Archive for the ‘Central Banks / Monetary Policy’ Category

1965: The Year the Fed and US President Lyndon Johnson clashed..

March 23, 2017

Nice piece by Helen Fessenden of Richmond Fed.

Few challenges to the Federal Reserve’s independence have ever matched the drama of Dec. 5, 1965. Fed Chairman William McChesney Martin Jr. had just convinced the Board of Governors to raise the discount rate amid signs that the economy was starting to overheat. Fiscal stimulus — increased spending on the Vietnam War, expanded domestic programs for President Lyndon Johnson’s “Great Society,” and a tax cut enacted in 1964 — had raised inflationary warning signals for Martin and, increasingly, a majority of the Federal Open Market Committee (FOMC). But Johnson was adamant that higher rates would slow down the economy and compromise his domestic agenda. Enraged, he called Martin and other top economic officials to his Texas ranch, where he was recovering from gallbladder surgery.

“You’ve got me in a position where you can run a rapier into me and you’ve done it,” charged Johnson, as recounted by Robert Bremner in Chairman of the Fed. “You took advantage of me and I just want you to know that’s a despicable thing to do.”

Johnson was accustomed to getting his way — whether through bluntness or sweet-talking, as the occasion might require. But not this time.

“I’ve never implied that I’m right and you’re wrong,” Martin said. “But I do have a very strong conviction that the Federal Reserve Act placed the responsibility for interest rates with the Federal Reserve Board. This is one of those few occasions where the Federal Reserve Board decision has to be final.”

Johnson finally relented, and Martin’s refusal to back down is often considered one his strongest moments as Fed chairman. His relationship with the president was sometimes strained in the following years. But the 1965 showdown was seen as a tough lesson to Johnson that the Fed would flex its muscles when needed to push back against the inflationary pressures caused, in part, by his administration’s own policies.

What is less often remembered in the popular mind is that the rate hike of 1965 did not, in fact, turn a corner on inflation. In the years that followed, fiscal stimulus was ample, war spending kept rising, and the deficit grew. But FOMC members were often divided, and their policy decisions reflected this ambivalence. Furthermore, while Martin saw monetary and fiscal policymakers as obligated to work together to promote price stability and growth, he discovered that dealing with this particular White House and Congress was often a one-way street. And even though the Fed was substantially upgrading its analytic capacity in the 1960s — hiring more Ph.D. economists, building up its research departments, and adopting forecasting — it didn’t always translate into consistent monetary policymaking.

Nice bit of history..

Denmark outsources minting coins to Finland

March 22, 2017

One fundamental question businesses face is: Should one produce or outsource?

Denmark has decided to outsource the minting coins to Finland.

The Mint of Finland has now begun to produce Danish coins. The coins will be put into circulation in Denmark later this year.“We chose the Mint of Finland after a transparent tender process and we are convinced that they will be able to meet our expectations,” says Governor Hugo Frey Jensen, Danmarks Nationalbank.

It was Hugo Frey Jensen himself who pressed the button to start production of Danish 20-krone coins during a visit to the Mint of Finland in the southern Finnish city of Vantaa. In the near future, the Mint of Finland will also start producing the other Danish coins. “Ever since the tender process, production of Danish coins has been a big and important task for us. We are proud to celebrate the start of production,” says Jonne Hankimaa, CEO of the Mint of Finland.

Although all Danish coins are now minted in Finland, their appearance has not changed. The only difference is that the year on the new coins is 2017.

Reasons? Falling demand of coins and banknotes has made the activity financially unviable:

Payment patterns have changed and demand for new banknotes and coins has been falling for a number of years. Hence it could not be justified financially to keep up an own production of banknotes and coins at Danmarks Nationalbank.

A tender process for production of Danish coins was initiated in December 2015 and a 4-year framework agreement was subsequently signed with the Mint of Finland.

No agreement has yet been concluded with a supplier of banknotes. Danmarks Nationalbank has just published a timeline for the forthcoming tender for banknotes, and a supplier is expected to be found in early 2018.


But the cost of printing and minting is hardly much especially given the seignorage, the State gets from this activity. Now, it seems Denmark has found it even cheaper to mint the coins via Finland (and print the currency later).

