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Beyond the News, Inside the Issues

A Central Bank Digital Currency for Barbados? Part 1

Jan 29, 2023

Last Updated on January 29, 2023 8:33 pm by Editor

The word is out that the current Governor of the Central Bank of Barbados – Cleviston Haynes- will not be reappointed by the current BLP Barbados government.  In the wake of this development, rumours have surfaced that the government is seeking to give an African the job. 

That in itself is cause for concern because it would be the first time, as far as we can remember, that a Barbadian would not have been appointed to the job of Governor of the Central Bank. But it is not entirely surprising since the Mottley government has instituted a grand foreign policy pivot towards Africa. 

Up until now, our Central Bank could have been regarded as not only as symbol of the sovereignty of our nation but a de facto tool of sorts for the outworking of our financial sovereignty within the international financial order, however minimal that financial sovereignty was (is).  But much has changed and is changing rapidly so we need to come up to speed.   

Behold the Onion

In the last two decades in particular, as global trade and investment have grown, the financial sector has developed to the point where the thinking and practices in that domain have rendered the ordinary person virtually financially illiterate. 

But as a set of forces begin to peel back the layers of complexity and secrecy from the IFS (international financial system) it has become very clear that everything is not as it appears to be and that there are sinister forces working overtime to minimize, if not eliminate not only our financial freedom – or what is left of it – but those of many sovereign states across the world, including the evident case of the USA!

For this reason, we might want to take more than passing interest in the rumour that the Barbados Central Bank as we know it, will be disbanded.  That apart, in this short series, we want to help ordinary Barbadians understand and come up to speed with the really serious matters behind the seemingly simple, presenting issue of the impending change of a governor at the Barbados Central Bank. 

Monetary Policy

A key role of a central bank is to help government achieve desired economic objectives by the use of monetary policy.  While monetary policy as a whole is a complex topic, it should be noted that most of us have experienced and have been affected by it through the use one of its principal tools, the interest rate.

Monetary policy is the set of financial tools which can be used to control the supply of money in an economy.

Here is an example of how monetary policy is supposed to work.

Through a sequence of moves – which might start with increasing the printing and supply of money to the commercial banking sector – central banks are able to influence – that is, lower or raise – the interest rate charged by commercial banks which, in turn, can influence – increase or decrease- consumer borrowing from said banks.  That consumer borrowing, when spent by consumers in the economy, influences economic activity or more specifically, economic growth.

In essence, that is what basic monetary policy is about. Again, we stress we are simplifying for understanding.  Additionally, for his or her own edification, the reader should take note of two terms often used in monetary policy discussions. These are Expansionary Monetary Policy and Contractionary Monetary Policy.

Expansionary Monetary Policy is monetary policy that aims to increase the money supply in the economy e.g. by decreasing interest rates. In contrast, Contractionary Monetary Policy refers to policies that seek to decrease the money supply in the economy e.g. increasing the interest rate (source).

There are several shortcomings of monetary policy, but the chief one, according to some sources, is the long period of time it takes for that sequence of events outlined above to reach the “end of the line” so to speak.  The end of the line, in summary, is to increase/decrease economic activity as a result of increased/decreased consumer spending. 

Hopefully the reader will now understand why there are one so many different opinions about what is going on in our economy or any economy for that matter.  Although some economists may want us to believe otherwise, economics – and monetary economics in particular – is not an exact science!

In passing, it should be observed that monetary policy is only one type of economic policy available to governments to bring about economic changes.  The counterpart or alternative approach is called fiscal policy.

Fiscal policy is the set of financial decisions government makes regarding collection of revenue through taxation and the spending that revenue.

We should be more familiar with fiscal policy because it refers to government budgeting which is detailed in the annual financial and budgetary proposals of the government, a subject we have discussed extensively in a series of articles on this platform  (See for example the articles here and here).

Fiscal policy is often accompanied by fiscal incentives which are inducements or enticements for consumer or business to spend or invest in a certain manner e.g. tax concessions for investing in green energy.

Central Bank Status

One of the characteristics of a central bank, at least in theory, is that it is supposed to be independent of the government.  On this basis, it is then argued that one of the advantages of central bank is that it would promote transparency and trust because its advice is supposed to be predicated on hard data and professional analysis, rather than political expediencies.

However, we are all very much aware that the Minister of Finance – who is usually but not always the Prime Minister – appoints the governor of the Central Bank. Some of us may be old enough to remember that the late, former Prime Minister Owen Arthur even fired a Central Bank governor by fax.

Small wonder then that over the years we have witnessed the government making predictions about the effect of their fiscal policies (for example, increased employment) which were not supported by hard central bank economic statistics. Or the delay in the issue of a central bank report because of some policy statement to be issued by the government of the day or because of some imminent election.

Currency Control

One of the more traditional roles of a central bank is to be the issuer of the currency of the country.  The basic concept of a currency is that it is a medium of exchange.

We are most accustomed to thinking of currency as money or cash, that is, a set of hard notes and coins. However, this was not always the case. There was a time when bartering, then precious metals such as silver and gold (and other materials before and concurrent with that) was the means of exchange.  

However, developments in cryptocurrency, money laundering, counterfeit currencies and financial scams such as Ponzi schemes, have made the world rethink the nature of physical currencies such as the dollar.   

Consequently, currency as we know it, is now being described as fiat money. The term refers to a government-issued currency that is not backed by a commodity such as gold.  The term “fiat” itself means “sanctioned” or “authorized” implying that currency (as we now know it) has no “real value” where “real” means “physical” (as in real estate).

The reference to gold is a reference to the so-called Gold Standard whereby a country could only issue as much currency as was backed by or “equivalent” to the amount of gold it possessed. 

According to www.gold.org:  

The Gold Standard was a system under which nearly all countries fixed the value of their currencies in terms of a specified amount of gold, or linked their currency to that of a country which did so. Domestic currencies were freely convertible into gold at the fixed price and there was no restriction on the import or export of gold. Source

Of course, this is a simplification but the reader can peruse the full article at his or her leisure at the source given.

In July 1944, 44 countries made a formal agreement to be tied to a gold standard. That standard is called the Bretton-Woods System:

Under the Bretton Woods System, gold was the basis for the U.S. dollar and other currencies were pegged to the U.S. dollar’s value. The Bretton Woods System effectively came to an end in the early 1970s when President Richard M. Nixon announced that the U.S. would no longer exchange gold for U.S. currency.  Source.

We know it is difficult, but it is important that we pause and consider that the crisp new dollar bills we often hold in our hands are not worth the paper they are printed on; their value is only what they can be exchanged for at the time. Essentially, that value is subject to the control of the government and the actions of people and institutions thousands of miles away.

With that as background, in the next instalment, we will look at the short-lived movement to wrest currency control out of the hands of government (more formally known as cryptocurrency) and the fight of governments across the world to resist that movement through the strategy of CBDCs or Central Bank Digital Currencies which, although having several advantages, have tremendous potential for abuse by governments and supranational organizations. 

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By Editor

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