Archive for the ‘Central Banks / Monetary Policy’ Category

Both Government and RBI print India’s currency notes under different units…

January 22, 2018

A news broke over the weekend saying an RBI official has been caught stealing banknotes from the printing facility at Dewas:

 In a serious breach of the government mint, the Central Industrial Security Force (CISF) caught a senior officer at the RBI-controlled bank notepress (BNP) facility in Dewas stealing newly printed currency notes. Currency notes worth Rs 90 lakh were recovered from his office and residence which he reportedly stole over a period of time. Security officials say the incident raises doubts over the mint’s audit of newly printed notes.

The media should have been more responsible with this as Dewas facility is under the Government of India. The Government owned Security Printing and Minting Corporation of India Limited has two facilities – Nashik (in 1928) and Dewas (in 1975).

Currency Note Press, Nashik Road and Bank Note Press, Dewas which are engaged in production of Bank Notes for our country as well as for foreign countries using state of the art technology. More than 40% of Currency Notes circulated in India are printed by these units. 

The bank note printing in India started in 1928 with the establishment of India Security Press at Nashik by Government of India. Until the commissioning of Nashik Press the Indian Currency Notes were got printed from Thomas De La Rue Giori of United Kingdom. The second bank note printing press was established in Dewas (Madhya Pradesh) in 1975 by Government of India. With the growth in population and economic activity, the demand for bank notes has been steadily increasing. To bridge the demand and supply gap, the Government of India decided to establish two new bank note printing presses one at Mysore (Karnataka) and the other at Salboni (West Bengal)

…..Considering the magnitude of the project, the Company decided to establish the presses in two phases viz, Phase I for establishing a Mini Press with a single production line at each site which would be used as a testing ground for the new work methods and train the personnel for efficient running of the Phase II machines. The Phase II involved establishment of the Main Presses with 7 lines of production in Mysore and 8 lines of production in Salboni. The phase I was operationalised at Mysore and Salboni in June and December 1996 respectively. During 1998-99, the Mini Press machinery at both the sites after testing the work methods and the performance the machines was shifted to the Main Press. While all the seven lines of production at Mysore went on stream on 12th May 1999, the Salboni Press was inaugurated on 12th February 2000.

This error of attributing Dewas Press to RBI irked the central bank. It responded:

It has been reported in a section of the media that an RBI officer has been apprehended by CISF, stealing printed currency at the RBI printing facility at Dewas. It is clarified that the Bank Note Press (BNP), Dewas is a unit of Security Printing & Minting Corporation of India Ltd. which is not under the control of the Reserve Bank of India. Further, RBI does not have any official placed with BNP, Dewas. The reports, thus, are not based on facts.

RBI regrets to note that the facts were not verified before publishing the news reports.

This is all the more so post demonetisation in 2016 which is still in memory. There was a surplus of Rs 2000 notes and a deficit of new Rs 500 notes leading to all kinds of chaos as change for Rs 2000 was not available.  Later, there was news that both RBI and Government redistributed their tasks. The Government printed Rs 500 notes in Nashik  and asked RBI to print Rs 2000 notes under its Mysore press. Latter was ready and former lax leading to the chaos.

But then even RBI is to be blamed here. It should continuously educate people on currency management and its issues. It is a very interesting area and people should know how and from where they get their money power. We all think it is duty of RBI to print notes and attribute all news to the central bank.

But the government plays a role as well. Infact in terms of minting coins, government is the sole authority. Look at how other central banks discuss and post pictures about their notes. The best example is Bank of Nepal which has put up a publication listing all its banknotes since 1945..


History of currency notes and coins of Nepal (1945 onwards)

January 22, 2018

I came across this wonderful publication released by Central Bank of Nepal on its 50th anniversary. It lists and shows all the currency notes and coins used in Nepal since 1945.

India’s Nashik based Security Printing and Minting Corporation of India Limited printed these notes from 1945-60. Then Nepal GOvernment outsourced the activity to De La Rue of UK. Later Nepal’s notes were printed by other firms as well: Germany based Giesecke & Devrient, Australia based Note Printing (owned by Australian central bank), B A Banknote International of  Canada etc.

It gives me great pleasure in bringing out this publication on the ‘Notes and Coins of Nepal’ on the auspicious occasion of the Golden Jubilee Year of the Nepal Rastra Bank (NRB), which was established as the central bank of the country on April 26, 1956 under the Nepal Rastra Bank Act, 1955. Incorporating all representative notes issued in Nepal and the coins issued by the NRB, this publication captures the evolution of the notes and coins issuance in Nepal through their pictorial representation and description. I believe this publication will serve as a useful reference source to those interested in the notes and coins of Nepal.

