The central banking system was originated in different countries during the 19th century. But it was in a very crude form during thattime. The modem system of central banking particularly developed in the 1st half of the 20th century (i.e. 1901-2000). The need of a moderate central banking system was strongly felt during the financial crisis caused by First World War (1914-1918).
After the war there was complete confusion in currency and exchange markets. There were large withdrawals of money from banks. The bank reserves fell below the needed level. There was no institution which could supervise the working of banks and also serve as a fiscal agent. In addition to the above difficulties, there was rigidity or lack of elasticity in the supply of currency. In order to solve the monetary problems of the countries and set them on healthy footings, a Conference was held at Brussels in 1920. It was decided in that Conference that to control the supply of money and credit in the economy and maintain stable business conditions, each country must establish its own central bank.
Now, a central bank is a symbol of financial sovereignty and economic stability of a country. It is an institution which is responsible for safeguarding the financial stability of a country. It holds the ultimate reserves of the nation, controls the flow of purchasing power-whether currency or credit and acts as a banker to the state.
In the modem age, this importance of central banks has enormously increased. This has been due to various causes; the growing inter dependence of economic life within and between countries; the greater necessity of management and control of currency system etc.
EVOLUTION & GROWTH:
The Riksbank of Sweden was setup in 1656 and declared as central bank in 1668 and is considered to be the oldest of the central banks. The Bank of England was established in 1694. It is also called the Mother of central banks. The Bank of France was set up in 1800. The National Bank of Denmark was opened in 1818 and National Bank of Belgium in 1850. I hcReichs Bank of Germany was made in 1876. In U.S.A. Federal Reserve System was set up in 1914. The Reserve Bank of India was formed in 1935 and the State Bank of Pakistan was established on July 1, 1948.
DEFINITIONS:
- “The guiding principle of a central bank is that it should act only in the public interest for the welfare of the country as a whole and without regard to profits as a primary consideration “.
(Dekock)
- “An institution, which is charged with the responsibility of managing the expansion and contraction of the volume of money in the interest of the general public welfare”^
(R.P. Kent)
- In other words: “The bank which is established to strengthen the credit system, to increase the pace of economic growth and to promote the welfare of the country”.
- “The Bank in any country authorized by the Government to control the amount of credit and to supervise the operations of the commercial banks. It carries out the business of the Government and maintains its account. It controls the issue of notes and country’s reserves and takes steps to preserve the value of the country’s currency and the foreign exchange.”
Main Points of Definition
- An institution.
- Authorized by government.
- To control the amount of credit.
- To supervise the commercial banks.
- To act in the public interest.
PRINCIPLES/OBJECTS^OF CENTRAL BANK
- Economic Stability:
Central bank basically works for the fulfillment of financial needs, economic stability and for the growth of banking system. If any sector of economy faces problems, special treatment is given by the central bank to consolidate its financial position.
- National Interest:
The basic object of central bank is not to eanrfite profit rather to work in the best interest of the nation. Central Bank always prefers national interest to all other things. Beside it, central bank also pursues the other member banks to work earnestly in the best interest of the nation.
- Effective Policy:
Central bank implements effective policies to control the undue expansion or contraction of credit in the country. The central bank uses its powers to subdue the commercial banks in order to enforce the devised policies.
- Special Authorities: *
Central bank has special authorities to perform its functions effectively (e.g.) Issuance of currency notes, control of credit and different functions being a Govt. Bank etc. The central bank uses its authorities to strengthen the economy of the country with a great responsibility.
- Constitutional Limitations:
Central bank works according to the framed rules and regulations of the government and its all dealings always remain within the said rules. The central bank not only observes the constitutional limits but also instructs the other banks and financial institutions to observe the said limits.
- Free From Political Pressure:
Central bank does not accept any kind of pressure of any political party or group while rendering its duties for the better interest of the country. Unfortunately, if the central bank becomes an instrument of any subversive group then the country can face an irreparable loss.
- Custodian of Banking System:
Central bank is responsible for the protection and growth of banking system. So the central bank not only keeps a watchful eye on the economic affairs of the country but also plays a vital role to strengthen and secure the present banking system.
- Custodian of Credit System:
Central bank is also responsible for the protection and stability of credit systemSo, these factors always kept in view deciding the matters.