How central bankers see themselves as saviors, but not the cause of the instability at the first place

March 22, 2017

C Jay Engel posts based on a speech by Peter Praet of ECB:

ECB Executive Board member Peter Praet recently gave a speech in Brussels. The underlying theme captures the convenient positioning of world central banks. They want to be seen as saviors of collapsing financial markets, but neither the cause of the instability nor the continued struggle for economic growth. From the speech:

Faced with a prolonged crisis, the ECB’s unconventional policy measures have been essential to provide additional accommodation to the economy and prevent a self-sustaining fall in inflation — and they have been a clear success. Easier credit conditions have fed into a domestic demand-led recovery that has spread across countries and sectors. The economic outlook today is now better than it has been for many years.

And yet, as he admits, the ECB has been in crisis mode since 2008. So they want appreciation for bringing forth recovery, but want the world to look elsewhere for the reason why these economies aren’t self-sustainable. He even blames the crisis in the first place, not on central bank activity from 2000–2007 but on the masses themselves! 

The first [cause of the crisis] was the bout of over-optimistic expectations which took hold in several advanced economies in the pre-crisis years, reinforced in the euro area by a renewed sense of security and economic prosperity following the launch of monetary union. Despite slowing potential growth, agents in a number of economies overestimated their future income and borrowed against it, accumulating excessive debt. In some countries this over-leveraging was centred [sic] on firms, in other countries on households and in others still on the state.

Well, one might ask where this “excessive debt” came from. Does it not come from central bank policy? What Harry Browne once noted of governments equally applies to central banks: “Government is good at one thing: It knows how to break your legs, hand you a crutch, and say, ‘See, if it weren’t for the government, you wouldn’t be able to walk.'”

One of the consequences of living in an unfree world is the aggravating subjection to condescending Official Narratives. It’s not just that our Monetary Saviors get to make money supply and interest rates decisions on our behalf, it’s also that we are being saved from our own over exuberant actions. We ruin the economy, and then we get pulled from our own fires. And the bureaucrats hardly get a thank you.


Post Charolette Hogg Resignation: Thinking about senior central bank appointments

March 17, 2017

I had blogged about the recent case of Ms. Charolette Hogg who had to resign from Deputy Governorship of Bank of England. It is not any simple resignation with many lessons on central bank governorship. It should be discussed much widely.

CroakingCassandra  Blog, the goto blog on NZ economy and central banking issues thankfully has a post on the issue. He draws lessons for Reserve Bank of New Zealand and quite a bit applies to Reserve Bank of India as well (barring lack of female participation at top central bank roles. Unlike RBNZ, RBI has had females at the helm, though much more needs to be done.)


Lessons on Central Bank Governance from Charlotte Hogg, Deputy Governor of Bank of England who resigned…

March 15, 2017

It would have been least expected that one of the major issues which will trouble central banking is governance. How we keep seeing several such cases in recent years – NY Fed, Barbados Central Bank, India central bank and so on…

Now a new one has come up from the mother of central banking: Bank of England.  And this is a strange one.

Charlotte Hogg was a COO in the central bank for four years after many years in private sector. Based on her great track record, she was appointed Deputy Governor on 1 March 2017. But in just 14 days she has had to resign. Reason? She did not disclose her brother working at Braclays at the time of joining the Bank.

She says it was an honest mistake with no ill-intentions. But given a public job, there cannot be such mistakes and so she should resign:

Dear Mark and Anthony,

Last week I offered you my resignation in recognition of the fact that I made a mistake in not declaring my brother’s work on the forms that the Bank requires. It has become clear to me that I should now insist. As I have said, I am very sorry for that mistake. It was an honest mistake: I have made no secret of my brother’s job – indeed it was I who informed the Treasury Select Committee of it, before my hearing.

But I fully accept it was a mistake, made worse by the fact that my involvement in drafting the policy made it incumbent on me to get all my own declarations absolutely right. I also, in the course of a long hearing, unintentionally misled the committee as to whether I had filed my brother’s job on the correct forms at the Bank. I would like to repeat my apologies for that, and to make clear that the responsibility for all those errors is mine alone. I have not shared confidential information or misused it in any way. I do not have any financial relationship with my brother and I am utterly committed to the safeguarding of confidential information and the separation of a home and work life.

However, I recognise that being sorry is not enough. We, as public servants, should not merely meet but exceed the standards we expect of others. Failure to do so risks undermining the public’s trust in us, something we cannot let happen. Furthermore, my integrity has, I believe, never been questioned throughout my career. I cannot allow that to change now. I am therefore resigning from my position. I will, of course, work with you through any transition.

BoE accepted her resignation with deep regret.

Though what is more interesting is how she was grilled at the Parliament hearing:

At Ms Hogg’s appointment hearing on 28 February, the Committee asked about the interests declared in her questionnaire response, which included her statement, “my brother works for Barclays as a Director in Group Strategy”

Kit Malthouse: One final thing from me is that you have declared some conflicts of interest. Obviously you have family connections in the industry, so what measures have you agreed with the Bank to manage those?

