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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