Justify the following statements with valid arguments : (a) The Central Bank is the sole currency issuing auth

Question 43 of 67

Q. Justify the following statements with valid arguments :

(a) The Central Bank is the sole currency issuing authority of an economy.

(b) Money serves as a measure of standard of deferred payments.

Madhya Pradesh MpbseCBSE Class XII Board 2024Subjective· 4mImportance★★★★★

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Concept understanding — Functions of the Central Bank

The Bank That Sits Above All Other Banks

Every economy has one special institution that does not serve ordinary customers, yet stands at the apex of the entire financial system. In India it is the Reserve Bank of India. The central bank is not just “a big bank” — it is the guardian of the currency, the banker to banks, and the financial arm of the government.

Central Bank = the apex monetary institution that controls, regulates and supervises a country's money supply, banking system and credit, and acts as banker to the government.

The Key Functions

1. Issue of Currency (Sole Currency Authority)

The central bank has the exclusive monopoly to issue currency notes (in India, all notes except the one-rupee note and coins issued by the government). Why give this power to one body? Because a single issuing authority ensures uniformity, public confidence, and effective control over the total money supply. Multiple issuers would breed distrust and instability.

2. Banker to the Government

The central bank manages the government's banking transactions — it keeps government deposits, receives and makes payments on its behalf, and manages public debt. In this role it acts as the government's banker, agent and adviser:

Banker — maintains the government's accounts and handles its receipts and payments.
Agent — buys and sells foreign exchange, manages public borrowing and debt (including operations touching gold and forex reserves).
Adviser — counsels the government on monetary, financial and economic policy.

3. Bankers' Bank and Supervisor

Just as households bank with commercial banks, commercial banks bank with the central bank. It:

Holds a part of every bank's reserves (the CRR).
Acts as lender of last resort, lending to banks in crisis so the system does not collapse.
Runs the clearing house to settle inter-bank claims.

4. Custodian of Foreign Exchange Reserves …

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The Central Bank’s monopoly over currency issuance ensures uniformity, trust, and monetary control, while money’s role as a standard of deferred payments allows debts to be contracted and settled in a common, stable unit over time.

(a) The Central Bank is the sole currency issuing authority of an economy.

The Central Bank — in India, the Reserve Bank of India (RBI) — is the only institution legally empowered to issue currency notes (except one-rupee notes and coins, which are issued by the Ministry of Finance). This monopoly is not arbitrary; it serves several critical economic functions.

First, uniformity and trust. If multiple banks or private entities could issue currency, there would be chaos — different notes with varying degrees of acceptability, risk of counterfeiting, and no guarantee of value. A single issuing authority ensures that every rupee note is identical, legal tender for all transactions, and backed by the full faith of the government. People accept currency without hesitation because they know the Central Bank stands behind it.

Second, monetary control. The Central Bank uses its control over currency supply to manage inflation, deflation, and overall economic stability. If currency issuance were fragmented, no single authority could effectively regulate the money supply. For example, during a recession, the Central Bank can increase currency in circulation to stimulate spending; during inflation, it can contract it. This power is lost if others can print money at will.

Third, seigniorage revenue. The profit from issuing currency (the difference between the face value of notes and their cost of production) accrues to the government. This is a significant source of revenue, and centralising issuance ensures it is not dissipated among private entities.

Note

In India, the RBI issues all banknotes above one rupee. One-rupee notes and coins are issued by the Ministry of Finance but are put into circulation through the RBI. This is a minor exception, but the principle of centralised authority remains intact.

Thus, the Central Bank’s sole currency-issuing role is foundational to a stable, trusted, and controllable monetary system.

(b) Money serves as a measure of standard of deferred payments.

Deferred payments are payments to be made in the future — loans, mortgages, credit sales, rent, salaries, etc. For such contracts to work smoothly, there must be a common unit in which both the amount owed and the future payment are expressed. Money fulfils this role perfectly.

Think of a barter economy. If you borrow 10 bags of wheat today, what will you repay? The lender may not want wheat next year; the quality or quantity of wheat may change; there is no standard way to express the debt. Money solves this by providing a stable unit of account that both parties agree on. A loan of ₹1,00,000 today is understood to be repaid as ₹1,00,000 (plus interest) in the future, regardless of what happens to individual goods. …

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Q.Justify the following statements with valid arguments :

(a) The Central Bank is the sole currency issuing authority of an economy.

(b) Money serves as a measure of standard of deferred payments.

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