measurements,—
with a fundamental study of the languages and literature of Asia, and
more especially of China, have gradually demonstrated the
inaccuracy and exaggeration of those wild hypotheses. The mountain
plains (ὀροπέδια) of Central Asia are no longer regarded as the
cradle of human civilization, and the primitive seat of all arts and
sciences. The ancient nation of Bailly’s Atlantis, which d’Alembert
has happily described as “having taught us everything but its own
name and existence,” has vanished. The inhabitants of the Oceanic
Atlantis were already treated, in the time of Posidonius, as having a
merely apocryphal existence.[BD]
A plateau of considerable but very unequal elevation runs with
little interruption, in a S.S.W.-N.N.E. direction, from Eastern Thibet
towards the mountain node of Kentei, south of Lake Baikal, and is
known by the names of Gobi, Scha-mo, (sand desert,) Scha-ho. (sand
river,) and Han-hai. This swelling of the ground, which is probably
more ancient than the elevation of the mountain-chains by which it
is intersected, is situated, as we have already remarked, between 81°
and 118° east longitude from Greenwich. Measured at right angles to
its longitudinal axis, its breadth in the south, between Ladak, Gertop,
and H’lassa (the seat of the great Lama), is 720 miles; between Hami
in the Celestial Mountains, and the great curve of the Hoang-ho, near
the In-schan chain, it is scarcely 480; but in the north, between the
Khanggai, where the great city of Karakhorum once stood, and the
chain of Khin-gan-Petscha, which runs in a meridian line (in the part
of Gobi traversed in going from Kiachta to Pekin by way of Urga), it
is 760 miles. The whole extent of this elevated ground, which must
be carefully distinguished from the more eastern and higher
mountain-range, may be approximately estimated, including its
deflections, at about three times the area of France. The map of the
mountain-ranges and volcanoes of Central Asia, which I constructed
in 1839, but did not publish until 1843, shows in the clearest manner
the hypsometric relations between the mountain-ranges and the
Gobi plateau. It was founded on the critical employment of all the
astronomical determinations accessible to me, and on many of the
very rich and copious orographic descriptions in which Chinese
literature abounds, and which were examined at my request by
Klaproth and Stanislaus Julien. My map marks in prominent
characters the mean direction and the height of the mountain-
chains, together with the chief features of the interior of the
continent of Asia from 30 to 60 degrees of latitude, between the
meridians of Pekin and Cherson. It differs essentially from any map
hitherto published.
 The Chinese enjoyed a triple advantage, by means of which they
were enabled to enrich their earliest literature with so considerable
an amount of orographic knowledge regarding Upper Asia, and more
especially those regions situated between the In-schan, the alpine
lake of Khuku-noor, and the shores of the Ili and Tarim, lying north
and south of the Celestial Mountains, and which were so little known
to Western Europe. These three advantages were, besides the
peaceful conquests of the Buddhist pilgrims, the warlike expeditions
towards the west (as early as the dynasties of Han and Thang, one
hundred and twenty-two years before our era, and again in the ninth
century, when conquerors advanced as far as Ferghana and the
shores of the Caspian Sea); the religious interest attached to certain
high mountain summits, on account of the periodical performance of
sacrifices, in accordance with pre-existing enactments; and lastly, the
early and generally known use of the compass for determining the
direction of mountains and rivers. This use, and the knowledge of the
