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 bankâ€™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 Bankâ€™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 bankâ€™s
profits for government expenditure, Exter has made special provisions in
the Monetary Law regarding the application of profits of the Central
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 governmentâ€™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 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, Exterâ€™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 â€ś....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 governmentâ€ť. 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, â€śthe 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 Ministerâ€™s
views will be made known to the other members of the Boardâ€ť.
However, Exter did not expect this arrangement to be effective at all
times. Hence, he made the proviso that â€śit would depend on the men
occupying the key positionsâ€ť 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 bankâ€™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
This is the main lesson which Exter has left for us in the twenty
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
John Exter, in his wisdom, firmly believed that when laws fail, human
beings working with moral consciousness could do wonders.