CHAPTER -1 HISTORICAL DEVELOPMENT OF CENTRAL BANKING SYSTEM IN THE WORLD 1.1 - EVOLUTION OF CENTRAL BANKING Before the 20 Century the concept of Central Banking was not clearly defined. The Central Banking system developed in various countries over a long period of time. In fact Central Banking system developed recently even though some Central Banks were established more than two centuries ago. The Risk Bank in Sweden was established in the year 1668 followed by Bank of England in 1694, which was the first Bank to assume the position of a Central Bank, hence it is known as the 'Mother of Central Banks'. The Federal Reserve System in America was established in 1913 while the Bank of Canada was established in 1934. By and large, the establishment of a Central Bank was encouraged in the countries all over the world. In 1920, a financial conference was held at Brussels. A resolution was passed in the conference that, "all those countries which had not yet established a Central Bank should proceed to do so as soon as possible, not only with a view to facilitating the restoration and maintenance of stability in their monetary and Banking systems but also in the interest of the world cooperation."^ Commencing with the South Africa Reserve Bank in 1921, Central Banks have been established not only in the existing independent or self governing Countries which had not yet have a Central Bank, but also in many new independent states during the past fifty years as shown in the following chart. A Chart showing establishment of some important Central Banks in the World. Year of Name of the Central Bank Establishment 1921 South African Reserve Bank 1922 Reserve Bank of Peru (Reconstituted as Central Reserve Bank of Peru in 1931) Bank of Latvia Bank of Lithuania 1923 Bank of the Repubhc of Colombia 1924 National Bank of Hungary Bank of Poland Common wealth Bank of Australia and Bank of the Republic of Uruguay converted into Central Banks. 1925 National Bank of Albania 1926 National Bank of Czechoslovakia Central Bank of Chile Central Bank of Guatemala (reconstituted as Bank of Gautemala in 1946) 1927 Central Bank of Ecuador Bank of Estonia converted into a Central Bank. 1928 Central Bank of China National Bank of Iran Central Bank of Bohvia Bank of Greece (in place of National Bank of Greece) National Bank of Iceland Converted into a Central Bank. 1929 National Bank of Yugoslavia (in place of former National Bank of Serbia) 1931 Central Bank of the Republic of Turkey 1932 Bank of Mexico converted into a Central Bank. 1934 Reserve Bank of New Zealand Central Reserve Bank of El Salvador 1935 Bank of Canada Reserve Bank of India Central Bank of the Argentine Republic 1936 Bank of the Republic of Paraguay (reconstituted as Bank of Paraguay in 1944). 1937 National Bank of Costa Rica 1939 Bank of Afghanistan 1940 Central Bank of Venezuela 1941 National Bank of Nicaragua converted into a Central Bank. 1942 Central Bank of Ireland Bank of Thailand State Bank of Ethiopia 1945 National Bank of Poland (in place of Bank of Poland) 1947 Central Bank of the Dominican Republic 1948 State Bank of Pakistan. Bank of the German States - Bank Deutscher Lander (in place of ReichsBank in West Germany). Central Bank of the Philippines. 1949 National Bank of Iraq 1950 Central Bank of Ceylon National Bank of Cuba Bank of Korea Central Bank of Honduras Central Bank of Costa Rica (in place of National Bank of Costa) German Bank of Issue - Deutsche Noten Bank (in place of ReichsBank in East Germany) 1952 Central Bank of Belgian Congo (replaced by Monetary Council in 1960 and by National Bank of Congo in 1964) Union Bank of Burma converted into Central Bank. Central Bank of Paraguay (in place of Bank of Paraguay) Bank of Issue of Associated States of Indo-China (split into the National Banks of Cambodia, Laos and Vietnam in 1955) 1953 Bank of Indonesia (in place of Bank of Java) 1954 Bank of Israel 1955 National Bank of Libya (renamed Bank of Libya in 1963) 1956 Central Bank of Syria Central Bank of Iraq (in place of National Bank of Iraq) Bank of Rhodesia and Nyasaland (split into Reserve Bank of Rhodesia, Bank of Zambia and Reserve Bank of Malawi in 1964) Central Bank of Nepal 1957 German Federal Bank - Deutche BundesBank (in place of Bank Deutscher Lander) Bank of Ghana Central Bank of Surinam 1958 Central Bank of Nigeria Central Bank of Malaya (renamed Central Bank of Malaysia in 1963) Central Bank of Tunisia 1959 Bank of Morocco Reserve Bank of Australia (Commonwealth Bank split into Reserve Bank and Commonwealth Banking Corporation) Central Bank of West African States Central Bank of Equatorial Africa and Cameroon. 