... I wonder what the reader makes of the proposition from Michael T. Snyder that: Central banks are specifically designed to trap nations in debt spirals from which they can never possibly escape, and that we need to educate as many people as possible about why we need to get rid of the central banks
ADEREMI MEDUPIN
Brief History of Central Banking
I was provoked to open this discussion theme on coming across an article titled: “Stop worshiping central banks”, published in MR Online on October 19, 2022. The opening of what looks like a charge reads: Preoccupied with enhancing their own credibility and reputations, central banks (CBs) are again driving the world economy into recession, financial turmoil and debt crises. Going further, the charge records that: most CB governors believe credibility is desirable and must be achieved by fighting inflation at any cost.
To justify their own more harmful policies, they warn inflation is damaging. They argue CBs need independence from governments to pursue credible monetary policy, inflation targeting to anchor inflation expectations is supposed to generate desired confidence. But CBs have been responsible for many costly failures. The little known but real crime of central banks, however, is that they behave the way they do because, as testified by economic historians, in order “to promote the interests of commercial banks, rather than economic recovery”. Give this some thought.
Google makes the fairly well known point that a central bank is an independent, non-political financial agency that supervises monetary policy. It is responsible for maintaining cash and foreign currency reserves, thus stimulating the nation's economic growth and controlling inflation. Each country has its central bank to manage its financial and banking issue. In the rendition by Wikipedia, a central bank is an institution that manages a state’s currency, money supply, and interest rates. Central banks also usually oversee the commercial banking system of their respective countries. In contrast to a commercial bank –called money deposit banks in some climes such as Nigeria, a central bank possesses a monopoly on increasing the monetary base in the country, and usually also prints the national currency, which usually serves as the country’s legal tender. Thanks to Michael D. Bordo who, in his January 12, 2007 piece, “A Brief History of Central Banks”, we can assert that the history of central banking goes back at least to the seventeenth century, to the founding of the first institution recognized as a central bank, the Swedish Riksbank. Established in 1668 as a joint stock bank, it was chartered to lend the government funds and to act as a clearing house for commerce. A few decades later, the Bank of England was established in 1694. Since then, several, indeed virtually all nations of the world have their central banks although of unequal visibility and influence. As Michael T. Snyder observed on the platform of investing.com, central banking has truly taken over the entire planet; the only major nation on the globe that does not have a central bank is North Korea. Yes, there are some small island countries such as the Federated States of Micronesia that do not have a central bank, but counting, more than 99.9% of the population of the world lives in a country that has a central bank.
Sample of notable central banks
Seven of the most important banks currently are listed hereunder.
i) Federal Reserve of USA (Fed): The, U.S. Federal Reserve System (Fed) is the central bank of the United States. It is probably the most influential central bank in the world. With the U.S. dollar used for approximately 90% of all of the world's currency transactions, the Fed's sway has a sweeping effect on the valuation of many currencies, although it is now coming under intense opposition especially from the BRICS plus nations as they work on a possible alternative global reserve currency. Indeed, a retired CIA Director has projected a specific date, August 22, 2023, for the literal fall of the dollar.
ii) European Central Bank (ECB): The European Central Bank (ECB) was established in 1999. Its governing council-consisting of six members of its executive board plus the governors of all the national central banks from the 19 Eurozone countries-decides on changes to monetary policy. The bank's mandate is to keep prices stable and ensure that growth is sustainable. Unlike the Fed, the ECB strives to maintain the annual growth in consumer prices below 2%. As an export-dependent economy, the ECB also has a vested interest in preventing excess strength in its currency because this poses a risk to its export market. The ECB's council meets bi-weekly.
iii) Bank of England (BOE) is publicly-owned, which means it reports to the British people through its parliament. Founded in 1694, it is often touted as one of the world's most effective central banks. Its mission is to maintain the stability of England's monetary and financial systems; to accomplish this, the bank has an inflation target of 2%. If prices surpass that level, the central bank will look to curb inflation. Contrarily, a level far below 2% will prompt the central bank to take measures to boost inflation.
