International Finance - Role of Central Banks

International Finance

Functions of Central Bank

1. Bank of Note Issue:

The central bank has the sole monopoly of note issue in almost every country. The currency notes printed and issued by the central bank become unlimited legal tender throughout the country.

In the words of De Kock, "The privilege of note-issue was almost everywhere associated with the origin and development of central banks."

However, the monopoly of central bank to issue the currency notes may be partial in certain countries. For example, in India, one rupee notes are issued by the Ministry of Finance and all other notes are issued by the Reserve Bank of India.

The main advantages of giving the monopoly right of note issue to the central bank are given below:

(i) It brings uniformity in the monetary system of note issue and note circulation.

(ii) The central bank can exercise better control over the money supply in the country. It increases public confidence in the monetary system of the country.

(iii) Monetary management of the paper currency becomes easier. Being the supreme bank of the country, the central bank has full information about the monetary requirements of the economy and, therefore, can change the quantity of currency accordingly.

(iv) It enables the central bank to exercise control over the creation of credit by the commercial banks.

(v) The central bank also earns profit from the issue of paper currency.

(vi) Granting of monopoly right of note issue to the central bank avoids the political interference in the matter of note issue.

2. Banker, Agent and Adviser to the Government:

The central bank functions as a banker, agent and financial adviser to the government,

(a) As a banker to government, the central bank performs the same functions for the government as a commercial bank performs for its customers. It maintains the accounts of the central as well as state government; it receives deposits...