Central Bank:

In 1668, Sweden founded the first ever central bank, called Sveriges Riksbank. Its foundation
stems from the failure of Swedens first bank, Stockholms Banco in 1656. Shortly after its
inception, Stockholms Banco became the first bank to formally introduced banknotes to Europe
in 1661.
A central bank has been defined in terms of its functions. The following are some of the
definitions given by economists.
According to Smith, 'the primary definition of central banking is a banking system in which a
single bank has either complete control or a residuary monopoly of note issue'.
H.A. Shaw defines a central bank, 'as a bank which controls credit'.
In the words of Hawtrey 'a central bank is that which is the lender of the last resort'.
According to Samuelson, 'a central bank is a bank of bankers. Its duty is to control the
monetary base and through control of high-powered money to control the community's
supply of money.

 An institution which is charged with the responsibility of managing the expansion and
contraction of the volume of money in the interest of the general public welfare.
 The guiding principle of a central bank is that it should act only in the public interest for
the welfare of the country as a whole & with out regard to profits as a primary
considerations.

Functions of Central Bank:

1. Traditional Functions:

Which are generally performed by central banks all over the world are classified into two
groups:

Primary functions:

 including issue of notes, regulation of financial system, conduct of monetary policy.

 Sole authority to issue notes
 Issue department
 Banking department
 Conduct of monitory policy & credit policy
 Supervision of financial system
 Banker’s Bank
 Services to the scheduled banks
  Reserves of scheduled banks
 Demand and time liabilities of scheduled banks
 Excess reserves
 Clearing housing
 Remittance facility at concessional rates
 Banker to the government
 Lender of the last resort

Secondary functions:

 includiong management of public dept, manag ment of foreign foreign exchange,

advising the government on policy matters and maintaining close relationships with the
international financial institutions.
 Public debt management
 Subscribing federal and provisional govt. securities at the times of their issue
 Sale/purchase and intetrest payments of prize bonds & some saving scheme
 Management of foreign exchange
 Foreign exchange reserve
 Foreign exchange control
 Foreign exchange rate stability
 Advisor to government
 Relationship with international financial institutions

2. Non traditional functions:

 these functions are performed by the State Bank include development of financial
frame work, provision of training facilities to bankers, and provision of credit to
priority sectors.
 Development of the banking system
 training facilities to bankers
 institute of bankers
 training department
 Development of specialized financial institutions
 Credit for priority sectors

Functions of Central bank

The main functions of a central bank are common all over the world. But the scope and content
of policy objectives may vary from country to country and from period to period depending on
the economic situations of the respective country. Generally all the central banks aim at
achieving economic stability along with a high growth rate and a favourable external payment
position through proper monetary management. The common functions of central banks are
discussed below.

 Regulator of currency

The issue of paper money is the most important function of a central bank. The
central bank is the authority to issue currency for circulation, which is a legal
tender money. The issue department of the central bank has the responsibility to
issue notes and coins to the commercial banks. The central bank regulates the
credit and currency according to the economic situation of the country. In the
methods of note issue, the central bank is required to keep a certain amount or a
fixed proportion of gold and foreign securities against the total notes issued. The
Reserve Bank of India is required to keep Rs.115 crore in gold and Rs.85 crore in
foreign securities, but there is no limit to the issue of notes.

 Having the monopoly of note issue, central bank gains advantages as

 Ensuring uniformity of the notes issued and a proper control over the
supply of money can be exercised.

 Bring stability in the monetary system and creates confidence among the
public.

 Government is able to earn profits from printing currencies.

 Banker, Agent and Adviser to the Government

The central bank of the country acts as the banker, fiscal agent and advisor to the
government. As a banker, it keeps the deposits of the central and state
governments and makes payments on behalf of governments. It buys and sells
foreign currencies on behalf of the government. It keeps the stock of gold of the
country. As a fiscal agent, the bank makes short-term loans to the government for
a period not exceeding 90 days. It floats loans and advances to the State
governments and local bodies. It manages the entire public debt on behalf of the
government. As an adviser, the bank gives useful advice to the governments on
important monetary and economic problems like devaluation, foreign exchange
policy and budgetary policy.