Charlotte Hogg: My only connection at the moment, which you are referring to, is my brother, who is part of Barclays’ strategic planning group. He has been for a number of years. I do not discuss work with him and he does not discuss it with me. We mostly talk about his children. [ … ]

Chair: Let us go back to an answer you gave to Kit Malthouse a moment ago. You said that, with respect to conflicts of interest with your brother, you do not discuss business with him and that that should be enough to allay concern of any conflicts with your work on the PRC particularly, which has direct responsibility for regulating Barclays. Have you discussed the reply you just gave with the Governor?

Charlotte Hogg: I have always declared, from the moment I joined the Bank, all of my potential conflicts of interest. I would be more than happy to discuss it with Mark if he wants to. I am pretty sure he is aware of it. [ … ] Charlotte Hogg: [ … ] I am in compliance with all of our codes of conduct. I know that; I helped to write them.


Court confirmed that there were multiple opportunities when Ms Hogg could have declared her brother’s role: Helen Goodman: How many opportunities has she had to declare that her brother works at Barclays?

Anthony Habgood: When she joined, whenever she has attested to that code, which I guess we brought in 18 months ago or something like that, so probably two or three and she has not attested to that. [ … ]

Chair: [ … ] we went through several hoops when she first arrived in the Bank and then these two or three further opportunities to address this on a code that she herself had written. In evidence to us she said she knew she was compliant because she helped write the code. But it took parliamentary scrutiny and the requirements of parliamentary scrutiny to elicit a response that she should have given several years ago. It does not look good, does it, Mr Habgood?

Anthony Habgood: It does not look good. I agree with you—it does not look good. Chair: To use the phrase of Mr Fried, it does not look like leading by example, does it, Mr Habgood?

Anthony Habgood: It does not look like leading by example, no. Helen Goodman: There was the occasion when she took up her initial appointment. There were the annual attestations—there might be a couple of those—and then there was the application for the job.

The whole hearing document is a great read. Tells you how important central bank governance is against what quite a few believe in India.

Seeing all this drama in recent years, one realises how much stress we put on monetary policy framework, policy etc but so little on governance matters. Take for instance Indian central bank which is undergoing such a transition amidst huge hype. But the more important issues of governance and appointment matters remain under a wrap. It isn’t clear how various people are appointed on central bank (other regulators as well) nor we get to read about their discussion with government on matters. In Bank of England on the other hand, these things are common and central bankers are grilled for their decisions.

It was very rare when the media covered (got to cover?), Indian central bank head grilling over demonetisation. But noting much came out of it as it was just picked from sources. The thing should have been televised or transcript put for viewing later.

The so called best practices about running institutions is as much about governance as it is about policies. High time we focus on former as well..

RBI’s assessment of impact of demonetisation on Indian economy…

March 10, 2017

A big surprise from RBI as it has released its assessment of impact of demonetisation on Indian economy. All this while the stunning silence of the central bank has been so puzzling and irritating.

There is nothing much to note as much is already known via multiple news items and analysis. The most awaited data of how much old notes came back to the system is still not there (atleast I could not find it in the big document).

The report says important consequence is rise in digital transactions which was not even the original objective:

Demonetisation announced on November 8, 2016 was aimed at addressing corruption, black money, counterfeit currency and terror financing. Although demonetisation holds huge potential benefits in the medium to long-term, given the scale of operation, it was expected to cause transient disruption in economic activity. The analysis in this paper suggests that demonetisation has impacted various sectors of the economy in varying degrees; however, in the affected sectors, the adverse impact was transient and felt mainly in November and December 2016. The impact moderated significantly in January 2017 and dissipated by and large by mid-February, reflecting the fast pace of remonetisation. The latest CSO estimates suggest that the impact of demonetisation on GVA growth was modest.

Currency squeeze due to demonetisation along with seasonal factors pushed food inflation significantly down but has not had much impact on inflation excluding food and fuel. A surge in deposits led to a sharp expansion in the consolidated balance sheet of scheduled commercial banks and created large surplus liquidity conditions. These were managed by the Reserve Bank of India through a mix of conventional and unconventional policy instruments. There has not been any significant impact on the external sector. There has been a sharp increase in the number of accounts under the Pradhan Mantri Jan Dhan Yojana and the deposits in such accounts have also surged. Financial re-intermediation may have received a boost following demonetisation.

