Banker of the State

Thc second important function of a central bank is to ad as a banker to the government. Alll till’ balances HI’the gm CI’IlIIll’lIt IIf the cuuntry; arc kept “ilh thc ccutral hunk. On these balances, ; usually the central bank pays no interest. On thc other hand, thc bank performs a number 01” scrvices to thc government. Generally speaking. It i~ thc fiscal agent of thc govcrmncnt, and advises thc latter in matters relating to currency and exchange as well as finance. It carries out their exchange, remittance and other bank operations including thc managemcnt of public debt. “Central banks everywhere operate as bankers to the State not only because it may be more convenient and economical to thc State, bUI also because of thc intinratc connection between public finance and mouctaryuffairs.”An important function of thc central bank with respect to the State is the provision IIf short-term IlIall\. Thi: I usually done through thc central bank discounting the government treasury bills either directly or \.\hen presented by other banks. This is to enable thc government to meet its current financial obligations in anticipation of its revenues. During times of Cri~IS like a war, such lending to the government can lend to serious inflation as happened in the case of France, Germany and elsewhere in Europe during and after the war of 114-18. “lIistury is full of examples,” sa)’~ De Kock, “of inflation and currency ~cprcciation resulting from credit creation on behalf of thc State. In fact. experience has shown that hcavy government borrowing either directly from the central bank or indirectly through rediscount, is thc easiest means, and sometimes the only means of bringing nbout substantial inflation.” When a central Bank gives advances to the guvernmcnt again. t treasury bills or other government securities, the money pent by government is again deposited with commercial banks b) tho. c who receive payments, This. ill fact, mean, an increase in the commercial hanks’ balances with the central bank which, as we have seen, arc as good a cash. On thc basis of this cash. thc commercial banks arc able to increase their loans and advance 11m. inflation starts.