 Custodian of cash Reserves of commercial banks

Commercial banks are required to keep a certain percentage of cash reserves with
the central bank. On the basis of these reserves, the central bank transfers funds
from one bank to another to facilitate the clearing of cheques.

 Custodian and Management of Foreign Exchange reserves

 The central bank keeps and manages the foreign exchange reserves of the country.
It fixes the exchange rate of the domestic currency in terms of foreign currencies.
If there are any fluctuations in the foreign exchange rates, it may have to buy and
sell foreign currencies in order to minimize the instability of exchange rates.

 Lender of the last resort

By giving accommodation in the form of re-discounts and collateral advances to

commercial banks, bill brokers and their financial institutions, the central bank
acts as the lender of the last resort. The central bank lends to such institutions in
order to help them when they are faced with difficult situations so as to save the
financial structure of the country from collapse.

 Clearing Function

The central bank acts as a 'clearing house' for other banks and mutual obligations
are settled through the clearing system. Since it holds cash reserves of commercial
banks, it is easier for the central bank to act as a 'clearing house'.

 Controller of credit

The most important function of the central bank is to control the credit creation
power of commercial banks in order to control inflationary and deflationary
pressures within the economy. For this purpose, the central bank adopts
Quantitative methods and Qualitative (selective) methods. Quantitative methods
aim at controlling the cost and quantity of credit by adopting i) bank rate policy ii)
open market operations iii) variations in reserve ratios of commercial banks.
Qualitative methods control the use and direction of credit. It involves i)
regulation of margin requirements ii) regulation of consumer credit, iii) rationing
of credit, iv) direct action by the central bank, and v) moral suasion

Besides the above functions, the central bank performs many additional functions. It has to study
all problems relating to i) credit, ii) fluctuations in price level iii) fluctuations in foreign
exchange value. It has to collect monetary and financial statistics, conduct research and provide
information. It has to look after the matters relating to IMF and the World Bank. All together, the
central bank is the financial and monetary guardian of the nation.
Government:

Branches of Government:

Executive:

It is one of the three branches of government as given above. State functions through the
executive, the namely the government. It is the duty of the executive or enforce the laws passed
by the legislation. The executive who exercise real power is the real executive. The executive
who has nominal power is the normal executive.
Powers and functions of executive are:
 Enforcing law
 Maintaining peace and order
 Repelling aggression
 Building friendly relations with other states
 When necessary to wage war to protect the country
 Making appointments to higher posts
 Raising money and spending them
 Convening the sessions of the legislation and conducting business
 Issues ordinances whenever the legislature is to in session
 Implement schemes and projects to improve he social and economic conditions of the
people
 Power to grant pardon, reprieve or remission of punishment

Legislature:

The legislature is the law making branch. The legislature has an important role in the adjustment
of the constitution. The legislature is a deliberative body where matters of social, economic and
political concerns are discussed, debate and decided.
Judiciary

Judiciary is the third important organ of the government machinery (erquipment). Its main
function is to interrupt laws and administer justice.

Functions of Judiciary:

 Administration of justice.
 To determine what is law and what is the cope and meaning of it
 To give advisory opinion on matters referred to it
 To issue orders or writs for the purpose of preventing violation of rights and laws.
 To acts as guardian of the constitution.

Types of Government:

Aristotle was the first to define three principal types of government systems in the fourth century
B.C. These consisted of monarchy, aristocracy and polity. Since then, many more have been
formulated, but the main themes and ideas have remained. Today, the most common government
systems include democracy, republic, monarchy, communism and dictatorship. This list details
what to know about each.

1. Anarchy

Anarchy isn’t a type of government; it’s actually the absence of one. In an anarchist society, a
central governing body doesn’t exist. Many times, anarchy will take center stage when a
government collapses. There are currently no true anarchist countries. The closest example in
recent history was Somalia, which had no government from 1991 to 2006, but today it is a
federal parliamentary republic. While anarchy has not been implemented on a large scale in the
modern world, there are communities such as Freetown Christiania in Copenhagen, Denmark,
which is one of the few anarchist communities that is still functioning.