It may be recalled that the NRB was established when a dual currency system was in practice with the Nepalese and Indian Currencies both circulating in the country. For the purpose of making the Nepalese Currency the legal tender, it was imperative to develop a proper system of notes and coins and ensure confidence in the national currency. This motivation was refl ected in the preamble to the 1955 Act which stated that the Bank would ensure “proper management for the issuance of the Nepalese currency notes”. This importance has been reiterated in the Nepal Rastra Bank Act, 2002 which states a function of the Bank as “to take necessary decisions with regard to the denominations of bank notes and coins, the figures, size, metal, materials for printing notes and other materials, and to frame appropriate policies with regard to their issue.” 

The responsibility of issuing currency notes was initially held by His Majesty’s Government, then called the Government of Nepal, through the “Sadar Mulukikhana” (Central Treasury) from September 1945 through February 1960, when this responsibility was handed over to the NRB. For this purpose, the NRB had set up the Note Department in September 1956 which was renamed as the Currency Management Department in November 2002. Since taking over the responsibility of issuing the currency notes, the NRB has issued notes in denominations of Rs. 1, 2, 5, 10, 20, 25, 50, 100, 250, 500 and 1000. I am pleased to mention that the NRB has also issued the commemorative note of Rs. 50 to mark its Golden Jubilee.

Likewise, His Majesty’s Government issued regular coins (1 paisa, 5 paisa, 10 paisa, 25 paisa, 50 paisa and Re 1) and various
commemorative coins through the Mint Department, which was set up in 1932 and functioned as it was until 1983 when this responsibility was also transferred to the NRB, which has been so far minting 5 paisa, 10 paisa, 25 paisa, 50 paisa, Rs. 1, 2, 5 and Rs. 10 as regular coins and a number of other commemorative coins. To streamline the currency management function through a one-window system, the Mint Department wasmerged with the Currency Management Department and renamed as the Mint Division since July 2005. The NRB has also issued silver coin of Rs. 1,000 and gold coins of 2.5 gm, 5 gm and 10 gm to mark the Golden Jubilee.

Fascinating …

South African central bank can be liquidated but no provision for nationalisation in its Act..

January 18, 2018

I had blogged about how the how the South African government is planning to nationalise Central Bank which till date is privately owned.

Prof Jannie Rossouw of University of the Witwatersrand looks at the matter.

He says the shareholders hardly play much role anyways. The central bank policies are mainly run by the Governor and Dep GOvernors who are appointed by the President. The sahreholders can elect 6 of the 13 members and get dividends not more than 10% per annum.

He says nationalisation will require change in the Act. Currently, the Central Bank Act talks about liquidation not nationalisation. Ultimately it all boils down to law:


Differences between Development Banks and Wholesale and Long-Term Finance (WLTF) banks..

January 18, 2018

Dr YV Reddy spoke on the topic at the centenary of Indian Economics Association.

He chose the topic given recent RBI discussion on Wholesale and Long Term Financing Banks:

I chose the subject Development Banking for the lecture today because there is a revival of interest in development banking consequent upon the large amount of non-performing assets in the banking sector in India. It is believed that large part of NPAs, are on account of banks’ exposure to the infrastructure sector. It is now felt in some quarters that the universal banks are not the ideal institutions for
development of infrastructure. There is, therefore, interest in resurrecting Development Banks.

The Reserve Bank of India has circulated a discussion paper recently on Wholesale and Long-Term Finance (WLTF) banks. The discussion paper recognises the current problems faced by banking sector in long-term and project finance, in particular, infrastructure projects and also reflects the change in attitude of the RBI in regard to differentiated banks.

What is a development bank?


The Federal Reserve and central bank cooperation over the past 100 years…

January 17, 2018

Superb speech by Simon Potter of NY Fed. It is at the occasion of Centennial of the Federal Reserve’s US Dollar Account Services to the Global Official Sector. It is these account services which led to both US Dollar and Federal Reserve play begin to play a central role in world economy.

As expedient as the accounts were for wartime needs, the historical records show they were also motivated by ambitions of the Fed’s first leaders to establish the dollar as a major international currency and, for Benjamin Strong, to establish New York as a great international financial center to rival London. They had their work cut out for them.

By 1914, while the U.S. was already the world’s largest economy and trading nation, its banking system remained curiously parochial and the dollar was not a major international currency. In fact, American firms continued to finance their trade almost entirely with credits from foreign banks, a source of resentment, with Paul Warburg, the first Federal Reserve vice chairman, referring to the annual acceptance fees paid to London banks as a form of “tribute.” 

