This document provides information about the functions and roles of a central bank. It discusses how the first central bank, the Bank of England, was established in 1694. A central bank is responsible for a country's financial and economic stability by regulating other banks and formulating monetary policies. It acts as both the government's bank, by managing public debt and foreign exchange, and as the banker's bank by providing services to commercial banks. The document also outlines different methods that central banks use to issue currency, such as minimum reserve, fixed fiduciary, and proportional reserve systems.

1. Chapter 12
Central Bank

2. Definition
• The bank which is responsible for the financial
and economical stability of country.
• It has a pivotal position in the banking system
and regulates and formulates policies for the
scheduled commercial banks in the country.

3. Origin and growth
• The bank of England came into being as first
ever central bank in 1694.
• The central bank includes the issue of currency
notes.
• But at later stages it was entrusted with other
crucial functions like credit control, clearing
house, management of public debts.

4. Continue…
• Now a central bank has become a must for
every country and its economy.
• It controls other banks, inflation and formulates
its economic and fiscal policies and advises the
government on foreign trade, development of
financial and capital market, balance of trade,
foreign aids etc.

5. Continue….
• The world bank (IBRD) and international
monetary funds (IMF) have their full control over
all central banks, especially those in the Third
World countries.
• Every country, being the member of the UN, has
no option except to follow the dictates of the IMF
and the World Bank.

6. Functions of Central Bank
• Central bank can be placed in two broad
categories.
• 1- Government’s bank
• 2- Banker’s bank

7. 1- Government’s Bank
• 1- Monopoly of note issue
• 2- Controller of credit
• 3- Custodian of foreign exchange
• 4- Issue and management of public debts
• 5- Development of financial institutions

8. 1- Monopoly of note issue
• Issue currency notes for the country.
• Notes are issued on certain principal including a
fixed ratio of a reserve of gold, silver and
approved foreign exchange.

9. 2- Controller of credit
• The central bank controls and regulates credit
money in the country in order to expand or
contract it to maintain the requirement of
economy.
• It controls:
• Bank rate policy
• Open market operation
• Bank reserve ratio

10. 3- Custodian of foreign exchange
• Every country exports goods and services to
earn profit.
• This earned and other foreign exchange is held
in the custody of the central bank

11. 4-Issue and management of public debts
• Central bank manage issue of debts, payment of
interest and retirement.
• Pay annual interest and return the principal
amount on maturity.

12. 5-Development of financial institutions
• Central bank is responsible to develop financial
institution which play vital role in industrial,
agriculture and capital development of economy.
• It also facilitates the establishment and running
of money market and stock exchange.

13. 2- Banker’s bank
• Capacity to performs valuable services to its
scheduled commercial banks.
• 1- Lender of last resort
• 2- Rediscounting bill of exchange
• 3- Clearing housing services
• 4- Cash reserve
• 5- Counseling services

14. 1- Lender of last resort
• The central bank provides loan to the bank in
crises to enable it to discharge its obligation and
thus prevents it to go bankrupt.

15. 2- Rediscounting bill of exchange

16. 3- Clearing housing services
• Every bank receives cheques drawn on other
bank, because of which every bank becomes
creditor or debtor of other banks.
• All these cheques are sent to the central bank
where it settles all the accounts of the bank.
• Clearing services is possible because the
central bank possess cash reserver of
commercial bank.

17. 4- Cash reserve
• Every bank is bound to deposited a certain
percentage of all its deposits with the central
bank
• In this manner central bank finds itself in better
position to control credit money.

18. 5- Counseling services
• The central bank offers advice and counseling
services in the light of experts and advice
commercial banks to formulates and readjust
their polices.

19. Advantages
• Money supply is in complete control of the
central bank.
• The currency system become uniform
• The system enjoys complete confidence of
public which is necessary for the success of
currency.

20. Method of issuing currency
• Minimum reserve system
• Fixed fiduciary system
• Proportional reserve system
• Simple deposit method

21. Minimum reserve system
• Certain level of gold reserve is fixed against
which any amount of currency can be issued.
• Advantage
• Facilitates saving of gold
• Flexible and allow contraction and expansion of
money supply.

22. Limitation
• This system cause inflation
• It may lose public confidence for over-issue of
the currency.

23. Fixed fiduciary system
• Currency is issued up to a certain amount
without any reserve of gold.
• Currency is needed more than the fixed level it
must be backed by gold penny for penny.
• This method was adopted by Japan and
Norway.

24. Merits
• It is safe system
• Inflation is well controlled
• It enjoys public confidence to the highest.

25. Demerits
• The system is inelastic
• It adversely affects industrial growth.
• It lacks frugality because it requires much gold
• It is a costly system

26. Proportional reserve system
• This system call for a proportionate gold and
silver reserve to the total issue of currency.
• Due to its strong benefits it has become
internationally accepted currency-issuing
system.

27. Counties deposited reserve ratio
• U.S 40%
• France 35%
• Germany 40%
• Russia 25%
• Pakistan 30%
• India 40%

28. Advantage
• It is flexible.
• It is helpful in industrial growth.
• Gold and silver are required in comparatively
small amount.

29. Disadvantage
• Inflation to some extent is possible
• Keynes declared it an extravagant and wasteful
system
• Government have tendency to violate the
system.

30. Simple deposit system
• This system requires a hundred percent gold
reserve for the issue of currency.
• Pros
• It is safe
• Inflation is not possible

31. Cons
• It is inelastic and cannot be changed to the
requirement.
• It restricts business and industrial growth.
• A large amount of gold and silver is needed.
• Costly and wasteful.
• Risk of deflation.
• It is impracticable.

34. Thank You