Principles of central banking

Three main considerations govern the operations of a central bank; these are known as the fundamental principles of central banking. Firstly, the central bank is always motivated by the spirit of national Welfare. The operations of the central bank must always be guided by the objective of maximizing the welfare of the people or the nation and not by maximizing the profits as is the objective of commercial banks. It does not, however, mean that the central bank should undertake activities without keeping in view their financial implications or results. As a matter of fact when de Kock said that the central bank should work exclusively in the interest of public welfare he meant that profit earning should be a secondary consideration for a central bank and the maximization of public welfare should be its primary objective. Secondary, the central bank’s operations should aim at maintaining the monetary and financial stability in the economy. And from this point of view, every central bank has been provided with wide powers for controlling the monetary and banking structure of a country and for achieving this objective. Thirdly the central bank’s activities should be free from all political considerations or influences. It should not be governed by the ideology of any particular political party. It does not mean that it should not work in using with the government of the country. What it means is that it is not the ideology of political party in power that would decide its policy but the economic conditions of the country which should receive the foremost consideration from the central bank. Since the Government is also expected to solve the economic problems of the country and the central bank is also supposed to find out a solution for the economic problems of the country, therefore both these should work in cooperation with each other. Finally, a central bank should not compete with the commercial banks in the country or should not perform such banking transactions as a accepting deposits from the general public and accommodate regular commercial customers with discounts or advances.

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