An important consequence of demonetisation has been the sharp increase in the use of digital transactions.

It has lots of statistics which could be used for future analysis provided we can trust these numbers…

By now, we all know the impact was never intended to be on economics. The real impact always was to unsettle India’s political  environment.  In a brilliant set of moves, the government has used demonetisation to build a narrative around corrupt and non-corrupt nd has used it well during recent elctions.

How Indian central bank got itself to be centre of Indian politics is quite something. The success/failure of demonetisation is more likely to reflect in election results and not as much in economic data..

Central Bank embrace of Blockchain is all about control

March 10, 2017

When you can’t fight them, join them.

C.Jay Engel writes about how Chinese central bank is embracing blockchain technology:


Ghana introduces QR code in its currency notes..

March 10, 2017

Another interesting update on currency note design via

To celebrate its 60th anniversary, CEntral Bank of Ghana has introduced a new 5 cedis note with a QR code. See page 13 of pdf…


Somalia likely to print its first currency since 1991..

March 10, 2017

Somalia is likely to introduce its own printed currency for the first time since 1991 (HT:


State of Texas planning to allow bitcoins as legal tender along with precious metals…

March 8, 2017

I just blogged about State of Idaho and Arizona are planning to allow precious metals like gold and silver to become legal tender.

State of Texas (which has the veto to move out of US) is going further by even proposing to allow digital currencies like bitcoin to become legal tender:

A joint resolution introduced in the Texas House proposes a state constitutional amendment to guarantee the right to own, hold and use any mutually agreed upon medium of exchange. Passage of the bill would take another step toward undermining the Federal Reserve’s monopoly on money.

Rep. Matt Schaefer (R-Tyler) introduced House Join Resolution 89 (HJR89) on March 2. If passed, the resolution would place a constitutional amendment on the ballot recognizing the right of the people to own, hold, and use a mutually agreed upon medium of exchange, including cash, coin, bullion, digital currency, or privately issued scrip. The proposal would add the following language to the Texas state constitution.

“The right of the people to own, hold, and use a mutually agreed upon medium of exchange, including cash, coin, bullion, digital currency, or scrip, when trading and contracting for goods and services shall not be infringed. No government shall prohibit or encumber the ownership or holding of any form or amount of money or other currency.”

In effect, passage of the bill would, as Ron Paul has often said, “legalize the Constitution” by treating gold and silver specie as money. Professor William Greene, an expert on constitutional tender, noted that the proposal would introduce competition with the Federal Reserve.  “By introducing competition in currency through ‘recognizing the right of the people to own, hold, and use’ bullion such as gold and silver coins, passage of the amendment would take one more step toward the ultimate goal of ‘nullifying’ the Federal Reserve system,” he said.

The amendment would also protect the right to own and use digital currencies like bitcoin in the state.

The legislation builds on recent efforts in Texas to encourage sound money, such as the 2013 law eliminating sales taxes on gold and silver bullion, and the establishment of a precious metals state depository that can develop into a “hard money bank” for average citizens to use gold and silver in everyday transactions.

If passed by the legislature, the proposed amendment would go before the voters in Nov. 2017.

 Ultimate goal is to “Nullify the Federal Reserve System”. That is some goal to have.

Another expert says having Federal Reserve notes in Texas is unconstitutional:

Green explained how passage of the amendment would take another step toward nullifying the Fed’s monopoly on money.

As I noted in a paper I presented at the Mises Institute (“Ending the Federal Reserve from the Bottom Up“), when you introduce competition in currency, “[o]ver time, as residents of the State use both Federal Reserve Notes and silver and gold coins, the fact that the coins hold their value more than Federal Reserve Notes do will lead to a ‘reverse Gresham’s Law’ effect, where good money (gold and silver coins) will drive out bad money (Federal Reserve Notes).” Economist Peter Bernholz has labeled this “reverse Gresham’s law” as “Thiers’ Law,” after French politician and historian Adolphe Thiers.

As “Thiers’ Law” takes effect, a cascade of events can begin to occur, including the flow of real wealth toward the State’s treasury, an influx of banking business from outside of the State (as citizens residing in other States carry out their desire to bank with sound money), and an eventual outcry against the use of Federal Reserve Notes for any transactions. Far from causing economic destabilization, as monetary theorist and Constitutional scholar Edwin Vieira notes, a “more sound currency will simply supplant a less sound currency, by operation of the free market.” At that point, the Federal Reserve system will have become unwanted and irrelevant, and can be easily abolished by the people’s elected Representatives in Washington, D.C.