With the passage of the Federal Reserve Act in 1913, some of the constraints on the emergence of a robust dollar trade financing market were removed and the newly established U.S. central bank could take a more active role in nurturing and backstopping a nascent dollar acceptance market, which it did. These efforts included buying dollar acceptances for foreign central bank accounts at competitive discount rates and providing guarantees, for a small fee, on payments at maturity of acceptances bought for these accounts.

These actions helped to spur the dollar’s emergence as an important international currency, with dollar acceptances viewed as an attractive reserve asset by the 1920s.

The early accounts also represented tangible links of cooperation among major central banks, with much of this cooperation centered on efforts to maintain or restore the international gold standard in the aftermath of the First World War.11 The reciprocal relationships enabled central banks to buy and sell foreign exchange to influence credit conditions in each other’s markets with the aim of regulating cross-border gold movements. In this, central banks of the time viewed acting through foreign central bank correspondent accounts as preferable to acting through private intermediaries.

Now this Account Service pretty much controls world’s financial system:

h the Central Bank and International Account Services area of the New York Fed, the Federal Reserve today offers banking and custody services in dollars to just under 180 foreign central banks and monetary authorities, approximately 18 international multilateral financial institutions, and a number of ministries of finance or national governments. The suite of services offered to these account holders is a basic package of dollar-denominated and gold services in three general areas: transfer and custody services for gold and fixed income securities; dollar-based payment services; and dollar-based cash management and investment services.

Every day, New York Fed staff process on average hundreds of billions in transaction volumes on behalf of foreign official account holders. In total, approximately $3.6 trillion of dollar-denominated securities and cash deposits are held by foreign official account holders at the New York Fed, representing about half of the world’s official U.S. dollar reserves and one-third of the world’s total official FX reserves.

There is also discussion from the archival records on how the service came into being:

It was left to Governor Benjamin Strong of the New York Fed to journey to Europe in the spring of 1916 to personally negotiate the early account agreements, allowing him to forge close personal relationships with European central bankers, most famously with the Bank of England’s Montagu Norman, or as Strong would come to call him: “my dear Monty.”4 While these initial discussions in 1916 did not lead immediately to agreements, partly owing to U.S. observance of neutrality, the groundwork had been laid such that by the time the U.S. entered the War in April 1917 the arrangement with the Bank of England could be executed rapidly.

The historical records show that the establishment of this first account agreement with the Bank of England involved a minor diplomatic faux pas, known as the British Treasury bills episode. President Wilson, having won reelection in 1916 on the claim of having kept the U.S. out of the Great War and observing strict neutrality, had directed the Federal Reserve Board in Washington to issue a clear-cut warning to U.S. banks not to invest in a pending large placement of British Treasury bills in the U.S. market. The immediate and worldwide effect of the statement was to give the impression that the U.S. had “broken with Britain,” an impression which officials were soon scrambling for ways to counteract.5 The result was the Federal Reserve Board’s decision, contrary to the terms of the account negotiations and to the consternation of the New York Fed, to unilaterally announce to the public the account agreement with the Bank of England. The whole episode spoke perhaps to the Fed’s inexperience in matters of delicate international financial diplomacy. In any event, the Bank of England magnanimously let the matter slide-noting that mistakes “may arise even in the best regulated families”-and the account agreement was executed on May 3, 1917 and operationalized on June 20, 1917.

Superb stuff…Lots of global history in this speech…


How a Bitcoin System is Like and Unlike a Gold Standard

January 16, 2018

Larry White has a post:

In what important respects are the Bitcoin system and a gold standard similar? In what other important respects are they different?

Bitcoin is similar to a gold standard in at least two ways. (1) Both Bitcoin and gold are stateless, so either can provide an international base money that is not the creature of any national central bank or finance ministry. (2) Both provide a base money that is reliably limited in quantity (this is the grounding for Selgin’s characterization), unlike a fiat money that a central bank can create in any quantity it likes, “out of thin air.”

Bitcoin and the gold standard are obviously different in other ways. Gold is a tangible physical commodity; bitcoin is a purely digital asset. This difference is not important for the customer’s experience in paying them out, as ownership of (or a claim to) either asset can be transferred online, or in person by phone app or card. The “front ends” of payments are basically the same nowadays. The “back ends” can be different. Gold payments can go peer to peer without third-party involvement only when a physical coin or bar is handed over. Electronic gold payments require a trusted vault-keeping intermediary. Bitcoin payments operate on a distributed ledger and can go peer-to-peer electronically without the help of a financial institution. In practice, however, many Bitcoin transactions use the services of commercial storage and exchange providers like Coinbase.

