Central Banking

Topics: Central bank, Monetary policy, Money supply Pages: 7 (2107 words) Published: April 14, 2013

Central Banking is one of the most useful institutions which human ingenuity has developed to help the society in managing its collective financial affairs. Every country, these days has a Central Bank which controls its entire banking system. Few countries had a Central Bank in the 19th century, but the popularity of the Central Bank has greatly increased in the 20th century. Today, there is hardly any country in the world which does not have a Central Bank of its own. After the First World War, an International Monetary Conference was held at Brussels in 1929 to find a solution to the problem of recurring economic crisis which confronted the world. This conference recommended the solution to setting up a Central Bank in every country.

The Central Bank occupies a pivotal position in the Monetary and Banking structure of the country. The Central Bank is the undisputed leader of the money market. It supervises controls and regulates the activities of the commercial banks affiliated with it. The Central Bank is also the highest monetary institution in the country charged with the duty and responsibility of carrying out the monetary policy formulated by the government.

India’s Central Bank known as the RESERVE BANK OF INDIA was setup in 1935. The bank of England is the oldest Central Bank in the world. It assumes Central Banking functions in the second half of the 19th century. In America, the Central Bank known as the Federal Reserve System which was established in the year 1930.


Many economists have given different definitions of Central Bank based on functions performed by the central bank. Some of them with economists are as follows:-

“A Central Bank is a bank of bankers. Its duty is to control the monetary base….and through control of this ‘high-powered money’ to control the community’s supply of money.” --- SAMUELSON

“The essential function of a Central Bank is the maintenance of the stability of the monetary standards.” --- KISCH AND ELKIN

“The business of a Central Bank as distinguished from a commercial bank is to control the commercial banks in such a way as to promote the general monetary policy of the state.” Thus, according to him, the major function of the Central Bank is to carry out the monetary policy formulated by the government of the country. --- R. S. SAYERS

“The one true, but at the same time, all sufficing functions of a Central Bank is to control of credit.” He gives exclusive importance to control of credit as the major functions of central bank. --- W. A. SHAW

“The primary function of Central Bank is a banking system in which a single bank has either a complete or a residuary monopoly in the note issue. It was out of monopoly in the note issue that were derived the secondary functions and characteristics of our modern Central Banking.” --- VERA SMITH

From the above definitions, it is concluded that:
“The Central Bank may be defined as the apex banking and monetary institutions whose main function is to control, regulate and stabilize the banking and monetary system of the country in the national interest.”


The need for a Central Banking Institution in a country arises from the following: -

1. CONTROL OF CREDIT: - every commercial bank creates credit during its daily operations. In fact, credit creation is supposed to be the major function of the commercial banks. But this credit creation sometimes poses serious dangers for the economy of the country.

2. ISSUE OF PAPER CURRENCY: - a Central Bank is also required to issue paper currency. The reason is that the note issue by the central bank satisfies the requirement of elasticity. Moreover, the note issue of Central Bank is based strictly on economic considerations. As against this, the system of note issue of the government lacks elasticity. It may be also be influenced by political considerations.

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