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Where there is no law, but every man does what is right in his own eyes, there is the least of real liberty
Henry M. Robert
6 March, 1999 - 00:00

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BANK POLITICS

Does a Country Need Real Money If it Has No Idea How to Use it?
Ideologist of so-called scientific socialism Nikolai Bukharin once wrote
that there is no better way to ruin the "bourgeois regime" than to subjugate
the laws of money circulation. By and large, Bukharin's contemporaries
almost reached their aim, for they understood they could print as much
money as they pleased, then destroy it as a vestige of capitalism through
complete depreciation.

Given a 70-year history of bank-notes in place of money, the Ukrainian
currency has not yet had enough time to become used to real money. And
there has not always been a desire in independent Ukraine to have this
kind of money. Actions of the National Bank in 1991-1993, i.e., sacrificing
money to keep afloat bankrupt industries and renouncing economic reforms
before they started, are often put down to the lack of knowledge about
money. But this has only a grain of truth.

Verkhovna Rada will soon hold its second reading of the law on the National
Bank of Ukraine (NBU) which in fact contains the answer to the question
whether this country will have real money. But we may easily guess that
the answer does not depend so heavily on the professional knowledge of
money. As all things in this world, it depends on interests.

INTRIGUE

Let us try to find the essence of the intrigue concerning passage of
the National Bank law. The bill says the NBU's chief aim is to "ensure
stability of the national currency and prices and trouble-free functioning
of the settlement system in Ukraine, to develop and strengthen the banking
system." In a word, the NBU is being vested with identifying and carrying
out the state's monetary policy, i.e., with what Parliament does now. The
NBU staff think the Solons being encumbered with pre-election promises
and their limited term of office hinder them from reaching the strategic
goals of monetary policy aimed at maintaining the national currency's stability.
Naturally, this does not mean Verkhovna Rada has no impact on the Bank.
The draft envisions NBU's accountability to Parliament. The Rada appoints
the NBU chairman and half the members of the National Bank Board. Incidentally,
the same kind of relationship exists between the Federal Reserve System
and US Congress, the latter refraining from specific "valuable advice"
to the central banking system. On the other hand, the National Bank has
to coordinate its actions with the government which shapes the country's
monetary and fiscal policies. In fact, this is the only option, for the
monetary and fiscal systems are but two sides of the same economy. However,
for all the apparent harmony in the division of functions and duties, there
also are some serious contradictions here.

The point is that Ukraine still lacks a single (political) viewpoint
on the priorities of economic policy in general and monetary strategy in
particular. After the 1992-1993 hyperinflation, restricting the money supply
became virtually the only method of combating inflation. Nobody cared about
making enterprises competitive; quite the contrary, enterprises incurring
debts and losses are still being treated as top priorities. That this accelerated
the industrial slump and exacerbated the banking crisis is now common knowledge.
But we have not yet been lucky enough to see that strong money encourages
growth in the long-term. Thus, the economy received two cycles of circulation
after the currency was nominally bolstered. In, the financial and export
sector, good money, has been concentrated, while the rest of the economy
has got money substitutes.

It is clear that so-called good money is (speaking arbitrarily) under
NBU control. The Bank sees to it that there should be as much money as
is required to maintain acceptable price rises for the goods sold for money.
Let us recall that the inflation index determining the cost of money depends
almost exclusively on the quantity of goods and services produced. Thus
the NBU is quite right in insisting that its role is secondary, for the
pace here is set by government and legislative policies which do not encourage
production. True, money also has a price in terms of foreign currency.
The hryvnia's foreign exchange rate is nothing but the measurement of Ukrainian
goods sold abroad, as well as of the amount of hard currency its owners
wished to convert into hryvnias.

TEMPTATIONS

As to the rest of the economy (not based on money), everything is much
more confused. Production stimuli to this economy are measured not in money-expressed
profits but with a whole system of money substitutes - from goods and non-payments
to trade in political power. Can the NBU ignore this kind of economy? Of
course not. But the non-money economy does not like how the bank treats
it. In general, the NBU's monetary policy, as far as it is possible under
the current situation, aims to gradually replace the non-money with money
as such. The NBU does this by expanding the money-settlement space, winning
trust in the national currency and banking system, making money settlements
cheaper, and, finally, by countering the opportunistic demands of industrial
lobbyists from the executive and legislative branches. In principle, the
NBU bill puts what has come into being de facto in the past 2-3 years on
a de jure basis.

Let us come back to good and bad money. We know from textbooks that
the real price of money is determined by the total demand of the whole
economy. In other words, the price of good money circulating within the
very narrow circle of the few owners of liquid assets - the budget and
ten or so banks, cannot be applied to the whole economy. So it is small
wonder that the subjects which have for various reasons fallen out of this
narrow circle will more and more explicitly show interest in bank notes.
For example, factories whose earnings do not cover expenses, banks that
have issued bad loans, non-funded public-sector employees - all of them
badly need at least bank notes, if not money. (Note that these elements
are not alone in their claims: they have many representatives in all the
branches of power).

It is clear this demand is expressed in most quaint forms the reader
is aware of. But in our history this interest is nontraditional: it is
veiled by a closely-guarded process of preparing a parallel Verkhovna Rada
draft law on the National Bank Board. The main idea of this is as follows:
the NBU Board is to work out basic monetary policies, while the NBU is
to pursue them. Since the NBU Board is to be composed of representatives
of the "qualified" parliamentary and pro-presidential public, we may only
guess what the final version of the "basics" will be. But there is no doubt
it will differ very little from the already available "concepts" and "programs"
expressing in condensed form the business interests of their authors. What
is more, such a board would bear no responsibility for its decisions. It
is the NBU Board of Governors that will be responsible for the fruition
of such ideas, insane as they may be. However, such parallel law-making
is based not only on subjective premises.

REALITIES

We are now in fact witnessing a paradoxical situation. Experts of a
German consulting group note that "a market system can only function effectively
and successfully under one condition: if there is smooth money circulation
which facilitates economic activity and not hamper it. Simultaneously,
the point today is no longer in supporting reforms by monetary means but
in the danger of internal and external destabilization of money as the
result of an inadequate policy of reforms."

What is left for an institution, in charge of the hryvnia stability,
to do in these circumstances? It seems to have only two ways of handling
the problem. One is to pursue a monetary policy adequate to the policy
of pseudo-reforms (it is not ruled out that the parallel bill on the NBU
Board implicitly pursues precisely this aim). The alternative, by the way,
is also controversial. A former Russian civil servant turned businessman,
Petr Mostovoi, has thus assessed the role of the Russian Central Bank (CB)
in ways very similar to our conditions: "Under conditions where the government
does not manage the economy and the Duma would like to but cannot, the
main parameters of economic policy are set by the Central Bank... On the
one hand, an active CB is better than an inactive government. On the other,
the CB has specific goals and interests of its own. When the main role
in economic governance is being played by the CB, the institutions under
its aegis naturally get advantages over other economic entities."

So what is to be chosen - a dependent or independent National Bank?
Which of the two alternatives should we prefer? Obviously, whichever would
be the lesser evil if we have nothing better in store for ourselves.

By Iryna KLYMENKO, The Day

 

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