iv) Bank of Japan (BOJ) began operating on June 27, 1882. The bank is often called Nichigin and it is located in the heart of. Tokyo, The bank has been known to enter the open market to artificially weaken its currency by selling it against U.S. dollars and euros in order to safeguard its nation’s interest as an export dependent economy. Its governing board meets eight times a year.
v) Swiss National Bank (SNB) is an independent bank that is responsible for its nation's monetary policy. Its main goal is to maintain the stability of prices while overseeing economic conditions in the country. Like Japan and the Eurozone, Switzerland is very dependent on exports. This means that the SNB does not have an interest in seeing its currency become too strong. Therefore, its general bias is to be more conservative with rate hikes.
vi) Bank of Canada (BOC): Canada's central bank is called the Bank of Canada (BOC). Its mandate is to ensure stability in Canada's economy and financial system. Its governing council meets eight times a year.
vii) Reserve Bank of New Zealand (RBNZ): The Reserve Bank of New Zealand is the central bank of New Zealand. It was established in 1934 and is currently constituted under the Reserve Bank of New Zealand Act 2021.
This list captures some of the most powerful central banks in the world. Although they may have different targets, structures, and meeting timelines, their mandates are generally the same. That shared mandate is to ensure the economic prosperity of their nations, to oversee their financial systems, and to control their currencies. These banks often work together to ensure that the global economy remains in check.
Typical functions of Central Banks
According to KPMG, Central banks are crucial to national economic health, controlling monetary policy through instruments such as money supply management and interest rates. In practical terms,, there are four functions that are core and critical in central banking, namely:
i) Base Rate Setting: Base rate setting is the most significant function of the central bank. The base rate sets the rate at which it lends to commercial banks (called money deposit banks in some climes). Commercial banks select the interest rate on credit for the public based on the base rate. If the central bank raises the base rate for banks, consumers and companies would ultimately face higher interest rates, making commercial loans more expensive. As a result, the market’s money circulation reduces. Consequently, a decrease in the base rate results in cheaper loans; as a result, it increases the market’s money circulation, increasing demand for products and services;
ii) Money Supply Control: Central banks conduct open market operations to acquire bad assets by generating liquidity for these assets. After obtaining the funds, the company purchases financial securities or investments. Therefore, the funds get transferred to the buyer’s banking institution. Consequently, it can pump new funds into the economy;
iii) Maintaining the Required Level of Reserves: They regulate commercial banks’ statutory cash reserve requirements to increase or decrease the market’s money supply; and
iv) Maintaining Foreign Exchange Reserves: They ensures sufficient foreign currency reserves to preserve the value of a nation’s currency. It may begin to purchase the local currency if it loses value; it signals to the market that the local currency is in demand, causing its value to rise.
It is pertinent to add that the central bank determines where and how to source for funds from abroad and negotiate the terms of repayment of both the principal and interest. It is part of the management functions of the central bank to finance any deficits arising from government budgets. All put together, on a macro basis, central banks influence interest rates and participate in open market operations to control the cost of borrowing and lending throughout an economy. Central banks also operate on a micro-scale, setting the commercial banks' reserve ratio and acting as lender of last resort when necessary-which means it is responsible for providing its nation's economy with funds when commercial banks cannot cover a supply shortage. Thus, the central bank prevents the country's banking system from failing.
It may interest the reader to know that there’s the Central Banker Report Cards, published annually by Global Finance since 1994, which grades the central bank governors of nearly 75 key countries (and the European Union) on an “A” to “F” scale for success in areas such as inflation control, economic growth goals, currency stability and interest rate management. “A” represents an excellent performance down through “F” for outright failure. In this vein, in August, 2015, Global Finance magazine named the heads of the Central Banks of the Czech Republic, the European Union, India, Israel, Malaysia, Paraguay, Peru, the Philippines, and Taiwan as the World’s Best Central Bankers over the past year, in recognition of their achievement of a prestigious “A” grade on Global Finance’s Central Banker Report Cards. It is of course undeniable that subjective criteria also apply, in any case, in that 2015 grading, Nigeria reportedly scored a ‘C’ under Godwin Emefiele while the comment on the 2014 score was: “Too early to say”. For some comparison, in the 2015, the following African countries had the indicated scores: Algeria--B, Botswana--B+, Egypt--B, Ethiopia--B+, Ghana--C, Morocco--B+, Namibia--B, South Africa--B+, Tunisia--B-, and Uganda--B. It is perhaps pertinent to note that the Magazine’s audience includes senior corporate and financial officers responsible for making investment and strategic decisions at multinational companies and financial institutions.