While praising the amendment as a good first step, Green said there is more to be done.

 If a full version of the Constitutional Tender Act were passed into law, then not only would the use of Federal Reserve Notes by the State be made illegal (because they are in violation of Article I, Section 10 of the U.S. Constitution); the use of legal tender U.S. gold and silver coins would be encouraged among the general population as well, along with any other currency that parties mutually consent to using. This would have three immediate effects: the elimination of FRNs from State transactions; the requirement of individuals and businesses to cease using FRNs in their transactions with the State; and (like HJR89) the introduction of competition in currencies among the general population. With all three effects working in tandem, the use of low-value pieces of paper issued by the Federal Reserve will become increasingly irrelevant, and an emaciated Federal Reserve system can much more easily be brought to an end — in essence, a de facto “nullification” by the State of the Federal Reserve itself.


Demand for sound money (declaring gold, silver, other metals as legal tender) rising in US States…

March 8, 2017

Both Idaho and Arizona are looking at allowing gold. silver etc to circulate as legal tender:


Are we all macroprudentialists?

March 7, 2017

Julien Noizet of Spontaneous Finance is back to blogging after a break. He questions the government/central bank intervention in financial matters.

In his recent post, he asks the question: Are we all macroprudentialists?


Central Bank of Nigeria’s forex crisis..

March 2, 2017

After Central Bank of Barbados crisis, something has been brewing in Central Bank of Nigeria too. Though, Barbados is unique in terms of what was seen and the Governorship issue not seen here. But on both countries exchange rate has become the bone of contention.

The currency had depreciated seriously in month of Feb leading to a new policy by the central bank. This has led to some immediate appreciation but overall concerns remain.

Nigeria is dependent on imports which are financed by oil exports. As oil prices dipped recently, the troubles started:

Without equivocation it can be stated that the present forex crisis is a consequence of the play out of several factors bordering on its acute scarcity and poor management of same. Import dependent as the Nigerian economy traditionally is, the fall in the international price of oil eroded over 50% of its forex earnings, leaving it with a drastic shortfall of the funds. Even at that the CBN gad been operating a most wasteful forex management regime in which at least 11 different rates are operational, which leaves a wide room for abuse and attendant leakage and wastages. Even with the present new regulations the apex bank seems not to have learnt its lessons especially as such pertains to the problem of multiple exchange rates.

In the light of the widespread abuse of the process the CBN should harmonise all official exchange rates into one, which can be linked with the floating market (black market rate), and adopt voucher schemes for any area in which it considers to grant concessions. The voucher scheme can be designed to incorporate tax reliefs and breaks for dedicated areas of the economy, where fiscal policy can provide additional targeted support. 

The ultimate panacea still remains the redesign of the country’s economic policy to favour a determined diversification of the economy in order to generate forex from sources other than oil and to also reduce this country’s near criminal dependence on all manner of foreign-made consumer goods.

Due to the oil shock, Nigeria had imposed stiff foreign exchange regulations earlier which have been undone recently. In Nov 2016, qz reported:

This isn’t the Central Bank’s first tactic to attempt to control the forex market. A year ago, with oil prices down and government earnings slowing, the apex bank adopted a fixed exchange rate as local banks put limits on spending on debit cards outside the country. In June, after several months of criticism of its currency policies, the Central Bank agreed to float the naira and allow the value of the currency be determined by market forces. But given the stability in the currency’s official value despite the devaluation, the Central Bank’s move was described as a “managed float.”

Despite its stated goal of trying to stabilize the foreign exchange market and resolve the persistent dollar shortage, the Central Bank has curiously made several moves that have worsened the crisis. It has barred banks from forex trading and cracked down on money transfer operators, an important source of forex for the local market through remittances from the diaspora (both bans were later lifted).

The bank’s unorthodox moves are believed to be backed by government which has also played its part in worsening an already bad situation. Last week, state security agents raided bureau de change operators accused of “unnecessarily hiking rates“, a move which has only worsened the dollar scarcity.

How these bans have similar story across countries. And how central bank eventually face the flak much of which is doing of the government, though that does not mean central banks have no faults.

This piece argues for a float of the Naira:

We are at this point because as revenue from crude oil sales have dropped drastically over the past two years, this administration has been insistent on not floating the naira against the advice of experts, both local and foreign.

As a result, the CBN has been dancing to its tune by trying ‘demand management’, cutting down the number of people accessing forex officially through the introduction of a list of 41 items for which importers cannot get cheap dollars. The end result is obvious – it has forced people to the parallel market and created such a wide difference between the official and black market price and allegations of a forex subsidy scam taking place.

