William Luther of Kenyon College posts about his upcoming paper on the topic.
He shows how people downloaded more bitcoin apps during Cypris crisis in 2013:
We wish governments to stay away from central banking operations. But we should expect the same from the central bank as well especially on election matters. There is research which showing how central bank stances during elections leads some governments coming to power and others being voted out.
Election Commission of India is not just irked by the low cash withdrawal limits but also by the attitude of Indian Central bank:
Stuff continues to be written on RBI Board. After its (mysterious) role in demonetisation, we have seen flurry of articles from comparing it to SEBI to international central bank boards. Then this blog looked at historical evolution of RBI Board and another one on fullness or emptiness of the Board in recent years.
Now, in another long must read post Bhargavi Zaveri adds more clarity to the debate. She says on the contrary FLSRC would have strengthened the RBI Board. Would it have altered the outcome of demonetisation?
A forgotten Board ha stolen the limelight like no other.
Ila Patnaik and Shubho Roy compare RBI Board to Bank of England and Federal Reserve Boards. Obviously, RBI is least transparent. Actually, why go that far. As this blog shows, one could learn lessons from SEBI’s Board as well but we hardly look at it.
They say RBI Board is like any other and should be governed by similar laws:
RBI’s Board has just come back to centre of research on India’s monetary policy. One just looked at history and evolution of RBI Board from a 14 member team to a 21 member team.
The question that keeps coming to mind is how empty was RBI Board on 8 Nov 2016? Former RBI chief Subbarao in an interview said there have been precedents in the past as well:
Q: There are only three members of the RBI board, external members. The rest are all RBI Deputy Governors and Governor and Finance Ministry officials. The fact that 6-7 seats are vacant, did all this already pave the way for very weak opposition?
A: I do not think so. I think that is reading too much conspiracy into this. There have been several instances over extended period, the RBI board was not fully positioned. At least on the specific point you are referring to that the RBI board is not fully positioned. Yes, that is a shortcoming, that is not desirable, but to see some conspiracy in that and to say that the decision on demonetisation would have been any different or the implementation would have been any different if there had been seven more members on the RBI board is unrealistic.
One just dug up data from RBI’s Annual Report and came with following:
Some commentators have invoked Section 7 (1) of RBI Act to suggest the RBI Board had no choice but to go ahead with the 8 Nov 2016 move.
Section 7 (1) says:
(1) The Central Government may from time to time give such directions to the Bank as it may, after consultation with the Governor of the Bank, consider necessary in the public interest.
Given one was trying to figure RBI Board History, I came across why this section came into being at the first place.
As argued earlier, RBI started as a shareholder bank with Board nomination coming from both Government and shareholders. However, while working towards RBI’s nationalisation the shareholder angle did not matter anymore. A Bill was prepared to amend RBI Act.
In the bill, on one of the points RBI Governor suggested that in case of differences between the two, the government should take responsibility for their action. However, Finance Ministry refused this and added what is now seen as Section 7 (1). From RBI’s First History Volume:
Despite one wanting to withdraw from Currency Withdrawal exercise, it continues to ask questions and remains exciting.
The role of RBI Board in the exercise which was a mystery in the early part of the debate (not for the readers of this blog ) has become a major issue now. There are comments on both side of the debate. Some suggest the role of RBI Board shows how RBI has lost its autonomy and others who suggest this is not the case. Then there were concerns raised about FSLRC’s suggestion on reducing the RBI Board strength which has not been commented by anybody.
As there is so much chaos, it is best to get back to genesis. How did RBI Board evolve?
This Dec 2016 article by Matthew Wright in Reserve Bank of New Zealand Bulletin is a breezy read.
The Series 7 banknotes, introduced from late 2015, represented the first major re-design of New Zealand’s banknotes since the early 1990s. Although the selection of people, places, birds and other pictorial themes remained largely unchanged from the earlier Series 5 and 6 notes, the specific imagery was updated and full advantage taken of modern printing techniques to increase the reproduction fidelity. Some of the new security features, such as the ‘Spark Live’ bird image and the holographic window, are themselves of significant aesthetic appeal.
