- MONOPOLY OVER ISSUING OF NOTES
The main objectives of a central bank is to attain economic stability. Therefore, it has been entrusted with the complete or partial monopoly powers regarding issuance of notes. This is the basic function of a central bank. Because of this function they have accorded as ‘Bank of Issue’ for a long time. The central banks were authorized to issue the notes, because :
- It will create a uniformity among st the notes in circulation.
- The govt backing will lead to create a confidence in currency.
- The central bank will be able to control the operations of commercial banks in a better way.
- As the national bank has imposing business model over notes issuance, subsequently it has all the money assets of the nation. The national bank acquires changes the amount of notes as per needs of the nation. Two techniques are received while issuing the note:
- Reserve Capital Method
- Fixed Fiduciary System
RESERVE CAPITAL METHOD
While issuing notes by this technique the national bank needs to keep a specific rate of notes issued as gold and silver and so forth. As in Pakistan SBP has to keep 30% as reserves in the form of gold against each Rs 100 issued. “While” for the rest of the measure of note issued the national bank needs to keep govt securities. Such strategy is trailed by the nations like Pakistan, India, Germany and US and so on.
FIXED FIDUCIARY METHOD
Under this method the parliament of a country permits issuing the currency notes up to a specific limit without keeping any reserves against such issued notes. “If” more than such notes are issued an equal amount of gold has to be kept. The system is applied in case of UK, Norway, and Japan.
The first method is better than second because it helps to control supply of money in a better way and the provision of reserves lead to have a greater confidence in notes.
BANKER, AGENT AND ADVISOR TO THE GOVT
Central bank provides the same services to govt which are provided by the commercial banks to their customers. As central bank keeps the deposits of all govt departments. Again the govt uses are made through national bank. As the pay rates and benefits are paid to govt workers from SBP in Pakistan.
Central bank advances short term loans (for the 3 months) to govt so that during such period govt may be able to have revenues in the form of taxes etc. Again, central bank helps govt during wars and other emergencies. Moreover, central bank advances govt for commodity operations where govt has to purchase goods in a bulk amount. To have people in general obligation national bank fills in as a specialist to govt. It sells and purchase govt securities. It provides advisory services to govt. It guides govt regarding different economic issues like devaluation of currency, adoption of fixed or flexible exchange rate system, sale and purchase of govt securities, maturity period f securities and the rate of interest against public loans and securities. It keeps a close link with the money market of a country. In this way, it can properly analyze the financial conditions of a country. It helps govt in making the decisions regarding amount of credit, targets of credits and allocation of credit in different sectors and regions etc. It is the central bank which coordinates between fiscal and monetary policies so that the broader economic objectives could be realized. In this respect, it has to keep a close relationship with ministry of Finance. All this shows that central bank and govt. Depend upon each other and they perform their complementary functions.
CUSTODIAN OF FOREIGN EXCHANGE AND GOLD RESERVES
Most of central banks have to keep gold while issuing notes. “As” a result all the gold reserves of a country are placed with the central bank. In addition to gold the foreign exchange reserves are also with the central bank because most of the countries have to exercise exchange control whereby the citizens of a country can not keep foreign exchange with themselves. Moreover, the citizens of a country who are in need of foreign exchange have to get it from central bank. All this means that whole of the foreign exchange reserves are in the possession of central bank. There are so many advantages of keeping foreign exchange with central bank.
- It will lead to economize the use of foreign exchange; the undue demand for foreign exchange will not rise; and the central bank will provide foreign exchange for necessary uses.
- The fluctuations in exchange rate will not occur when central bank makes interference in foreign exchange market by selling and purchasing foreign exchange. In this way the exchange rate could be maintained at a reasonable level.
- The deficient in BOP can be removed in a better way when central bank would be having complete control foreign exchange reserves.
- BANKER TO COMMERCIAL BANKS
- Central bank is a banker to banks. Therefore, it is the function of a central bank to establish a suitable and proper type of banking structure in the country. In this way, not only credit requirements of different sectors could be met, but the central bank could also be able to have a greater control over the activities of commercial banks. Therefore, :
- All the commercial banks have to keep a certain proportion of demand and time deposits with central bank. With such reserves the central bank can influence the credit activities of commercial banks.
- The central bank re-discounts the bills of exchange offered by the commercial banks.
- The central bank serves as a Clearing House for the commercial banks. In other words it settles the mutual accounts between banks. “As” prof.DE Kock says “central bank has a centralized character. Therefore, on the basis of reserves with central bank the banking system becomes flexible and liquidity increases”. Thus, central bank supervises the commercial banks, guides them and assists them.