The end results of the refusal to float the naira cannot be overemphasized: companies and manufacturers are starved of forex to import raw materials, leading to staff being laid off; foreign investors are staying away in order to avoid losing their investments, and the economy continues to lose overall as a result.

This new p0licy is the latest in a string of moves by the CBN and the Federal Government to make forex more available and cheaper but without floating the naira. This is because all other policies have failed: banning importers of certain items from accessing forex officially, claiming to float the naira but not really floating it, directing banks to not sell forex to international money transfer organizations, and then instructing them how to allocate their forex. All of these have failed in making forex available and cheaper.

 This is because the CBN is disregarding well-established laws of economics and trying to achieve this objective through the backdoor. Based on recent history, it is safe to say that this recent appreciation of the naira is only a temporary reprieve.

The CBN should stop trying to hide its head in the sand when it comes to knowing the solution to our monetary policy crisis and it should move ahead to genuinely float the naira.

On its own part, the Federal Government should throw its weight behind floating the currency, and then moving forward with the necessary reforms that will move our economy forward. Its continued insistence in not floating the naira is a primary reason that there is such a wide difference between official and parallel prices of the dollar and only makes it easier for people to engage in round-tripping.

The longer we refuse to do the necessary thing, the deeper we sink into this economic morass.


If plastic replaces cash much that is good will be lost…

March 2, 2017

Brett Scott has a one of the best pieces on war on cash written so far.  He sums up the issues nicely.

He first starts with his experience when one of the payment machines refused his card. Based on this, he writes how there are two kinds of cash. One is the physical fiat cash which we hold in hands and other is digital cash which we hold in our bank accounts. The latter one is used to make payments from one bank to another. Banks naturally hate the physical cash as they have to run ATMs etc to dispense the cash. They would love the digital world where money remains in hands of banks and they can keep playing with it.

However, there are two more players which are interested in war on cash:


Demand for Virtual currencies replacing traditional currency has always been there…Is this time any different?

March 2, 2017

RBI DG R Gandhi has a speech on two upcoming opportunities/threats in finacial industry – fintech and virtual currency (VC).

On VCs (there was a time when VC meant Venture Capital) he says this idea that VC will lead to death of currency is hardly new. These ideas have been there for a while:


60 years of Bundesbank..

March 1, 2017

The iconic Bundesbank completes its 60 years on 1 Aug 1917.

The bank is going to celebrate (but obviously) and has put up a seperate site giving a timeline of the history so far.

How did the Bundesbank become an independent institution? How were the German gold reserves created? And how did the D-Mark reach eastern Germany? In the anniversary year of 2017, the Bundesbank is looking back at its history and providing numerous opportunities for the public to get to know the central bank and its tasks.

On 1 August 1957, the Bundesbank Act came into force, making the Bundesbank the central bank of Germany. For sixty years it has ensured a stable currency – firstly supporting the D-Mark for a good four decades, and then the euro, Europe’s single currency, since 2002. “Our principal task is to safeguard the value of our currency. To accomplish this, we need the confidence and the support of the public,” said Bundesbank President Jens Weidmann at the beginning of the anniversary year.

On the occasion of its 60th anniversary, the Bundesbank is making a wide variety of information available to the general public. By means of online and printed media as well as numerous events all over Germany, members of the public can discover how the Bundesbank came into being and learn about formative events in its history and its tasks.

Nice bit to follow…

Lessons from Central Bank of Barbados fiasco: Central Bank chief is a goalkeeper?

February 28, 2017

Finally after much deliberations and total chaos, Dr DeLisle Worrell the governor of Central Bank of Barbados got fired. One of the Deputy Gvernors has been named as the new Governor.

Dr Worrell got fired just a day after the Court intervened that he could keep his position:


Future of cash: Cash is tried and tested and has a future (the Swiss view)..

February 28, 2017

Given the war on cash, a few “developed countries” like Germany and Swiss are not letting bills disappear that easily. They perhaps understand the issue of how cash prevents privacy much better than others. I shall not be surprised if there are deeper historical reasons behind them.

In this speech, Fritz Zurbrügg, Vice Chairman of the Governing Board of the Swiss National Bank defends cash.

The last few months and years have witnessed a growing debate on the future of cash. Its critics say that cash should be abolished, or that cashless alternatives will in any case gradually render it obsolete. However, to paraphrase Mark Twain: Reports of the death of cash have been greatly exaggerated.