Indeed! Stunning pictures of banknotes can be seen here as well.
India’s central bank should take a cue. It should publish variety of research and not the usual boring type on inflation and growth..
Lot of noise was made regarding this RBI Governor appearing before a Parliamentary committee yesterday (another one tomorrow). It was called as grilling and what not. But in the end it just turned out to be a damp squib as RBI just refused to answer most of the questions.
Superb article by Prof George Selgin.
He comes from the free banking school which advocates banks issuing their own currency and managing their affairs with no central banks in picture. In such a case, one would imagine him advocating local currencies. But it is not the case as local currency does not help much if it does not enable trading beyond the local area:
Though the shortcomings of local currency are serious ones, they are far from being inherent shortcomings of all substitutes for official (national) currencies. On the contrary: far from being inherent, the shortcomings of local currencies are ones which have been purposely built into those currencies by persons seeking to make them serve an end quite at odds with that of making it as easy as possible for people to exploit potential gains from exchange.
There is, in fact, nothing to prevent other kinds of unofficial currency from commanding a national market. The key to having them do so is that, like modern bank deposits, they must be fully compatible with the existing monetary standard, and readily useful throughout the national economy, if not beyond it.
Historically, private banknotes have possessed these qualities wherever legal restrictions haven’t prevented banks from establishing branch networks or taking other measures to make their notes current beyond the banks’ headquarters; and it is conceivable that other forms of private currency, including privately-issued token coins, could also take the place of government-supplied alternatives, if only the government would let them.
So, while I applaud the effort of local currency proponents to break the Federal Reserve’s currency monopoly, I regret that they’ve chosen to sabotage this merit-worthy mission by linking it to the much less worthy one of keeping people from trading with “outsiders.”
As the ever-sensible Bastiat once observed, “The worst fate that can befall a good cause is not to be skillfully attacked, but to be ineptly defended.”
The Bastiat quote is quite apt to for the ongoing currency situation in Indian economy as well..
Wow. There is so much to learn and figure about monetary economics other than just inflation rates.
The Moneyness blog which has been a great source of education post 8 Nov 2016 has another post to think about. This one is on size of currency note. The blog says that India reducing size of the new Rs 500 and Rs 2000 note is in line with what practices elsewhere. He also points to this wonderful note which discusses various aspects of note design:
Though politics is important but one wants to keep it away given how polarised economics discussions have become nowadays. Given the huge event one is just interested in learning about alternate monetary arrangements taking shape in different societies/regions across India. These are the kind of developments which are kept distant from any monetary economics textbook, but are so important to understanding evolution of money.
This article by GS Radhakrishna tells you about how people are going back to barter system in a few places due to no cash:
In the days following the demonetisation of high-value banknotes on November 9, the Adivasis and rural poor of Andhra Pradesh and Telangana have fallen back on bartering to tide over the cash crunch. They exchange their goats, chicken, pigs, calves, buffalo, honey, tamarind, forest millets, jackfruit and gum for essential goods.
The immediate aftermath of the cash withdrawal caused a quandary for poor people in the border districts of Srikakulam, Vizianagaram and Visakhapatnam in Andhra Pradesh and Bhadrachalam, Khammam, Warangal, Adilabad, Bhoopalapalli, Kothagudem and Karimnagar in Telangana. Their employers continued to pay them in old notes, which the markets refused to accept, and new currency notes were not easy to come by.
Farmers and contractors said they had good sreason to pay wages in demonetised Rs 500 notes. “We did not get smaller notes ourselves and had only old notes,” said G Mallikarjuna Reddy, a landlord in Chintur in East Godavari district of Andhra Pradesh.
In this situation, help came from the Annalu, or elder brothers, as members of the Communist Party of India (Maoists) are known in these parts. The Annalu put pressure on traders to adopt the barter system, and used muscle power wherever they met with resistance.
This became explicit on November 22, a fortnight after demonetisation, when a poster on the wall of a residential school in Bayyaram, in Kothagudem district of Telangana, asked traders and farmers to accept forest produce from the people in exchange for essential goods. It was signed by Sagar, the spokesman for the North Telangana Special Committee of the Communist Party of India (Maoists).
