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Government Gazette

John Exter: Central Banker for all times

The first death anniversary of John Exter, Founder Governor of the Central Bank, fell yesterday. He died in 2006 after living a very productive life for 95 years.

A central bank, by nature, is in a position to acquire assets by creating liabilities. These liabilities take the form of new money issued by a central bank.

Hence, any asset acquisition by a central bank is done at the expense of its main objective, namely, price stability. As such, a central bank should not pursue profit making as a goal.

Technically, profit seeking has no meaning, because a central bank could make any amount of profits by inflating the economy. Hence, profits may arise from the central bank’s activities as a side product, but they do not form the main business of a central bank.

As a result, a special procedure has to be adopted for the application of the profits of a central bank. Exter knew this requirement very well.

In the Exter Report, he has argued that the Central Bank’s profits deserved special attention because of the inflationary or deflationary effects which their payment or non-payment could have on an economy.

He has recognised that when such profits are paid out and spent by the government, they would find their way into the reserves of commercial banks raising their multiple credit creating capability.

In order to minimise the ill effects of using a central bank’s profits for government expenditure, Exter has made special provisions in the Monetary Law regarding the application of profits of the Central Bank.

Accordingly, out of the surpluses of the Central Bank, the first charges should be to build the reserves of the Bank to support the currency it issues. Any remaining balance should be utilized to retire the government’s borrowings from the Central Bank or paid into the government as a normal profit transfer.

However, it has to be done collaboratively by the Minister of Finance and the Monetary Board, having taken into account the inflationary impact of each such measure. As such, the government does not have the first claim on the profits of the Central Bank, though it is owned by the government.

The profit criteria that are applicable to other governmental institutions are, therefore, not applicable to the Central Bank.

A general concern, which has often been raised at numerous public fora, has been the existence or the absence of the independence of the Central Bank. Many have found fault with Exter for making the Secretary to the Ministry of Finance a member of the Monetary Board.

They have argued that this official member with his own self-interest in funding the government expenditure programmes would use the opportunity to dictate terms to the Monetary Board, thereby permitting the fiscal policy to override monetary policy.

It has been equated by some critics to the case of permitting a child to put his hand into the cookie jar as many times as he wishes. While these criticisms may have some validity, Exter’s wisdom has been to create an environment for both the government and the Central Bank to have a peaceful and amicable cohabitation.

Exter has argued in his report that “....there are, however, many important problems of monetary policy, especially those relating to fiscal policy, on which a central bank should work in close harmony with the government”. Accordingly, a degree of independence has been afforded to the Central Bank unlike other governmental bodies.

This independence extends to the budget of the Central Bank, job security of the key central bank officials, and power to make monetary policy without consulting the government. The wisdom of Exter was that the central bank should as far as possible work in consultation with the government, rather than in isolation.

He believed that the true independence of the Central Bank could be preserved only through that consultative method.

In the words of Exter, “the ideal is ... one in which there will be continuous and constructive co-operation between the Monetary Board and the government. The principal instrument for achieving this co-operation should be the Permanent Secretary to the Ministry of Finance whose membership on the Board will ensure at all times that his Minister’s views will be made known to the other members of the Board”.

However, Exter did not expect this arrangement to be effective at all times. Hence, he made the proviso that “it would depend on the men occupying the key positions” and not on any legal formula. He argued quite correctly that such complex and delicate relationships cannot be established full-blown by a piece of legislation.

It must be the result of years of experience and the slow growth of political conventions. The writer has been questioned on this point on many occasions at numerous public fora. The position taken by him agrees fully with that of Exter.

This position requires the critics to compare central bank’s independence with the relationship within a family unit.

Both spouses have their personal interests, but work together for the well-being of the family unit. There are at times occasions where one spouse overrides the other. But, as a normal rule, the family unit moves forward without publicizing those internal family debates and sometimes family fights.

This is the main lesson which Exter has left for us in the twenty first century.

That is, both the Governor of the Central Bank and the Secretary to the Ministry of Finance should know their rights and responsibilities well and act on an ethical platform in which they continue to appreciate the distinctive roles to be played by them for the well being of the country.

John Exter, in his wisdom, firmly believed that when laws fail, human beings working with moral consciousness could do wonders.

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