This is reflected in the continuing robust demand for cash on the part of the general public. In many countries, the value of cash in circulation relative to GDP has increased over the last few years; a development that can be attributed to occasional periods of heightened uncertainty about the stability of banks in the wake of the financial crisis. Another factor is the low level of interest rates on transaction accounts, and hence the low opportunity cost of holding cash.

Moreover, surveys and anecdotal evidence suggest that cash is still widely and readily used for payments. This might seem surprising at first glance, given the numerous alternatives to cash, but there are a number of reasons. For instance, people like to use cash for personal reasons, because it allows more effective budget control or because it does not require technical know-how. People’s tastes can change, yet cash has properties that cashless methods do not have to the same extent. It is more reliable, because it does not depend on the use of a technical infrastructure. It also offers comprehensive protection as regards financial privacy. Only the availability of cash guarantees that the data owner really has control over the decision on how much financial information to share, and with whom.

In addition to these demand-side considerations, the SNB itself, as the supplier of banknotes, has no plans to do away with cash. The SNB is mandated by law to ensure the supply and distribution of cash as well as to facilitate and secure the smooth functioning of cashless payment systems. These tasks have equal status. By fulfilling both tasks, the SNB lays the groundwork for the public to choose its preferred method of payment for each individual transaction.

Yet this freedom of choice between payment methods exists only if the public has confidence in both cashless payments and cash. Prerequisites for public confidence in cash are, first, a monetary policy which is geared towards stability and ensures that banknotes and coins retain their value over the long term. Second, banknotes need to be of the highest quality and have the best possible protection against counterfeiting. Switzerland’s new banknote series is a case in point. It meets high standards of safety, design and technology. After all, banknotes are also a symbol for the quality and stability of our currency, as well as one of Switzerland’s ‘calling cards’.

It has to be seen for how long can these few dissenters against war on cash can continue…

The power and secrets of gold, central banking and what not: A case from Deutsche Bundesbank…

February 27, 2017

This is an interesting post by Norbert Häring which questions/exposes the secret world of central banking across the world. Just like the politicians who show they oppose each other, central banks too express their displeasure at monetary policy of other central banks. But in the evening just like warring politicians the central bankers too chill out with each other. It is a secretive murky world given how together they control the fortunes of so many.

Häring writes how recent Bundesbank announcement of shipping their own gold from NY Fed is being spinned nicely. The German bank portrays it like a victory but in reality it also calms the nerves of their American counterpart:


Demonetize huge amount onetime vs Demonetise smaller amounts frequently..

February 27, 2017

JP Koning’s blog keeps coming out with posts related to India’s demonetisation. Most people say demonetisation is over and not worth the time now. Well for  scholarship on monetary economics, India’s demonetisation deserves to be as widely researched a subject as any for many years. It just has so many facets to it.

In his recent post, Koning says instead of massive demonetisation drive onetime one could have smaller drives periodically. Interestingly in Philipines, Central Bank keeps withdrawing currency fairly regularly as well. Its central bank act says:

SECTION 56. Replacement of Currency Unfit for Circulation. — The Bangko Sentral shall withdraw from circulation and shall demonetize all notes and coins which for any reason whatsoever are unfit for circulation and shall replace them by adequate notes and coins: Provided, however, That the Bangko Sentral shall not replace notes and coins the identification of which is impossible, coins which show signs of filing, clipping or perforation, and notes which have lost more than two-fifths (2/5) of their surface or all of the signatures inscribed thereon. Notes and coins in such mutilated conditions shall be withdrawn from circulation and demonetized without compensation to the bearer.

SECTION 57. Retirement of Old Notes and Coins. — The Bangko Sentral may call in for replacement notes of any series or denomination which are more than five (5) years old and coins which are more than (10) years old.

Notes and coins called in for replacement in accordance with this provision shall remain legal tender for a period of one (1) year from the date of call. After this period, they shall cease to be legal tender but during the following year, or for such longer period as the Monetary Board may determine, they may be exchanged at par and without charge in the Bangko Sentral and by agents duly authorized by the Bangko Sentral for this purpose. After the expiration of this latter period, the notes and coins which have not been exchanged shall cease to be a liability of the Bangko Sentral and shall be demonetized. The Bangko Sentral shall also demonetize all notes and coins which have been called in and replaced.

But this is more about retiring old notes to keep counterfeiting etc at bay.

Koning says one way to achieve this regularly is by declaring notes having a particular serial number as losing legal tender status:

This continues a series of posts (1, 2, 3) I’ve been writing that tries to improve on Indian PM Narendra Modi’s clumsy demonetization, or what I prefer to call a policy of surprise note swaps.

