Central bank functions-bank of issue , Managerial Economics

Bank of Issue

The central bank enjoys the monopoly of bank note issue i.e. no bank other than the central bank is authorised by law to print currency notes. Printing of paper currency is one of the most important functions of a modern central bank. The privilege of note issue was almost everywhere associated with the origin and development of central banks .in fact until the beginning of the twentieth century the were generally known as banks of issue. So much important is this function that in the opinion of Vera Smith it is the essence of central bank definition. The following are the main reasons for granting the exclusive monopoly of note issue to central bank.

1. As the use of deposit money created by the commercial banks increased and with this as the growing need for credit central by a central bank was felt, it was realised that a monopoly of note issue allowed to the central bank made over the excessive credit expansion by the commercial banks more effective.

2. The inherence of the right of note issue in one single bank particularly when the payment of notes is guaranteed by the government, imparts the notes a distinctive prestige which is absent in the notes issued by several commercial banks.

3. When the notes are issued by the central bank, they carry with them the advantage of uniformity. Although uniformity can also be achieved by means of direct state issue of notes, many examples of depreciation of government notes in the past by shaking the public confidence have caused the state to vest the right of note issue in the central bank.

4. If the right of note issue is exclusively granted to the central bank it is easier for the state to supervise and control the irregularities and malpractices committed by central bank is issuing notes.

5. Since the central bank handles the complicated matters relating to monetary managements. It is better equipped to solve effectively the problems related to the issuing of notes.

Posted Date: 12/1/2012 6:40:41 AM | Location : United States

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