1960 Bank of Republic of Guinea Bank of Sudan Bank of Jamaica National Bank of Somalia converted into a Central Bank. 1961 Central Bank of Egypt (in place of National Bank of Egypt) Central Bank of Nicaragua (in place of National Bank of Nicaragua) Central Bank of Iran (in place of National Bank of Iran) Central Bank of Iceland (in place of National Bank of Iceland) 1962 Central Bank of Algeria (in place of Bank of Algeria) Bank of Republic of Mali Bank of the Netherlands Antilles 1963 Central Bank of Cyprus. National Bank of Ethiopia (in place of State Bank of Ethiopia) Central Bank of Jordan Bank of Sierra Leone 1964 Bank of Lebanon Central Bank of Trinidad and Tobago Bank of Burundi National Bank of Rwanda 1965 Central Bank of Brazil Bank of Guyana 1966 Central Bank of Kenya Bank of Tanzania Bank of Uganda 1967 Central Bank of Uruguay (in place of Bank of Republic of Uruguay) 1968 Central Bank of Malta Central Bank of Mali (in place of Bank of Republic of Mali) 1969 Central Bank of Kuwait Central Bank of Republic of Equatorial Guinea. 1971 Central Bank of The Gambia. Source : M.H.De Koek, Central Banking, Fourth Edition, Universal Book Stall, New Delhi, 1997, P.10,11,12. A clearly defined concept which has been evolved about Central Bank is that it is generally recognized as the Bank which constitutes the apex of the monetary and Banking structure of its country and which performs, as best it can, in the national economic interest. Historically, all the Central Banks were originally started as privately managed joint stock Banks. But gradually they have become the government organizations and their main objective is to support the economic policy of the government. In several countries, one Bank gradually came to assume more and more the position of a Central Bank, mainly due to its enjoying the sole or the principal right of note issue and acting as the Government Banker and agent. They were not originally known as Banks of issue or as national Banks. The regulation of the note issue was subject to safeguards imposed by the state, and the maintenance of the convertibility of their notes into gold or silver or both were such as in force, were the principal fiinctions of these Banks. In due course, such Banks of issue acquired other functions, duties and powers until the term 'Central Bank' came to be generally used to have a more or less standardized meaning. In various countries, during the course of the 19* century the state endowed an existing Bank with the sale or principal right of note issue, or caused a new Bank of issue to be established with special powers and privileges, accompanied by varying degrees of state control and supervision. In the countries such a Portugal, Romania Bulgaria, Serbia, Turkey, Java, Egypt and Algeria, Banks with a monopoly of note issue were also brought into being during the nineteenth century. Thus, by the end of the nineteenth century almost every country in the world had established a Bank of issue with special rights and powers. All these Banks became the Bankers and financial agents of the governments of their countries, and in different ways or in varying degrees they also assumed the other functions developed by the Bank of England and which have come to be regarded as essential functions of 'Central Banks'. 1.2 - CENTRAL BANKING SYSTEM IN THE WORLD L2.1 Banking System In America (U.S.A.) L2.L1 - Structure of the Federal Reserve System In Most of the countries of the world there is one Central Bank, in an economy usually owned and operated by the government. American's Central Banking system is unique in a number of respects, with too much centralization. The Congress established a Central Banking system with a Board of Governors and 12 district Federal Reserve Banks in various parts of the country. The capital stock of each Federal Reserve Bank is owned by the "member" Banks in its district. Dividends on the stock are limited to a maximum of 6 per cent. The Federal Reserve Banks operate generally under the guidance of the Board of Governors of the Federal Reserve System in Washington. The Board appoints three of the nine directors of each Federal Reserve Bank; the other directors are elected by member Banks in the district. The Federal Reserve Banks are operated in the public interest, rather than to make profits. Since 1947 more than 90 per cent of their earnings, after expenses and dividends, have been turned over to the United States Treasury. Members of the Board of Governors are appointed by the President of the United States, subject to confirmation by the Senate. The members are appointed for 14 year, non-renewable terms, and so arranged that the term of one member expires every 2 years.