The main goal of Modi’s demonetization (i.e. note swapping) is to attack holdings of so-called “black money,” or unaccounted cash. The problem here is that to have a genuine long-run effect on the behavior of illicit cash users, a policy of demonetization needs to be more than a one-off game. It needs to be a repeatable one. A credible threat of a repeat swap a few months down the road ensures that stocks of licit money don’t get rebuilt after the most recent swap. If that threat isn’t credible, then people will simply go back to old patterns of cash usage.


Weeding out rupee banknotes according to serial number rather than denomination would have allowed for a more refined policy along the lines advocated by Henry. Here’s how it would work. The government begins by declaring that all ₹1000 notes ending with the number 9 are henceforth illegal. Each person is granted a degree of protection from the note ban. Anyone owning an offending note can bring it to a bank to be swapped for a legitimate ₹1000 note (one that doesn’t end in 9). However, the government sets a limit on the number of demonetized notes that can be exchanged directly for legitimate notes, say no more than three. Anything above that can only be exchanged in person at a bank teller for deposits, which requires that they have an account (i.e. their anonymity will be lifted). Once an individual has deposited five notes in their account, all subsequent deposits of demonetized notes would require a good explanation for the notes’ provenance. Should the requisite paper trail be missing, the depositor gives up the entire amount.

The process begins anew a few months hence, the specific timing and banknote target being randomly chosen. So maybe thirteen months after the first swap, the government demonetizes all ₹500 notes ending in 6. Randomness prevents people from anticipating the move and hiding their illicit wealth in a different high denomination note. 

Too understand how this affects black money owners, consider someone who owns a large quantity of illicit ₹1000 banknotes, say ₹70 million (US$1 million, or 70,000 banknotes). This person faces the threat of losing 10% to the note swap. After all, when the 9s are called, odds are that he or she will have around 7,000 of them, of which only eight can be returned without requiring a paper trail. The owner can simply accept a continuing string of 10% losses each year as a cost of doing business.

Alternatively, they might protect themselves by converting their hoard into a competing store of value, say gold, bitcoin or low denomination rupee notes like ₹100s (which are not subject to the policy of ongoing swaps). If they flee high denomination notes, illicit cash users in a worse position than before the adoption of the policy of note swapping. Gold and small denomination notes have far higher storage and handling costs than ₹1000 banknote. And unlike gold and bitcoin, a banknote is both supremely liquid and stable.  

As for licit users of high denomination notes, the fact that the 10% clawback would not apply to them means they needn’t change their behavior. Nor would the poor, who are unlikely to be able to provide a paper trail, have to worry about the policy. Demonetizations would only occur in high denominations, in India’s case ₹500 and 1000s. The poor are less likely to own these in quantities above the three note limit.

Incidentally, readers may recognize a policy of repeat demonetizations as akin to a Gesell stamp tax, named after Silvio Gesell, who in 1916 proposed the idea of taxing currency holdings in order to increase the velocity of circulation. Greg Mankiw famously updated Gesell’s idea during the 2008 credit crisis to remove the zero lower bound. He did so by using serial numbers as the device for imposing a negative return rather than stamps. This post updates Mankiw’s idea, except rather than applying the tax to all cash it strikes only at illicit cash holdings, and does so in the name of an entirely different policy goal—attacking the underground economy, not removal of the zero lower bound.

A series of small serial number-based swaps seems like a better policy than Modi’s ham-handed demonetization of all ₹1000 and ₹500s. It would certainly do a better job of promoting a long-term decline in undocumented cash holdings and would do so by imposing a much smaller blast radius on the Indian public. There would be no currency shortages, huge lineups at banks, empty ATMs, or trades going unconsummated due to lack of paper money.

Not sure about this at all. Such measures always read like nice experiments but one has to see the overall context. India has massive amount of illiteracy and keeping people off guard regularly will create regular havocs. It is also important to note that Rs 500 and Rs 1000 notes are hardly high value given how inflation has eroded purchasing power over the years. Rs 500 atleast is used fairly common amidst even lower income people. So, it is not right to assume that poor will not be effected by repeated smaller demonetisation. Whether one time or regular, they are the ones who shall be hit given current denominations. Only if denominations are higher, can we even think of this measure.

Another problem shall be speculation against which number shall be demonetised next. Given how things work, markets are fairly good at guessing all this and we could see people refusing to accept notes even before the new demonetisation order. We have seen how Re 10 coin is not accepted despite being legal tender.

Any measures to manipulate currency usually backfire. People are way too smart than Governments think..