law relating to banking
According to Samuelson, “every central bank has one function. It operates to control the economy; supply of money and credit. “In the words of Vera Smith; “the primary definition of central bank is the banking system in which a single bank has either a complete or residuary monopoly of notes issue.” Kent defined it as “an institution which is charged with the responsibility of managing the expansion and contraction of the volume of money in the interests of the public welfare.” In Culbertson’s words, a commercial bank is defined as “an institution that makes short term loans to business and in the process create money.”
There are some major differences between the structure and functions of commercial banks and those performed by the central bank. For example there is only one central bank in a country and so many commercial banks; the Central bank acts as the banker of the government, banker of other banks and the monopoly issuer of currency. More so commercial banks are distinguished from the central bank because the later acts as the custodian of the country’s foreign exchange. Commercial banks can do this only on the approval of the Central bank.
Of particular interest is the fact that commercial banks’ major objective is profit earning whereas the Central bank should operate in the public interest, for the well-being of the entire country.
The principal functions of the banks are almost exclusive to it therefore no any commercial bank can perform the functions of the central bank effectively. This is particularly true in the arena of issuing notes and coins. If commercial banks are allowed to sprawl or overstep their boundary into the printing and issuing of money, certain problems automatically arise at the detriment of the fluidity and soundly functioning of the economy. The immediate symptom will be heterogeneity in the monetary system coupled with excess liquidity arising from over-issuing of currency since commercial banks are many in number.
There are some major differences between the structure and functions of commercial banks and those performed by the central bank. For example there is only one central bank in a country and so many commercial banks; the Central bank acts as the banker of the government, banker of other banks and the monopoly issuer of currency. More so commercial banks are distinguished from the central bank because the later acts as the custodian of the country’s foreign exchange. Commercial banks can do this only on the approval of the Central bank.
Of particular interest is the fact that commercial banks’ major objective is profit earning whereas the Central bank should operate in the public interest, for the well-being of the entire country.
The principal functions of the banks are almost exclusive to it therefore no any commercial bank can perform the functions of the central bank effectively. This is particularly true in the arena of issuing notes and coins. If commercial banks are allowed to sprawl or overstep their boundary into the printing and issuing of money, certain problems automatically arise at the detriment of the fluidity and soundly functioning of the economy. The immediate symptom will be heterogeneity in the monetary system coupled with excess liquidity arising from over-issuing of currency since commercial banks are many in number.
Bibliography: Central Banking in Theory S Blinder (1998) Three Central Bankers and the World on fire, I Neil (2013) Central Banking and Financial System, E Goodhart(1995) Question: Why is it impractical and undesirable for the functions of the central bank to be performed by commercial banks (25)