south-pointing of the magnetic needle, twelve centuries before the
Christian era, gave a great superiority to the orographic and
hydrographic descriptions of the Chinese over those of Greek and
Roman authors, who treated less frequently of subjects of this
nature. The acute observer Strabo was alike ignorant of the direction
of the Pyrenees and of that of the Alps and Apennines.[BE]
To the lowlands belong almost the whole of Northern Asia to the
north-west of the volcanic Celestial Mountains (Thian-schan); the
steppes to the north of the Altai and the Sayanic chain; and the
countries which extend from the mountains of Bolor, or Bulyt-tagh
(Cloud Mountains in the Uigurian dialect), which run in a north and
south direction, and from the upper Oxus, whose sources were
discovered in the Pamershian Lake, Sir-i-kol (Lake Victoria), by the
Buddhist pilgrims Hiuen-thsang and Song-yun in 518 and 629, by
Marco Polo in 1277, and by Lieutenant Wood in 1838, towards the
Caspian Sea; and from Lake Tenghiz or Balkasch, through the
Kirghis Steppe, towards the Aral and the southern extremity of the
Ural Mountains. In the vicinity of mountainous plains, whose
elevation varies from 6000 to more than 10,000 feet above the sea’s
level, we may assuredly be allowed to apply the term lowlands to
districts which are only elevated from 200 to 1200 feet. The first of
these heights correspond with that of the city of Mannheim, and the
second with that of Geneva and Tübingen. If we extend the
application of the word plateau, which has so frequently been
misused by modern geographers, to elevations of the soil which
scarcely present any sensible difference in the character of the
vegetation and climate, physical geography, owing to the
indefiniteness of the merely relatively important terms of high and
low land, will be unable to distinguish the connexion between
elevation above the sea’s level and climate, between the decrease of
the temperature and the increase in elevation. When I was in Chinese
Dzungarei, between the boundaries of Siberia and Lake Saysan
(Dsaisang), at an equal distance from the Icy Sea and the mouth of
the Ganges, I might assuredly consider myself to be in Central Asia.
The barometer, however, soon showed me that the elevation of the
plains watered by the Upper Irtysch between Ustkamenogorsk and
the Chinese Dzungarian post of Chonimailachu (the sheep-bleating)
was scarcely as much as from 850 to 1170 feet. Pansner’s earlier
barometric determinations of height, which were first made known
after my expedition, have been confirmed by my own observations.
Both afford a refutation of the hypotheses of Chappe D’Auteroche
(based on calculations of the fall of rivers) regarding the elevated
position of the shores of the Irtysch, in Southern Siberia. Even
further eastward, the Lake of Baikal is only 1420 feet above the level
of the sea.
In order to associate the idea of the relation between lowlands
and highlands, and of the successive gradations in the elevation of
the soil, with actual data based on accurate measurements, I subjoin
a table, in which the heights of the elevated plains of Europe, Africa,
and America are given in an ascending scale. With these numbers we
may then further compare all that has as yet been made known
regarding the mean height of the Asiatic plains, or true lowlands.
 Toises. Feet.
Plateau of Auvergne 170 1,087
„ of Bavaria 260 1,663
„ of Castille 350 2,238
„ of Mysore 460 2,942
„ of Caracas 480 3,070
„ of Popayan 900 5,755
„ of the vicinity of the Lake of Tzana, in Abyssinia 950 6,075
„ of the Orange River (in South Africa) 1000 6,395
„ of Axum (in Abyssinia) 1100 7,034
„ of Mexico 1170 7,482
„ of Quito 1490 9,528
„ of the Province de los Pastos 1600 10,231
„ of the vicinity of the Lake of Titicaca 2010 12,853