Perhaps the most contentious issue around the status of central banks concerns their independence or autonomy. Back in 1994, B.W. Fraser, the then Governor, Reserve Bank of Australia, in an address to the 20th SEANZA Central Banking Course, Karachi, on November 23 blandly titled his talk: Central Bank Independence: What Does It Mean? This talk was later published in the Reserve Bank of Australia Bulletin of December of that year. The Governor acknowledged that: “The issue of central bank independence has generated considerable debate all over the world in recent years”; more interestingly noting that the issue is as old as central banking itself, having been debated on and off over the past couple of hundred years. The hallmarks of independence – namely, autonomy from the government and non-financing of budgets – were identified clearly by David Ricardo in a paper on the establishment of a national bank in 1824. Fraser then posed the rhetorical question: Why is central bank independence an important issue? The brief answer to this question-according to its poser- is that price stability is generally considered a good thing, and that an independent central bank can help to achieve it.
In his address at the Reuters Forum Lecture, held in Johannesburg, on 11 October 2000, Mr T T Mboweni, the then Governor of the South African Reserve Bank, opened with the argument by the then French Prime Minister, Lionel Jospin, where he submitted that independence signifies ignoring pressures, whatever its source; the independence of central banks goes beyond independence from political, executive and legislative power. In his own presentation proper, Mr Mboweni noted how the traditional argument in favour of a strong, independent central bank is that the power to spend money should in some way be separated from the power to create money. He recalled numerous episodes in the world’s economic history testifying to a government’s potential abuse of its power to create money. For example, around the third century AD in the Roman Empire, the silver coins collected by the tax authorities were melted and combined with inferior metals, yielding many more coins to spend on the Caesar’s priorities than the initial tax take. With too much money chasing too few goods, the end result was high inflation.
A set of indices have become widely accepted for measuring central bank independence, which have been ably summarized by N. Nergiz Dincer and Barry Eichengreen- of TED University, Ankara, Turkey and University of California, Berkeley, respectively - in their 2014 article, “Central Bank Transparency and Independence: Updates and New Measures”, reporting as follows: First, a central bank is categorized as more independent if its head (the chief executive) is appointed by the board of the central bank and not by the prime minister or minister of finance, is not subject to dismissal, and has a long term in office. These features of the appointment process are important for insulating the head of the central bank from political pressures. Second, independence is taken as greater when policy decisions are made without direct government involvement. Third, a central bank is classified as more independent if its charter states that price stability is the sole or primary goal of monetary policy. Finally, independence is greater when there are limits on the ability of the government to borrow from the central bank
The then Governor of South African Reserve Bank referenced earlier took pains to harvest the results of major empirical studies that had been carried out on the subject and controversy around central bank independence. According to him, these studies all seem to come to the following three conclusions. Firstly, they provided evidence of a negative correlation between central bank independence and long-term inflation. A low inflation rate is therefore more likely to be found in countries with independent central banks than in countries where the central bank is subject to government control. Secondly, they showed that there is a negative correlation between central bank independence and the long-term budget deficit expressed as a percentage of a country’s gross national product. Countries with independent central banks tend to have smaller budget deficits than those with government-controlled central banks. Thirdly, the studies in general did not find any evidence of a correlation between the independent status of a central bank and production growth. It therefore does not follow that production or employment will suffer as a result of the independent status of the central banks over the medium to long term.