The most important difference between Bitcoin and gold lies in their contrasting supply and demand mechanisms, which give them very different degrees of purchasing power stability. The stock of gold above ground is slowly augmented each year by gold mines around the world, at a rate that responds to, and stabilizes, the purchasing power of gold. Commodity (non-monetary) demands also respond to the price of gold and dampen movements in its value. The rate of Bitcoin creation, by contrast, is entirely programmed. It does not respond to its purchasing power, and there are no commodity demands.


Good way to think about the two systems…

When banks mentioned paid-up capital on their notes…Canada edition

January 15, 2018

JP Koning keeps coming up with some amazing insights.

His recent tweet has this picture of an old Bank of Montreal note (when banks issued their own notes). Note the size of the note. He also points how the banks mentioned their paid up capital on the note to signal their financial health:

To this, Stephen Williamson clarified:

Replying to 
It’s not so much advertising financial health, as advertising how much the shareholders are on the hook for. There was double liability, so if there is $12 million in paid up capital, that’s an extra $12 million that can pay off the noteholders if the bank goes under.
This double liability clause started in Canada in 1871.  Not sure whether this was used in other countries as well. In India, banks could print their own notes only till 1861 after which unified currency circulated in British India. There were some princely states like Hyderabad but again it was a State currency not requiring printing of paid-up capital on the notes.
So much one can learn by just noting the changes in design and writing on currency notes..Thanks again JP!

Central banks should also be judged by their quality of research/work….(Why central banks do not blog?)

January 15, 2018

Nice article which says we should move beyond just talk of institutions being independent. Rather institutions should be assessed on the quality of their work.

In our contemporary lexicon ‘independence’ – for instance of a government body – is usually a Good Thing.

But if we’re thinking of independence as a good thing for an agency to have – for instance, the Productivity Commission (PC) – it’s not sufficient. It also needs to be used by the agency, and the agency must be worthy of it by virtue of the quality of its work. The odd thing is that so many such agencies have such a strong flavour of bureaucracy about them. There’s the same cultural emphasis on what I call being a sound chap. I’ve come to think that this is a kind of natural product of groups. They are … well … groupish.

They acquire the same kinds of social dynamics you notice at high school when nearly everyone wants to be one of the cool kids. But in government there’s an institutional basis to this also. Even if they have their own act, even if their independence is prized in our public culture, most government statutory agencies are tethered to the career public service. Their officers enjoy the privileges of the Commonwealth public service career structure. So we should not be so surprised that those in such independent agencies think like bureaucrats. And there are few things more important to bureaucrats than appearing to be in control. To be thought of as sound chaps.
The institutions need to move beyond their comfort zone. In this the author differentiates between central banks of Australia and England:


Swiss National Bank from high losses to high profits.

January 9, 2018

In 2015, the central bank incurred a loss of CHF 23.3 billion followed by a profit of 24.5 billion in 2016.

In 2017, it expects a profit of CHF 54 billion, more than double of last year.

For all you know, amidst all the gloom and doom central banks continue to run amazing profits. Fortune 500 list showed Apple topping the highest profits list with a profit of USD 45.7 billion in 2016. Federal Reserve in 2015 generated USD 100.27 billion of profits followed by USD 92.17 billion in 2016.

Should be similar for other central banks as well.

Perhaps the best business in town. The losses do not effect the entity and profits are coolly transferred to the respective share-owners which is government in most cases.

Riksbank kickstarts 350 year anniversary with new postal stamp..

January 9, 2018

This blog had pointed that the first central bank of the world -Riskbank- will complete 350 years in 2018.

The government/central bank kickstarted the anniversary. The Postal office has released commemoration stamps  to mark the event. Though it is ironical that a physical stamp is being to mark anniversary of a central bank which  could issue digital currencies. The governments historically have printed both stamps and banknotes in one of their units.


Legal tender laws in US: States can decide what is legal tender…

January 8, 2018

Superb post by Timothy Taylor. He points about legal tender laws in US.


Alternative local currencies are the future and why they matter for local development…

January 5, 2018

Lorenzo Fioramonti (Professor of Political Economy at University of Pretoria) writes on the importance of cryptocurrencies and local currencies:

When I began to teach in 2012, I decided to start my course with an analysis of how money affects social order. What my students found particularly fascinating was the then-nascent world of cryptocurrencies, which I described at length as a crucial feature in the future of money.

Some colleagues criticised my approach. They accused me of indirectly encouraging students to invest in what they saw as a shady, crime-ridden financial underworld. But I was simply exposing young minds to a fast-evolving, complex phenomenon that in my view would have a major impact on power distribution in the global economy.

