In My 1996 PhD thesis, I argued that the Monetary System was getting ready for a major change, which would involve other things taking place of cash money. Today, my convictions are stronger than ever.
In order for me to explain the main reason for convictions, let me analyse a question I was asked on television and my answer to this particular question.
“Governments all around the world have been putting pressure central banks lately. What may be the reason for that?”
Theirs is an explanation for this phenomenon that didn’t escape my attention either.
When we consider the founding philosophy and primary goals of Central Banks, it would be easier for us to come up with an answer to the question above.
- Their role as a Bank before Public Institutions and Government
- Their role as a Bank serving for other Banks and their role as a Regulatory Authority
- Their duty to control the supply of money
- Their duty to ensure the stability of their country’s currency
- Their duty to maintain price stability
- Their duty to maintain financial stability
However, given the fact that Central Banks are carrying out some of their abovementioned duties with the help of other institutions, we must be aware that other authorities or money market instruments are also capable of performing similar duties.
It can be clearly seen that Central Banks need Regulatory Authorities to Financial Stability. And the instruments they possess are not alone enough to maintain price stability.
In the 21st century, it is a known fact that Central Banks are not allowed by law to lend money to government or public sector. Let me remind you that Treasury has no longer right to ask for a short-term debt from a Central Bank. However, this issue was recently ignited again with the “Reserve Funds” debate. Nevertheless, public sector no longer receives funds from Central Banks. It can now generate funds through taxes, domestic borrowing, and planning and projects loans. And the IMF comes to rescue whenever Central Banks are in trouble.
No matter how hard Central Banks try to bring the supply of money under control using its money market instruments, they no longer achieve success. Today, it’s simply not possible to implement a “national monetary policy” especially in developing countries. National money is either used for buying foreign currency or leaves the country even though interest rates start falling down, which leads to a decrease the money supply of money. But, when the interest rates tend to go up, this time foreign funds start flowing into the country, increasing the money supply. Consequently, the results turn out to be exact opposite of what was intended in the first place. Central Banks fail to maintain exchange rate stability in any case because the narratives that determine the value of national currency are not written by Central Banks.
So, given that Central Banks can properly bring neither price stability nor money supply under control, then they are left with sole function. “Decreasing or increasing the cost of funding”. It unfortunately looks like it won’t be possible for Central Banks to attain positive results through policy interest rates either.
“Since they print unbacked money…”
There’s a simple reason behind the fact that those in power criticize the Central Banks more heavily than ever: the mission of Central Banks is about to die. And the most convincing evidence for it is the emergence of crypto currencies.
It looks like the fact that Public Banks can easily perform the duties of Monetary Authorities, private banks consider central banks ‘useful’ merely in terms of “cost of funding”, instead of Central Banks, banks and non-bank financial institutions should generate money with interest rates multiplier prompted people into action.
“Since Central Banks print unbacked money, everyone can create their own money as long as it is creditable and has the same functions” It’s as simple as that. This is the fact underlying the reason whyBitcoin and other crypto currencies were invented in the first place. No matter what your money is called, it has to be creditable and easy to be used everywhere.
All of the facts I mentioned above remind us that banks will survive longer than regulatory authorities. Banks, which are the most important product of the Capitalist System, existed before Central Banks and still exist today, which, can sometimes put them under government spotlight when Central Banks fail to execute all of their duties properly.
Given that it’s quite natural for Parliaments, Courts, Municipalities and other Constitutional Institutions to become subject to criticism when they fail to perform their duties, I think we should embrace the fact that ‘Central Banks can be criticised too’.
I can already foresee that the facts I mentioned above will not just be the undoing of Central Banks, but they will take down the other current monetary systems as well. But if they’re lucky and wise, they would change and adapt to the new circumstances as quickly as possible.
Accordingly, Banks and Financial Institutions should better start foreseeing the upcoming change and take the necessary measures.
