Central bank: position
The formal position of a central bank within a society is, as a rule, established by law enacted by the legislative body (Parliament), whilst in some developing countries the de jure position of a central bank may be regulated by the governmental.
The former practice is regarded as normal, whilst the latter is usually encountered in non-democratic countries or those which practice some kind of command economy (Sevic, 1996b). Although there are more than 160 central banks worldwide, it is almost impossible to find two whose status is the same. A common theoretical definition says that the central bank is the chief institution of a country’s monetary system and executive body for the implementation of monetary policy. In most cases this definition is sustainable, but not in all. This is the situation where the central banks are de jure independent while, if they are dependent, they just execute government decisions on monetary, credit and financial policy. In theoretical models a central bank is a state-owned or quasi-state institution, regulated by public law, which is established in order to maintain the macro-economic liquidity of the financial system as a whole and prevent mass bankruptcy of (commercial) banks and a high rate of unemployment. A central bank is not incorporated to be profitable, although its note-issuing function can be a source of significant revenue for the government - seigniorage (Sevic, 1996; 1997c). Such a definition begs the question of whether the central bank is a bank at all.It seems so, at least on account of its two (contemporary) duties: government banker and lender-of-last-resort (bankers’ bank). Besides exercising these two functions, the central bank can even be regarded as a specific entity established by law and regulated within the public law regime (Sevic, 1996b). The respected British economist, Richard Sayers, argues the same: ‘The central bank is the organ of government which undertakes the major financial operations of the Government and, which by its conduct of these operations and by other means, influences the behaviour of financial institutions so as to support the economic policy of the Government’ (Sayers, 1960, p.
64). He also found that central banks are different from commercial banks in a number of ways. Central banks are usually governed by persons closely related to the government, and they do not seek to maximize profit, which is generally seen as the main aim of the commercial banks. The central bank must establish and maintain the special, close relationship with the (commercial) banking sector, so as to be able to influence this sector in its implementation of agreed government economic policy (Sayers, 1960). However, we would not go as far as Sayers in concluding that the central bank is an organ of government which must be ‘in some sense a part of the government machine’ (ibid., p. 64). The point made here is that there is a significant difference in the way the ‘state’ is perceived in Continental European and Anglo-Saxon general legal culture. The Europeans developed the sense of ‘state’ as an eternal and continuous social institution of utmost social importance, while the Anglo- Americans developed the sense of ‘government’ as a current social power.Central banks’ raisons d’etre lies in the fact that
i they provide the best solution with regard to the minimization of the risks inherent in modern (commercial) banking by providing an efficient lender-of-last-resort (LLR) function;
ii they provide an institutional mechanism to minimize or avoid the profligacy of governments in their fiscal roles, and
iii in a contemporary economy they have the means of effecting control over monetary variables so as to provide conditions appropriate for the improvement in real economic activity (Sevic, 1996b).
A central bank can also have a development role, especially in a developing economy. In contrast, the actual existence of central banks has its contradictions. Central banks must be engaged in the resolution of conflicts which emerge from (long-term) financial intermediation (money market failures, for instance), in the government’s power over money creation and the conflicts which might arise in the usual business cycle slowdowns.
These must be effectively managed at both micro and macro levels. So all these perplexities determine, to some extent, the de facto position and prospective roles of the central bank. The de jure position, usually depends primarily on the vision of the legislator. Subsequent corrections of an initial view are not only normal but also highly recommended. In the field of central banking regulation, to stick to tradition cannot only be socially ineffective, but also very costly, because the central bank is prevented from responding appropriately and in timely fashion to innovations in the banking sector and money market.Although the majority of countries have some kind of central monetary authority, the organizational form may vary. Thus, the central monetary authority can take form of: (i) a unique central bank; (ii) a complex system of the central bank(s); (iii) a unique central bank for several countries (so-called ‘supranational’ central bank); (iv) a separate government agency which operates as a central bank; (v) a number of commercial banks which are entrusted with a note-issuing function and some other duties characteristic of a central bank; (vi) a special state body in charge of business finance, which assumes some central bank duties; (vii) a transitional central banking institution; (viii) a central bank in a formal monetary union, where the central bank of one country performs central bank duties on the (economic) territory of another country and (ix) a monetary board (Sevic, 1996b). At the time of writing there are only two countries without a central bank or properly defined separate central monetary authorities: Andorra and the Federated States of Micronesia. The former is a small country, a former protectorate, tax and duty ‘haven’, which circulates both the French franc and Spanish peseta, while the latter is a newly liberated country. As has been noted (Sevic, 1996a, 1996b), at the time of large social changes (revolutions, coups, upheavals, and so on), it is usually expected that the ministry of finance will assume some of the central bank duties and especially note issuing. The series of notes thus issued are referred to, in theory, as notes of state (government) issue, but, the duration for which the ministry is engaged in performing this duty differs. Usually, after a few months the central bank resumes all its functions, albeit closely monitored and supervised by the government.
The position and structure, as well as duties, of a central bank are fully legally stipulated. There is no possibility of assuming that the central bank has a duty if it is not clearly stipulated in the Central Bank Act. The structure of a central bank is usually designed in such a manner as to sustain the fulfilment of functions (roles) set out by law. So what are the functions of the central bank?