A central bank, reserve bank, or monetary authority is an institution that manages a state's currency, money supply, and interest rates. Central banks also usually oversee the commercial banking system of their respective countries. In contrast to a commercial bank, a central bank possesses a monopoly on increasing the monetary base in the state, and usually also prints the national currency, which usually serves as the state's legal tender. Central banks also act as a "lender of last resort" to the banking sector during times of financial crisis. Most central banks usually also have supervisory and regulatory powers to ensure the solvency of member institutions, prevent bank runs, and prevent reckless or fraudulent behavior by member banks.
Central banks were established in many European countries during the 19th century. The War of the Second Coalition led to the creation of the Banque de France in 1800, in an effort to improve the public financing of the war.
On 23 December 1913, the U.S. Congress created the US Federal Reserve through the passing of The Federal Reserve Act in the Senate and its signing by President Woodrow Wilson on the same day. Australia established its first central bank in 1920, Peru in 1922, Colombia in 1923, Mexico and Chile in 1925 and Canada, India and New Zealand in the aftermath of the Great Depression in 1934. By 1935, the only significant independent nation that did not possess a central bank was Brazil, which subsequently developed a precursor thereto in 1945 and the present Central Bank of Brazil twenty years later. After gaining independence, African and Asian countries also established central banks or monetary unions. The Reserve Bank of India, which had been established during British colonial rule as a private company, was nationalized in 1949 following India's independence.
Functions of a central bank may include:
implementing monetary policies.
setting the official interest rate – used to manage both inflation and the country's exchange rate – and ensuring that this rate takes effect via a variety of policy mechanisms
controlling the nation's entire money supply
the Government's banker and the bankers' bank ("lender of last resort")
managing the country's foreign exchange and gold reserves and the Government's stock register
regulating and supervising the banking industry
Hence, Central bank independence is usually guaranteed by legislation and the institutional framework governing the bank's relationship with elected officials, particularly the minister of finance.
Image Source:- Google
Content sources: en.wikipedia.org