Behind most cryptocurrencies is a simple technology known as “blockchain”, a system residing in multiple computers that allows for peer-to-peer financial ledger recording of all transactions occurring in a network.

This results in a transparent open-access registry of monetary flows which makes the intermediation of banking authorities unnecessary. Thus it challenges the conventional belief that money can only work through central planning.

Impressive to note he has been teaching about cryptocurrencies since 2012. Though, historically money worked in a more  decentralised way without the current technology earlier and then it was centralised by governments.

He says there are around 6000 complementary currencies:


Bank of England to launch e-pound?

January 4, 2018

Just as the new year set in, the news came that Bank of England is planning to launch its own cryptocurrency.

Bill Buchanan of Edinburgh Napier University chips into the matter:


Rise of non-bank finance in India..

January 4, 2018

Researchers at RBI- R. Ayyappan Nair, M V Moghe and Yaswant Bitra- point to this interesting ongoing development in Indian financial markets.

They show that non-bank sources of finance have risen significantly over the years. The share of banks as a source of finance has declined from 56.3% in 2010-11 to 38.4% in 2016-17 and share of non-bank sources has increased from 43.7% to 61.6%. This rise of non-bank finance is mainly via rise in inflows towards debt mutual funds which in turn have invested in corporate bonds:

The significant increase in inflows into mutual funds and their subsequent deployment is altering the scope of disintermediation in India. We look at this evolving milieu and its implications for bank intermediation in general and credit portfolio of banks in particular. We find that there is, (i) a gradual shift in corporate borrowings from banks to mutual funds as reflected in the contraction in corporate spreads for near-investment grades; and (ii) a significant differential between the risk-free rate and the benchmark lending rate for banks, viz., Marginal Cost of funds based Lending Rate (MCLR), which has given rise to disintermediation of bank credit for quality corporates.



Larin: The currency which facilitated trade between India and Middle East in 16th century…

January 3, 2018

Fascinating history by Krutika Haraniya. The article takes us to 16th century when the Safavid ruler Shah Tamhasp minted a currency called Larin to facilitate trade with India.

The currency eventually disappeared from circulation around middle of 18th century. And as expected, there is very little research on reasons for the disappearance.

There is so much to learn and figure. Numismatics should move from museums to curriculum on monetary economics..

Monetary policy’s cryptocurrency challenge: Several thought experiments at play..

January 3, 2018

Niranjan Rajadhyaksha as always comes up with this insightful piece on how cryptocurrencies could alter the monetary policy nad banking game. This is a followup to his earlier piece which argued about the speculative nature of the bitcoin. The first piece compared bitcoin features to other types of moneys and the second one is more around how it will impact monetary and banking systems.

How will it impact monetary policy? We moved from targeting money supply to targeting interest rates. We could be back to targeting money supply again:


How did a two-millennia-old coin image of a Greek king end up being used on a modern Afghan banknote?

January 1, 2018

The first post of 2018 and what could be better than history of money.

This post by Llewelyn Morgan takes you through Afghan and Greek history. He points how the modern Afghan notes use an image from a Greek coin which was used many years ago:


Should South Africa Central Bank be nationalised?

December 27, 2017

South Africa Reserve Bank, the central bank of the country, was the first central bank established by British in its colonies. Most central banks then were private entities but were later nationalised on independence like India.

However, SARB remained in private hands and is one of the few central banks owned by private shareholders.

Recently, there have been talks that African National Congress wants to nationalise the bank (20 Dec 2017):

The ANC has resolved that the South African Reserve Bank (SARB) should be nationalised and the existing structure of private shareholders within the central bank should be done away with.

The Economic Transformation Committee briefed the media on Wednesday night about the policies it had adopted.

In June/July, the 5th ANC policy conference resolved that the SARB should be nationalised and the central bank should have greater interaction with the Minister of Finance.

However, the central bank released a statement saying it will hardly matter as private shareholders do not influence monetary policy:


Why are cities so resilient while corporations so fragile? Lessons for bitcoin/cryptocurrency…

December 27, 2017

Interesting piece by Eran Shir.

He asks: why are cities resilient and corporations so fragile?


Israel planning its own e-sheckel…

December 26, 2017

Well as the saying goes:  “if you can’t beat them then joint them”.

After dismissing private digital currencies for quite sometime, the central banks are warming up to the idea. Some central banks like Sweden are thinking of issuing their own digital currency like whereas some others like Denmark and Finland have expressed reservations against the idea.

The latest to join in the first list is Israel:


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