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Guarding And Management Of Overseas Exchange Reserves

 Guards and Manages the Overseas Exchange Reserves
  1. The central bank holds and manages the overseas exchange reserve of the nation. It is an official pool of gold and overseas currencies.

  2. It trades gold at fixed prices to the monetary right of other nations. It also purchases and sells overseas currencies at international prices.

  3. Moreover, it sets the exchange rates of the home currency in terms of overseas currencies. It holds those rates within fine borders in holding with its requirements as a member of the International Monetary Fund and tries to fetch constancy in overseas exchange rates.
  1. Clearing House for Transfer and Settlement

    1. As banker’s bank, the central bank performs as a clearing house for shifts and defrayal of mutual claims of commercial bank.

    2. As the central bank possesses reserves of commercial banks, it shifts money from one bank to another bank to make possible clearing of cheques.

    3. This is performed by accounting transfer entries in their records on the principle of book keeping.

    4. To shift and defray liabilities of one bank upon others, the central bank functions a separate subdivision in big cities and business centres.

    5. This department is termed as Clearing House and it renders the service free to commercial banks.
  1. Lender of the Last Resort

    1. De Kock considers this operation as a sine qua of central banking. By granting accommodation in the form of re-discounts and collateral advances to commercial banks, bill brokers and dealers or other credit giving institutions, the central bank performs as the lender of last resort.

    2. The central bank lends to such credit institutions in order to facilitate them in times of strain so as to save the financial structure of the nation from crumple.

    3. It performs as lender of the last resort through discount house on the basis of treasury bills, government securities and bonds at the front door.

    4. The other way is to provide temporary place to the commercial banks or discount houses straight through the back door.

Central Bank as the Controller of Credit

Objectives of Credit Control

  1. To Soothe the Internal Price Level
  2. One of the determinations of controlling credit is to soothe the price level in the nation. Recurrent variations in prices badly affect the fiscal system. Inflationary or deflationary drifts require to be prevented. This can be accomplished by adopting a judicious strategy of credit control.

  3. To Soothe the Rate of Overseas Exchange
  4. With the variation in the internal price level, overseas transactions of the nation are pretentious. When prices drops, exports augment and imports drops. As a result, the demand for home currency enhances in the overseas market and its exchange rate rises.

    Conversely, a rise in home prices tends to a drop in exports and enhance in imports. Consequently, the demand for overseas currency augments and that of domestic currency drops thereby reducing the exchange rate of the home currency.

  5. To Safeguard the Outflow of Gold
  6. The central Bank possesses the gold reserves of the nation in its tills. Extension of bank credit tends to rise in prices which diminishes exports and augments imports thereby creating a critical balance of payments. This requires the exports of gold to other nations. The central bank has to control credit to avert such outgoings of gold to other nations.

  7. To Safeguard Trade Cycles
  8. Trade cycles are common phenomenon of capitalist nations which tend to periodic variations in production, employment and prices. They are featured by amending periods of wealth and gloominess. During lavishness credit contracts and manufacturing, employment and prices hikes.

    The central bank can neutralize such cyclical variations through retrenchment of bank credit during boom periods and extension of bank credit during gloominess.

  9. To Possess Development with Constancy
  10. In topical years, the doctrine aim of credit control is to have development with constancy. The other aims such as price consistency, overseas exchange, rate constancy etc, are considered as less important.

    The objective of credit control is to facilitate in accomplishing full employment and accelerated development with consistency in the fiscal system without inflationary pressures and balance of spending discrepancies.

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