kamjesh work 2 - Central banking the function of central...

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Central banking, the function of central banks, consists essentially of the exercise of the public duty of influencing—by regulation, persuasion, or market operation—the behavior of banks and other financial intermediaries in a country. Although they have antecedents as private institutions in the economic development of a few countries, central banks are now primarily public institutions for implementing economic policies of governments. They are appropriate to the Western-type economies; in the communist countries, where economic activity is more comprehensively organized by governments, there is little scope for central banking, although institutions described as central banks exist. In true central banking the public interest is universally paramount, although for historical and other reasons there is some clinging to vestigial private forms and some insistence on a peculiar independence from the central machinery of government. The activity of central banking emerged gradually from attempts by bankers to protect themselves by organized action and attempts by governments to ensure that monetary conditions serve the purposes of financial policy (at first) and general economic policy (later); this twofold origin is reflected in the formal organization of central banks as banks and in their ultimate subjection to the sovereign power in the state. Before 1900, the development of central banking was almost entirely empirical. Ideas on the subject sprang largely from the efforts of the Bank of England to deal with practical problems; there were also important experiences in the United States before 1836 and in Europe at times during the nineteenth century. Although some aspects were discussed in official inquiries, in English pamphlet literature (W. Bagehot’s Lombard Street, 1873, being the classic example), and in European controversy on the issue of bank notes, systematic thought on central banking in recognizably modern form can be dated from the United States controversy and public inquiry from which the Federal Reserve System emerged in 1913. The development of thought received further impetus from the problems of monetary reconstruction in the years immediately following World War i; it was in this phase that the central bank was seen as the independent controller of the supply of money, and therefore as the custodian of its value against the assaults of improvident ministers of finance. Incidental to the rehabilitation of the monetary systems of countries that had passed through extreme inflations, new central banks were established and older institutions were reconstructed and explicitly charged with the function of central banking. Since 1945 there has been a further spate of new central banks, especially in countries emerging from the breakup of colonial empires. In this latest phase, in these and other underdeveloped economies, central banks have been seen as part of the administrative machinery for speeding economic growth.
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