Amidst the unfolding debate, I find uniqueness in the intervention of Epstein Gerald in the 2006 article, “Central banks as agents of economic development” with the recall that: virtually all central banks, including the Bank of England and the US Federal Reserve (the Fed) have used direct means to support economic sectors. And this has not simply been a matter of historical aberration, but rather, it has been an essential aspect of their structures and behaviour for decades on end. In particular, a crucial role for both the Bank of England and the Fed has been to promote the financial sectors of their economies, and especially, to support the international role of their financial services industries. They have done this by using subsidized interest rates, legal restrictions, directed credit and moral suasion to promote particular markets and institutions. Moreover, at times, they have even oriented their overall monetary policy toward promoting the development of this particular economic sector. This representation clearly tallies with the position of an analyst who avers that, in essence, central banks can be considered as the engine of the economy, where like the engine the power is controlled and regulated, any malfunction in the engine creates a risk and problem in the system.
From a more radical perspective is the position offered by Mark Weisbrot, co-director of the Center for Economic and Policy Research, in Washington, D.C. also president of Just Foreign Policy who, while reacting to developments in Brazil on September 14, 2011, shared a questioning piece, “Brazil’s “Independent” Central Bank: Independent from Whom?”-in which he asserted that it is difficult to find a legitimate argument for the central bank to be independent of the will of the electorate, and of its elected leaders — whether in the executive or legislative branch. It is not like the judiciary, where the traditional argument is that an independent judiciary is needed to help guarantee the rule of law. Central bankers are not interpreting the law, but deciding on one of the most important macro-economic policy choices available to democratic governments — monetary policy. There is no obvious reason that monetary policy should be outside the realm of democratic governance, while fiscal policy — taxing and spending — is decided by democratically elected officials. In his view, therefore, those who argue that the central bank should be “independent” are making a rather extreme, elitist argument — in that they are saying that monetary policy is too important to be influenced by the electorate. But this could be said about any economic policy, or other important policies as well — why not have a king make these decisions? So far, the discussion has assumed that the central bank is operating in a peaceful environment; what if there was war?
Central Bank in war time: The case of National Bank of Ukraine
Beaming on crisis situations, specifically the case of Libya as monitored and reported by Premium Times of June 21, 2023: Libya’s Central Bank in Tripoli failed to account for the delivery of US$4.8 billion worth of local dinar banknotes from a British printing company, according to a leaked financial review, raising questions about where the money went. What happened, according to the report, was that “a central bank controlled by the rival government in eastern Libya contracted a Russian state-owned company to print its own parallel currency at an exorbitant cost, leaving that administration deeply in debt because the money was not backed by gold or any other collateral”. More indicting, documents provided by the Tripoli Central Bank showed a major discrepancy in the amount the institution should have received according to its contracts with De La Rue, and the amount accounted for in receipts it issued. Thus, Deloitte found that 6.5 billion dinars (worth about $4.8 billion) were unaccounted for in the paperwork.
Meanwhile, strangely, on March 13, 2023, the Central Banking Institute declared the Central (called National) Bank of Ukraine the “Central Bank of the Year”, primarily because “NBU maintained financial and macroeconomic stability in the face of extreme shocks”, according to the Institute. . The Institute then went ahead to report how, before the provoked Russian invasion, the NBU sent large quantities of banknotes to commercial lenders. The demand for cash at the start of the war increased because of uncertainty, and the NBU resupplied the banks with as much cash as they needed. At the same time, the NBU established an anti-crisis communications campaign, ‘financial defence of Ukraine’, to persuade Ukrainians to trust their financial system and national currency even in wartime. A key goal of the campaign – developed by staff as they worked in bomb shelters during the earliest days of the war – was to minimise panic, including reassuring the public that there was no need to make mass withdrawals of cash from ATMs or savings from banks. The communications team also set up a new portal, so the public could easily access updated information on the operation of banks, financial services and amendments to currency regulations. Working closely with the National Bank of Poland, an emergency cash exchange arrangement for Ukrainian refugees was developed from March 2022, which helped more than 100,000 extremely vulnerable Ukrainian refugees to exchange cash in Poland. The NBU made all communication channels open ‘24/7’, with real-time communication established with key public authorities, international donors, other central banks, the banking community, businesses and Ukrainian regional mass media.
Before closing the discussion, let us take a brief look at the Nigerian central banking scene.
