Is Monetary Management At Its Worst?

By Hema Senanayake –December 11, 2015

Hema Senanayake

Reforming Money System; Global Economic Revolution Is Overdue: Part 6

This is the most difficult subject in economic governance. It is not commonsense. Due to its highly technical nature I honestly regret that I will not be able to discuss the technical details as to how I would propose to reform the monetary system. Yet, I need to convince my readers as to what I am proposing to do differently. In this regard I could not figure out a simple methodology other than submitting an open challenge. For opting to this approach I humbly apologize to President Maithripala Sirisena and Prime Minister Ranil Wickremasinghe in advance. I like to begin this discussion as follows.

I would rate the Governor of People’s Bank of China, Zhou Xiaochuan as the most brilliant governor of any central bank. Perhaps you might think what qualification I have in order to evaluate the brilliance of central bank governors around the world. Kindly ignore that question for the time being. Let me submit my argument.

Since the end of World War 2, the United States dollar emerged as the major international reserve currency. In the year 2008 the United States economy crashed and there was a big time meltdown in its Financial System. The future of the U.S. dollar became unpredictable. By that time many of the Chinese financial assets were tied up to the U.S. dollar. Chinese president was worried about the value of the U.S. dollar and if the dollar had depreciated the real value of Chinese assets held in the U.S. dollar terms would depreciate accordingly. Somewhere in March 2008 the Chinese president intimated that the world would need a new global currency.

President Obama was quick to respond. “I don’t believe that there’s a need for a global currency,” said President Obama Tuesday night during his prime-time press conference (Forbes, March 26, 2008). A couple of days later the governor of Chinese central bank Zhou Xiaochuan released a text in response to President Obama’s above assertion.

In that text it was mentioned that, “The acceptance of credit-based national currencies as major international reserve currencies, as is the case in the current system, is a rare special case in history.” Let me give you a few clarifications for the benefit of non-economic readers. The term “credit-based national currency” refers mainly to the U.S. dollar. Why the U.S. dollar is credit-based? It is because the creation of most dollars is based on a system of credit issuance not by printing money. The use of a national currency which is created by the designated commercial banks during the process of lending is now used as an international reserve currency. Hence, the quote literarily meant to say that the acceptance of dollar as international reserve currency is a rare special case in history and China want to change it.

This is a statement that can be uttered only by a person who understood the current banking practice completely. Now, well within a decade after he released this particular text, Chinese national currency is almost an international currency today, thanks to the brilliance of the governor of Chinese central bank. The methodology the China is using is the signing of currency swap agreements with almost all economies.

Now my challenge is simple. I am not proposing to appoint any person as the governor of the Central Bank of Sri Lanka (CBSL), who cannot explain the true technical meaning of the statement of Zhou, mentioned above. This is not personal and that is why I apologized from the President and P.M. at the beginning of this article. Was this point a concern when P.M recommend the name of a person as the governor of CBSL and was the same point a concern when the President appointed the nominee as the governor? Out of respect, we do not expect any response to these questions from both gentlemen.Read More