Brief History
The history of the Banco de España goes back more than two centuries. The Banco Nacional de San Carlos, the first modern Spanish bank and direct forerunner of the current Banco de España, was founded on June 2nd 1782, by a Royal Warrant of King Carlos III. Its capital was private, but it was established under Royal patronage, which accounts for its name.
Its foundation was closely linked to growth in the public debt, a link which survived throughout its long life and through successive changes. The first director and inspiring force was Francisco Cabarrús, a French banker established in Madrid. Two years earlier, in 1780, Cabarrús had negotiated with the Treasury the issuance and placement of a new form of special government debt, called vales reales. These vales reales yielded interest of 4 per cent and had the properties of paper money in wholesale transactions and in the payment of taxes. One of the main objectives assigned to the new bank was to counter the depreciation of the vales reales, and it was thus authorised to purchase them for cash when they were presented for payment. Although the Banco de San Carlos was authorised to issue bearer banknotes, it did not use this power except during short periods. At first the Bank's operations fared well, but later the involvement of the Spanish crown in a continuous series of wars between 1793 and 1814 led the Bank into serious difficulties.
By 1814, the State owed the Bank more than 300 million reales (equivalent to 75 million pesetas). However, the Bank continued to operate, with its business reduced to the new activity of discounting in Madrid and the negotiation of bills in other centres. The shareholders of the Banco Nacional de San Carlos expected the Treasury to repay at least part of its debt to the Bank, and so it did, in 1829. The then Treasury minister, Luis López Ballesteros, had in practice definitively instituted the system of annual budgets for public expenditure and revenue. Accordingly, it was necessary for a financial institution to advance short-term funds to the Government, to bridge gaps in the Treasury's cash flow. For this purpose, he conceived the idea of giving the Banco de San Carlos a fund of 40 million reales, whereupon its shareholders founded a new bank of issue named the Banco Español de San Fernando. This Bank did use, albeit with extreme prudence, the power to issue notes. Until 1844 it was the only bank of issue in Spain. That year another two banks were created with the power to print and issue paper money. These were the Banco de Isabel II (based, like the Banco de San Fernando, in Madrid) and the Banco de Barcelona. In 1846 the Banco de Cádiz was created to distribute the banknotes of the Banco de Isabel II in that city.
The Banco de Isabel II emerged as a competitor to the Banco Español de San Fernando in the circulation of paper money in Madrid, an area in which this new institution displayed considerable initiative and innovation. As regards lending, the two banks followed different guidelines: the Banco de San Fernando maintained its traditional ties with the State, while the Banco de Isabel II gave priority to meeting the demand for credit from the private sector, amid a boom in investment and output. The mistake of concentrating its exposure on a few particular debtors led the Bank –at a time of financial crisis, in 1847– into a situation where there was a risk of suspension of payments. The danger was averted by a merger between the Banco de San Fernando and the Banco de Isabel II, with the new bank retaining the name Banco Español de San Fernando.
In 1849, Ramón Santillán, an expert in public finance and former Treasury minister, was appointed director (with the title of governor from 1851). Santillán successfully performed the difficult task of turning the Bank around after the difficulties caused by the merger with the Banco de Isabel II. In the early 1850s the question was raised of extending lending activity and the issuance of banknotes to the whole nation, and not just Madrid. Santillán proposed that the Banco de San Fernando–under the name Banco de España– should open branches in all the major cities, excluding Barcelona and Cádiz which had their own banks of issue. However, after the liberal revolution of 1854 the policy that prevailed was to authorise the creation of banks of issue in the provinces, independent of the Banco de España (which finally adopted this name in 1856). Despite the new and ambitious title, its sphere of action was confined to Madrid and the cities of Alicante and Valencia, in which it opened its first branches. Nevertheless, there were banks distributing its banknotes in 20 cities (including Barcelona, Bilbao, Santander, Sevilla and Málaga).
In 1874, as a result of the financial requirements of the Government, which was engaged at the same time in both a civil and a colonial war, the Banco de España, in exchange for a significant loan, was granted a monopoly over the issuance of banknotes. The provincial banks had to choose between remaining commercial banks, without the power to print banknotes, or joining the Banco de España with the status of branches. This was the origin of the branch network which the Banco de España eventually had throughout Spain. In 1887 it had 55 branches, a number which would later rise to 70.
The 1921 Ley de Ordenación Bancaria (Bank Ordinance Law) regulated for the first time the relationship between the Banco de España and the private banks, with the aim of converting the bank of issue into a genuine central bank. Its capital was increased, it was assigned the task of inspecting private banks, a preferential rate of interest was established for discount operations with the other banks and the exchange rate policy began to be regulated through the Banco de España.
It was precisely in the defence of the peseta exchange rate that growing opposition between the Government and the Banco de España became apparent in the 1920s and in the 1930s (under the Second Republic) up until 1936. The main disagreement between the Government and the bank of issue was over the power to dispose of the considerable gold reserves built up by the Bank since the beginning of the century.
After the 1936-1939 civil war –in which the above-mentioned reserves were used to purchase arms– the financial policy of general Franco's Government reflected the authoritarian ideology of his regime. The 1946 Ley de Ordenación Bancaria (Bank Ordinance Law) assigned most of the powers over monetary policy to the Government, making the Bank a mere appendage of the Ministry of Finance. However, after the Stabilisation Plan of 1959, the economic policy of the Franco regime became less interventionist; more heed was taken of market criteria and the economy was opened up somewhat. A product of this change of direction in the financial sector was the Ley de Bases de Ordenación de Crédito y la Banca (Law to Regulate Credit and Banks) of 1962, together with other supplementary provisions, including notably the Decreto-Ley de Nacionalización y Reorganización del Banco de España (Legislative Decree for the Nationalisation and Reorganisation of the Banco de España) of June 7th 1962, pursuant to which the bank of issue ceased to be a private company. The Ley de Bases continued to vest responsibility for monetary policy in the Ministry of Finance, but the Bank's authority and powers, to implement and develop the relevant measures in the technical area were recognised.
With the restoration of democracy in the second half of the 1970s, the Banco de España completed, in successive phases, its transformation into a
central bank with full responsibility for the regulation and supervision of
the financial system. The Ley de Órganos Rectores del Banco de España (Law on the Governing Bodies of the Banco de España) of June 1980 and, more recently, the Ley de Autonomía (Law of Autonomy 
(609 KB)) of June 1994 have guaranteed the Bank great freedom and flexibility in the performance of its functions, especially with respect to monetary policy. Finally, and in accordance with the terms established by the European Union (of which Spain has been a
member since 1986), Spain has gained access to EMU, having complied with the
convergence criteria laid down in 1994. As a result, the Banco de España
has joined the European System of Central Banks along with the Central Banks
of the other nations participating in European Monetary Union, and the European
Central Bank.