Re: Brazil and the IMF

["Henry C.K. Liu" <hliu@xxxxxxxxxxxxxx>]

This is an excerpt of an article I am writing:  The Case Against Central
Banking.

Central bankers are like librarians who consider a well-run library to be one
in which all the books are safely stacked on the shelves and properly
catelogued.  To reduce incidents of late returns or loss, they would proposed
more strict lending rules, ignoring that the measure of a good libray lies in
full circulation.  Librarians take pride in the size of their collections
rather than the velosity of their circulation.

Central bankers take the same attitude toward money. Central bankers view
their job as preserving the value of money through the restriction of its
circulation, rather than maximizing the beneficial effect of money on the
economy through its circulation.  Paul Volcker, the US central banker widely
credited with ending inflation in the early 1980s by adminstering wholesale
financial blood letting on the US economy, quipped light-heartedly in a
Washington party that "central bankers are brought up pullling legs off of
ants."

Central banking insulates monetary policy from national economic policy by
prioritizing the preservation of the value of money over the monetary needs
of a sound national economy. A global finance architecture based on universal
central banking allows an often volatile foreign exchange market to operate
to facilitate the instant cross-border ebb and flow of capital.  The workings
of an unregulated global finanical market of both capital and debt forced
central banking to prevent the application of the State Theory of Money in
individual countries to use sovereign credit to finance domestic development
by penalizing governments which run budget deficit with low exchange rates
for their currencies.

The State Theory of Money asserts that the acceptance of government-issued
legal tender, commonly known as money, is based on government's authority to
levy taxes payable in money.  Thus government can and should issue as much
money in the form of credit as the economy needs for sustainable growth
without fear of hyperinflation.  What monetary economists call the money
supply is essentially the sum total of credit aggregates in the economy,
structured around government credit as bellwether.  Sovereign credit is the
anchor of a vibrant domestic credit market so necessary for a dynamic
economy.  By making the State Theory of Money inoperative through the tyranny
of exchange rates, central banking in a globalized financial market robs
individual governments of their sovereign credit prerogative and forces
sovereign nations to depend on external capital and debt to finance domestic
development.  The deteriorating exchange value of a nation's currency then
would lead to a corresponding drop in foreign direct or indirect investment
(capital inflow), and a rise in interest cost for sovereign and private
debts, since central banking essentially rely on interest policy to maintain
the value of money.  Central banking thus relies on domestic economic
austerity caused by high interest rates to achieve its institutional mandate
of maintaining price stability.  Such domestic economic austerity comes in
the form of systemic credit crunches which cause high unemployment,
bankruptcies, recessions and even total economic collapse, as in the case of
Britain in 1992, the Asian financial crisis in 1997 and subsequent crises in
Russia, Turkey, Brazil and Argentina.  It is the economic equivalent of a
blood-letting cure.

A national bank does not seek independence from the government. The
independence of central banks is an euphemism for a shift from institutional
loyalty to national economic well-being toward intitutional loyalty to the
smooth functioning of a global financial architecture. The international
finance architecture at this moment in history is dominated by dollar
hegemony which can be simply defined by the dollar's unjustified status as a
global reserve currency.  The operation of the current international finance
architecture requires the sacrifice of local economies in a financial food
chain that feeds the issuer of dollars.

Historically, the term central bank has been interchangable with the term
national bank.  In fact, the enabling act to establish the first national
bank: The Bank of the United States, referred to the Bank interchangably as a
central and a national bank.  However, with the globalization of financial
markets in past decades, a central bank has become fundamentally different
from a national bank. The mandate of a national bank is to finance the
sustainable development of the national economy and its function aims to
adjust the value of a nation's currency at a level best suited for achieving
that purpose within an international regime of exchange control.  On the
other hand, the mandate of a modern-day central bank is to safeguard the
value of a nation's currency in a globalizedd market of no or minimal
exchange control, by adjusting the national economy to sustain that narrow
objective, through economic recession and negative growth if necessary.
Central banking tends to define monetary policy within the narrow limits of
price stability. In other words, the best monetary policy in the context of
central banking is a non-discretionary money supply target set by universal
rules of price stability, unaffected by the economic needs or political
considerations of individual nations.

Henry C.K. Liu


"James K. Galbraith" wrote:

> PKT friends --
>
> I have just published an essay on Brazil, the IMF, and larger monetary
> issues through the Levy Institute;  it is available at
> http://www.levy.org/docs/pn/02-2.html for those who may have an interest.
>
> With regards.
>
> James Galbraith
>
> *****
> Professor James K. Galbraith
> Lloyd M. Bentsen, Jr. Chair in Government/Business Relations
> LBJ School of Public Affairs
> The University of Texas at Austin
> Austin TX 78713-8925
>
> See the UTIP web-site at http://utip.gov.utexas.edu
> See the ECAAR web-site at http://www.ecaar.org
> See the Levy web-site at http://www.levy.org