CENTRAL BANKING PRINCIPLES

The principles on which a central bank is run are quite different from the ordinary banking principles:

(i) An ordinary bank is run for profit. A central bank, on the other hand, is primarily meant to shoulder the responsibility of safe guarding the financial and economic stability of the country. “The guiding principle of a central bank,” says De Kock, “is that it should act only in the public interest and for the welfare of the country as a whole and without regard to profit as primary consideration.”! Earning of profit for a central bank is thus a secondary consideration.

(ii) Since the central bank is not a profit or dividend- hunting institution, it docs not act as a rival of  other banking institutions. That is why it seldom allows interest on deposits nor can it advance money against the security of immovable property or grant
unsecured overdrafts. It is primarily concerned with the maintenance of the solvency of the entire banking system of the country. It mu t, therefore. keep Its own assets as liquid as po sible.

(iii) The central ban IS a re ervoir of crcdit and a lender of last resort. All other bank and financial hou. es can look to it for accommodation. of course. at a price. But the central bank cannot rely on any other institution to come to its aid and give it cash or take bills and securities off its’ hands.

(iv) The central bank must follow an active policy. It should not be merely all idle spectator when something goes wrong with the credit machinery of the nation. It must take active steps to remedy the situation. For this purpose, it may resort to two weapons: (n) the manipulation of \fie bank rate policy:

(v) the open market opcratious.’ Their working is explained the sections below. lVmay also adopt other measures of credit control, general or selective credit controls. (vi) For the efficient discharge of its functions, the central bank is provided with special equipment: (0) It is given the monopoly of the note issue.

(vii) It is made a banker to the government. (c) It is a bankers’ bank. With the position so acquired, it can effectively control currency and credit, and this control is the raison d’terc of a central bank.

(viii) Finally, a central bank should not be subservient to any political party. It must be independent of all political influence, so that it can act freely, without fear or favour, in the best interests of the nation as a whole, However, there is usually very close co-operation hetween the government and the bank.