2. Theocracy

Types of governments are about who rules. In a theocracy, the ruler is God or a deity. The
creation of laws comes from religious texts, scriptures and spiritual leaders. A theocracy also
mixes with other types of governments. For example, Iran is an Islamic democracy, and the
Vatican government is dictated by the Christian religion and pope.

3. Monarchy
 In a monarchy, state power is held by a single family that inherits rule from one generation to
the next. In a monarchy, an individual from the royal family holds the position of power until
they die. Today, the majority of monarchy governments have transitioned to constitutional
monarchies, where the monarch is head of state but only performs ceremonial roles and does
not have state power. Only a few countries still have systems where the monarch retains
control; these include Brunei, Oman, Saudi Arabia and Swaziland.

4. Oligarchy

Similar to a monarchy, an oligarchy places power with a few people or families, typically a
country’s wealthy elite. Unlike aristocracy, oligarchy is not necessarily dependent on noble birth,
but on wealth or those who are deemed most “capable” of ruling. The term is derived from the
Greek words for "few" (óligon) and "rule" (arkho).

There are multiple types of oligarchies, including

 autocracy
 plutocracy
 stratocracy .
 theocracy

5. Aristocracy

In an aristocracy, the wealthy or noble hold the power. These privileged few leaders make up the
ruling class or elite. Historically, Ancient Greece had an aristocratic government. A modern
example is the royal family in the U.K., which has an aristocracy known as the peerage as well
as a monarchy.

6.Democracy
A democracy can be defined as a government system with supreme power placed in the hands of
the people. It can be traced back to as early as the fifth century B.C. In fact, the word democracy
is Greek for “people power”. While most use the United States as an example of a democratic
government system, the United States actually has what is called a representative democracy.
The difference lies in the method of civilian participation. In a direct democracy, every citizen is
given an equal say in the government. In a representative democracy, citizens elect
representatives who make the law. The difference is significant when put into action. Other
examples of democratic states include Aruba, Bulgaria, Canada, Costa Rica and the Dominican
Republic.
7.Republic

In a republic government system, the power also rests with the people, as they are in charge of
electing or choosing the country’s leader, instead of the leader being appointed or inheriting
power. Broadly defined, a republic is a government system without a monarch. A republic may
be governed by a group of nobles, as long as there is not a single monarch. Some examples of
countries with a republic government system include Argentina, Bolivia, Czech Republic and
France.

8. Communism
A communist government system is usually based on a particular ideology of communism taught
by Karl Marx or Vladimir Lenin. A single party or group of people usually runs communist
states. In some cases, citizens of a communist state are given certain jobs or life duties in an
effort to obtain collective citizenship for the state. Examples of communist states include China,
Cuba and Vietnam.

9. Dictatorship
In a dictatorship, a single person, a dictator, has absolute power over the state. It is not
necessarily ruled by a theology or belief. It is an authoritarian form of government where one
person is in charge of enforcing and enacting the law. Aspects often include military
organizational backing, unfair elections (if any) and various human rights violations. A dictator
does not usually inherit their power like a monarch does; they either seize control of the state by
force or through (usually unfair) elections. Dictators are not held accountable for their actions
and thus are free to do as they please, including limiting citizens’ rights. Burundi, Chad,
Equatorial Guinea and North Korea are contemporary examples of countries run by a dictator.

10.Democratic republic

Republics where the running of the country is considered a “public matter”, not a private concern
or property of rulers, and where offices of states are subsequently, directly or indirectly, elected
or appointed – rather than inherited – where all eligible citizens have an equal say in the local
and national decisions that affect their lives.

While these types of government systems all vary, they have at least one similarity: the
allocation of power. Whether it be the allocation of power to a single person, a group of people,
or evenly distributed to everyone, power is the shared theme of all types of government systems.
– Haley Hine