No portion of the so-called Desert of Gobi, which consists in part

of fine pasture lands, has been so thoroughly investigated in relation
to its differences of elevations as the zone which extends over an area
of nearly 600 miles, between the sources of the Selenga and the
Chinese wall. A very accurate barometrical levelling was executed,
under the auspices of the Academy of St. Petersburgh, by two
distinguished savans—the astronomer George Fuss, and the botanist
Bunge. They accompanied a mission of Greek monks to Pekin, in the
year 1832, in order to establish there one of those magnetic stations
whose construction I had recommended. The mean height of this
portion of the Desert of Gobi amounts hardly to 4263 feet, and not to
8000 or 8500 feet, as had been too hastily concluded from the
measurements of contiguous mountain summits by the Jesuits
Gerbillon and Verbiest. The surface of the Desert of Gobi is not more
than 2558 feet above the level of the sea between Erghi, Durma, and
Scharaburguna; and scarcely more than 320 feet higher than the
plateau of Madrid. Erghi is situated midway, in 45° 31′ north lat.,
and 111° 26′ east long., in a depression of the land extending in a
direction from south-west to north-east over a breadth of more than
240 miles. An ancient Mongolian saga designates this spot as the
former site of a large inland sea. Reeds and saline plants, generally of
the same species as those found on the low shores of the Caspian Sea,
are here met with; while there are in this central part of the desert
several small saline lakes, the salt of which is carried to China.
According to a singular opinion prevalent among the Mongols, the
ocean will at some period return, and again establish its dominion in
Gobi. Such geological reveries remind us of the Chinese traditions of
the bitter lake, in the interior of Siberia, of which I have elsewhere
spoken.[BF]
The basin of Kashmir, which has been so enthusiastically
praised by Bernier, and too moderately estimated by Victor
Jacquemont, has also given occasion to great hypsometric
exaggerations. Jacquemont found by an accurate barometric
measurement that the height of the Wulur Lake, in the valley of
Kashmir, near the capital Sirinagur, was 5346 feet. Uncertain
determinations by the boiling point of water gave Baron Carl von
Hügel 5819 feet, and Lieutenant Cunningham only 5052 feet.[BG] The
mountainous districts of Kashmir, which has excited so great an
interest in Germany, and whose climatic advantages have lost
somewhat of their reputation since Carl von Hügel’s account of the
four months of winter snow in the streets of Sirinagur,[BH] does not
lie on the high crests of the Himalaya, as has commonly been
supposed, but constitutes a true cauldron-like valley on their
southern declivity. On the south-west, where the rampart-like Pir
Panjal separates it from the Indian Punjaub, the snow-crowned
summits are covered, according to Vigne, by basaltic and amygdaloid
formations. The latter are very characteristically termed by the
natives schischak deyu, or devil’s pock-marks.[BI] The charms of the
vegetation have also been very differently described, according as
travellers passed into Kashmir from the south, and left behind them
the luxuriant and varied vegetation of India; or from the northern
regions of Turkestan, Samarkand, and Ferghana.
Moreover, it is only very recently that we have obtained a clearer
view regarding the elevation of Thibet, the level of the plateau having
long been uncritically confounded with the mountain tops rising
from it. Thibet occupies the space between the two great chains of
the Himalaya and the Kuen-lün, and forms the elevated ground of
the valley between them. The land is divided from east to west, both
by the inhabitants and by Chinese geographers, into three parts. We
distinguish Upper Thibet, with its capital, H’lassa (probably 9592
feet high); Middle Thibet, with the town of Leh or Ladak (9995 feet);
and Little Thibet, or Baltistan, called the Thibet of Apricots (Sari-
Butan), in which lie Iskardo (6300 feet), Gilgit, and south of Iskardo,
but on the left bank of the Indus, the plateau Deotsuh, whose
elevation was determined by Vigne (11,977 feet). On carefully
examining all the notices we have hitherto possessed regarding the
three Thibets, and which will have been abundantly augmented
during the present year by the brilliant boundary surveying
expedition under the auspices of the Governor-general, Lord
Dalhousie, we soon become convinced that the region between the
Himalaya and the Kuen-lün is no unbroken table-land, but that it is
intersected by mountain groups, which undoubtedly belong to
perfectly distinct systems of elevation. Actual plains are very few in
number: the most considerable are those between Gertop, Daba,
Schang-thung (the Shepherd’s Plain), the native country of the
shawl-goat, and Schipke (10,449 feet); those round Ladak, which
attain an elevation of 13,429 feet, and must not be confounded with
the depressed land in which the town lies; and finally, the plateau of
the Sacred Lakes, Manasa and Ravanahrada (probably 14,965 feet),
which was visited by Father Antonio de Andrada as early as the year
1625. Other parts are entirely filled with compressed mountain
masses, “rising,” as a recent traveller observes, “like the waves of a
vast ocean.” Along the rivers, the Indus, the Sutledge, and the Yaru-
dzangbotschu, which was formerly regarded as identical with the
Buramputer (or correctly the Brahmaputra), points have been
measured which are only between 6714 and 8952 feet above the sea;
and the same is the case with the Thibetian villages Pangi, Kunawur,
Kelu, and Murung.[BJ] From many carefully collected determinations
of heights, I think that we are justified in assuming that the plateau
of Thibet between 73° and 85° east long, does not attain a mean
Welcome to our website – the ideal destination for book lovers and
knowledge seekers. With a mission to inspire endlessly, we offer a
vast collection of books, ranging from classic literary works to
specialized publications, self-development books, and children's
literature. Each book is a new journey of discovery, expanding
knowledge and enriching the soul of the reade

Our website is not just a platform for buying books, but a bridge
connecting readers to the timeless values of culture and wisdom. With
an elegant, user-friendly interface and an intelligent search system,
we are committed to providing a quick and convenient shopping
experience. Additionally, our special promotions and home delivery
services ensure that you save time and fully enjoy the joy of reading.

Let us accompany you on the journey of exploring knowledge and

personal growth!

ebooknice.com