Origin of central bank

Prior to the 20th century there has been no clearly defined concept of central banking. A gradual evolution of banks had been taking place in different countries over a long period. The discretion of individual managements had played an important part in the decisions and operation of banks. Gradually one bank came to assume a position similar to the central bank, as it acquired the sole right to issue currency notes, and became the governments bank and agent. These banks came to be known as “Bank of Issue”. Over time it began to perform various important functions and came to be known as the “Central Bank”.

At present every country has its own Central Bank. “It is symbol of State’s sovereignty and stability of the country.” A Central Bank is an institution which is responsible for safe guarding the financial stability of the country. It holds the ultimate reserves of the nation, controls the flow of purchasing power- whether currency or credit and acts as a banker to the State.”

In the importance of central banks has been steadily increasing. This is due to the growing interdependence of economic life within and between countries, the post war confusion in currency and exchange system, the great depression and the realization of the need for management and control over money supply by central banks could avoid or reduce cyclical fluctuations in the economy.


In order to control business cycles in developed countries and to promote economic development of developing countries, Central Banks are playing an active role.

The central bank works for the welfare of the nation. It is not a profit motivated institution. It is a reservoir of credit and a lender of the last resort.


Today, almost all the countries of the world have a Central Bank to control their entire banking system. In different countries, Central Bank are known by different names. For instance, in U.S.A., it is known as Federal Reserve System, in the U.K., it is called the Bank of England. Similarly, India’s Central Bank is the Reserve Bank of India (RBI).

The central bank in India, established and started functioning as a shareholders bank on 1st April 1935 is called the Reserve Bank of India. The shareholders were the Government of India and the private shareholders. The RBI was started as a non-government institution, almost the entire share capital being held by private shareholders. Government of India holding only nominal shares of `2,22,000. It was nationalised on 1st April 1949.

Of the existing central banks, the Riksbank of Sweeden is the oldest in a sense that it was the first one to be established [1656], and assumed the position of a central bank in 1897.

But the bank of England, established in 1694 was the first bank of issue to assume the position of a central bank and to develop the fundamentals of the art and science of central banking,

Scotland, “Bank of Scotland” – 1695
Spain, “Banco de Espana” – 1782
France, “Banque de France” – 1800
Finland, “Soumen Pakki or the Bank on Finland” – 1812
Netherlands, “DeNederlandsche Bank” – 1814
Norway, “Norges Bank” – 1816
Austria, “Oesterreichische National Bank” – 1816
Denmark, “Danmarks National Bank” – 1818
Portugal, “Banco de Portugal ”- 1846

In India, the Reserve Bank of India.
In USA, “The Federal Reserve System”
In UK, “Bank of England”

Posted in General Economics