The Nigerian Experience and lessons therefrom
Without prejudice to what will feature shortly, the effort of Premium Times’ consistent focus on such an important institutional subject as central banking, must be acknowledged. Apart from the coverage of Libya’s case earlier referenced, the online media outfit has been very critical of CBN leadership and its operations from the perspective of public interest. In this vein, the publishing medium on September 8, 2017 published an editorial comment, titled: “The Central Bank and Mismanagement of the Nigerian Economy” in which a fault line was exposed, on the note that: Anyone who has paid attention to the apex bank’s financial statements of late would not have been surprised to learn that the central bank has become a piggy bank to the Federal Government. In other words, the Central Bank has been glad-handing money to the Federal Government. A strong basis for the charge and verdict through a recall of statistic from a member of the CBN’s Monetary Policy Committee, showing that: CBN financing of the Federal Government since December 2016 assumed the following profile:• CBN’s claims on Federal Government (FG) at N814 billion is twentyfold higher while the claims of Commercial Banks rose marginally by 0.4 per cent to N4.6 trillion; 30.0 per cent increase to N454 billion in CBN’s purchase of government T-Bills; 5 percent increase in FG Overdrafts to N2.8 trillion; and increase in the ‘mirror account’ from N3 billion at the end 2016 to N1.5 trillion in April 2017.
Daily Trust newspaper, in its Tue, 3 Jan 2023 edition lent credence to the position of Premium Times with its editorial comment titled: “Abuse of CBN Ways and Means”. The Editorial noted that: The Ways and Means advances to the government have ballooned since President Buhari assumed office, rising from just about N789.6 billion in May 2015, to its current unacceptable and illegal level of N22.7trn. Worse, the advances have grown precisely as the government’s revenue flows have dwindled. Consequently, the Ways and Means advances, which are supposed to be of a short-term nature, have become the primary ways of funding the government’s deficits, or worse a blank cheque for the government. It cited the relevant rules to make its charge of reckless borrowing by the government from the CBN, namely: Section 38 of the CBN Act of 2007 as amended recognizes that the federal government can have a “temporary deficiency of budget revenue” for which the Bank “may grant temporary advances” to the government. But sub-Section 2 puts a clear cap on the amount that can be so advanced to the government, stating that the “Total amount of such advances outstanding shall not at any time exceed five per cent of the previous year’s actual revenue of the federal government”. The charge is sustained. Now, a quick recall of the history of CBN with a highlight on a just a few developments.
A draft legislation for the establishment of Central Bank of Nigeria was presented to the House of Representatives in March, 1958, and the Act was fully implemented on 1 July, 1959 when the Central Bank of Nigeria came into full operations. The CBN was officially given birth as a 100% government-owned institution. The major regulatory objectives of the bank as stated in the CBN Act are to: maintain the external reserves of the country, promote monetary stability and a sound financial environment, and act as a banker of last resort and financial adviser to the federal government.
As captured by Wikipedia, in 2009, the CBN fired the CEOs and executive directors of 5 Nigerian banks. In 2014, the President suspended the governor of the CBN on grounds of financial recklessness, and in April 2021 the whole board of the First Bank of Nigeria which was in a «grave financial condition, was fired. In June 2023, the Governor of CBN was arrested by the Nigerian State Security Service and removed from his position at the CBN following a previous arrest attempt in December 2022 for "financing terrorism, fraudulent activities, and economic crimes of national security dimension.”
A parting shot
At this juncture, I wonder what the reader makes of the proposition from Michael T. Snyder that: Central banks are specifically designed to trap nations in debt spirals from which they can never possibly escape, and that we need to educate as many people as possible about why we need to get rid of the central banks. Although his argument has the USA as its focus, the author’s point that the Central Bank “is an unelected, unaccountable group of central planners that has far more power over the economy than anyone else in society does”, clearly deserves our reflection. At the domestic level, if the reader feels disappointed that I have not been more explicit in my reference to a former CBN Governor in Police net, my promise is a willingness and readiness to meet with such a reader at any appointed place soonest for a joint trip to DSS Office. I come in peace, please.
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