The switch to a barter system was not limited to just the two southern states. In Chhattisgarh, for instance, petrol pumps on the highway from Bastar to Jabalpur are accepting payments in kind for fuel. Sahadev Ikshu, a farmer, said he had used tamarind to pay for petrol for his scooter. Other communities in the state are reportedly using honey, tamarind, Mahua liquor and forest fodder as currency.
All this is fascinating to read.
In some regions we are seeing digital payments rising in lieu of cash and in others we see reemergence of barter systems..
This blog has earlier posted on how most of economics advisory (should have added journalism as well) has become polarised and politicised. It is all about which political party one is siding with. Any article boils down to are you with the opposition or the ruling party?
One just came across this ET article which says critics of RBI losing autonomy have an axe to grind:
Today is truly a RBI Board day on this blog.
Thanks to Prof Jayant Varma’s post, one went back to SEBI Board. While looking at whether RBI Board can disclose more information of its meetings. one need go very far. SEBI provides a template to show this can indeed happen and even shows the way forward.
Interestingly, SEBI’s Board has been following different practices compared to the RBI Board.
The storm is clearly brewing now.
It has taken a while for followers of India’s macroeconomy to realise the importance of RBI Board. While they were busy singing praises for how the newly constituted MPC will change India’s central banking forever, finally it was the oldest RBI Board which took (or asked to take) one of the most important decisions in India’s monetary history. We should have asked for disclosure of RBI Board minutes (where all action is) than just MPC minutes (which are a drag anyways).
Ila Patnaik adds to the brew:
One just does not know how will all this hopelessness end. After going back on their promise that a citizen can exchange old notes even after Dec 30, the window was kept open only for those citizens who could prove they were away during the period (8 Nov t 30 Dec) and NRI/PIOs.
Now, it seems even latter are unable to exchange old notes as conditions are way too stringent:
After residents, NRIs and People of India Origin (PIO) are now braving long queues to exchange the old Rs 500/1000 notes at 5 designated RBI branches across the country but because of stringent conditions several of them have had to return disappointed. Tempers ran high outside the central bank branches as people coming from long distances were denied entry by guards on the grounds that they were not carrying the requisite documents.
Many NRIs complained that they are not allowed to speak to officials who could at least listen to their grievances. “Though I have foreign passport, I still have roots in India. Our family comes to India every year. We have few Indian currency notes and we want to exchange them but we are not allowed to enter RBI. Mr Prime Minister are we supposed to burn Indian currency that we have?,” said Ritu Diwan, an agitated US national.
This unnecessary harassment simply indicates that PIOs are no more welcome to the country of their birth, she added. Dharamveer, another US national, said PIOs generally keep some amount of Indian currency as they frequently visit India because there is no point in paying commission on exchange of currency on each visit.
“Any PIO who regularly visits India would easily have Rs 50,000 to Rs 1 lakh worth of Indian currency and I challenge the government to prove this as black money and forfeit this from us”, he said, adding that “this money, we don’t spent in the country where we live but country of our origin”.
“It is by chance that we are here at this time and wanted to exchange few currency but we are not allowed to do so. It is very frustrating,” he added. Many PIOs who were turned away protested that they don’t have crores of rupees but only few thousands which the administration should exchange. Frustrated at the “high-handedness of RBI” and the “government policy”, there are reports of NRIs throwing defunct Indian currency at the gate of RBI as a mark of protest.
Wow. Getting better and better…
Came across this really interesting speech by Cecilia Skingsley of Riksbank. It is a pity that the media and experts discuss every word of speeches made by Fed and ECB chiefs much of which is repetitive. In the process, we miss such speeches which give you a panoramic view of the burning issues by smaller central banks. And this is from the oldest central bank in the world.
Anyways Ms. Skingsley gives you a very nice historic and institutional account of central banks and their currency function. As cash usage in Sweden is one of the lowest in the world, they are talking much more about digital payments and digital currencies.
Given all this, the big question is should the central bank issue its own currency? If yes, how do we think through the changes? She says we need to think about e-krona as a complement to krona.