Functions of central bank , Managerial Economics


Economists and financial experts lack in unanimity about the functions of a central bank. According to Kisch and Elkin, the essential function of a central bank is the maintenance of the stability of the economy standard. While for Shaw it consists in the control of credit. De Kock has removed the confusion by mentioning the following seven function of a central bank in his well known book central bank banking. According to him a central bank is a

1.Bank of issue.
2.Banker, agent and financial adviser to government.
3.Custodian of member banks cash reserves.
4. Custodian of nation foreign exchanges reserves.
5. Lender of last resort.
6.Bank of central settlement and transfer acting a clearing house.
7.Controller of credit.

The functions of a central bank are different from those of commercial bank. Firstly, a central bank is established for public service rather than for private profit. Unlike commercial bank is, its operations are not basically guided by profit motive. Secondly a central bank has special relationship with the government of the country . since the central bank acts as the banker to the government , the latter informally influences its activity. Thirdly a central bank generally does not deal directly with the public. It deals with the public indirectly through the commercial banks and the money market. It does not accept deposits from the public as doing so would amount to usurping the usual banking function of the commercial banks. This is not, however, to deny that many central bank conducted commercial banking business in the beginning of their career. In fact almost without exception central bank before 1914 engaged in their regular commercial banking business with the general public and in some cases on a very substantial scale. With a wide network of branches throughout the country. This brought these banks into some measure of direct competition with the commercial banks. Concern for earnings moreover, all too often coloured their operations and policies to the detriment of their central banking responsibilities the bank of England being a good case in point. In this connection, it is pertinent to state that virtually all the central banks before 1914 were privately owned.

Posted Date: 12/1/2012 6:36:59 AM | Location : United States

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