Indepence of the Central Bank - Utopia

Written by Carlos Bondone

In view of the currency theories in effect (Austrian, Keynesians and Quantitativists), the main discussion resides in defining the degree of institutional independence (legislative-executive) of the “currency authority” from the political power.

According to the Theory of Economic Relativity, it is evident that the mistake resides in the theoretical formulation of the matter, since what is being called currency policy, is no more than a mistaken way to refer to the policy of redistribution of wealth by the means of manipulating Irregular Credit (credit that does not specify the amount and/or quality of the present economic good it will be cancelled with), which is adopted as currency.

Therefore, the question (of critical tenor) to the issue on the degree of independence that the currency authority must have from the political power is the same we can pose on the management of fiscal policy, since both have as their central axis the redistribution of wealth yet use different instruments: currency on a side and taxes on the other.

It is worth reiterating the practical applications derived from the Theory of Economic Relativity which operate as the foundation for the preceding statements. Let’s see:

1) In the current currency systems, with currency in form of Irregular Credit (something which all current theories sustain, except from Carl Menger’s), it is not the financial system the one that provides the indispensable present economic goods to make possible the generation of credit of any kind (regular or irregular). This confirms that the only reason to be of irregular currency systems is not what is called currency policy, but that it is in truth a policy of wealth redistribution.

2) Derivative of the above, it follows that the debt which the financial system holds altogether (led by the currency authority as the regulator of the “value” of Paper Money in which it nominates all the debt of the system) with the possessors of the different instrumentation forms (paper money, fiduciary means, etc.), that erroneously is said that it is the credit granted by the financial system, will be duly “cancelled” according to the political decisions of the government at the moment, which will have to act depending on the degree of emergency generated by the financial conditions of the whole currency system. This is what the Theory of Economic Relativity calls “the danger of the credit chain of the irregular currency systems”.

3) As a corollary, it is only due to mention that attentive to the fact that we are in front of a simple financial matter, the greater or smaller difficulties that they generate are studied according to mistaken theories that unnecessarily refer to imbalances between real versus currency interest, and both versus price level. In a currency system that has credit as currency (whether regular or irregular), the three are one same entity, since the interest is the price of currency (for being this last a credit), and the price level is measured by using currency as unit of measurement.

To sum up, according to the Theory of Economic Relativity, the level of real interest rates, currency interest rates and prices, is one same economic entity in currency systems which have a credit as currency. Then, it is inadequate to speak of the turbulences arising from the differences between entities that appear to be different but correspond to the same economic entity; even more detrimental is to take currency measures attentive to inadequate theories which sustain the mentioned error.

4) The exit to the financial emergencies derived from irregular currency systems will be in proportion to the degree of resistance or suffering of the less apt to handling these irregularities (generally the ones who live on their own personal effort) as the credit they granted to the financial system as a whole (basically expressed in Paper Money) will become uncollectable. This uncollectabillity has three forms to manifest:

a) The bankruptcy of the financial system (total or partial).

b) The badly called inflationary process, that is no more than a statistical attempt to measure the interest that the one who grants the credit to the financial system should perceive (generally the less experienced individual on the speculative matters that irregular monetary systems originate) but actually does not, which forms a true load to the service of the political power.

c) The badly called “recession” which is no more than not being able to sell what it is estimated as a result of people realizing that their “money” is in fact a partial or totally uncollectable credit (paper money and fiduciary means). In other words, the possible buyers notice that they cannot make (full or partial) use of the credits they had granted to the financial system. But the worse thing is that they were made to believe that the credit had been granted to them.

The concatenation of this article with the previous one is evident: Currency Policy, Paradox of Interest...

Finally, I repeat these fundamental concepts once again:

* The errors in the analysis made to the current currency systems (e.g. the one on the autonomy of the central banks treated here) arise from the faulty currency theories which sustain it developed during the 20th century for having deviated from the principles of the monetary theory initiated by Carl Menger by the end of the 19th century.

* In an irregular currency system it is impossible for the Central Bank to be independent from the political power, and in a regular currency system its existence becomes unnecessary.  
Buenos Aires, May 2007


Translator Note: The distinction between money and currency is essential in this work. The author places the term “currency” as a more general categorization than that implied in “money” . Thus, currency can acquire whether the form of money or of credit, and this last can be regular or irregular.

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