We reviewed the main functions of the Central Banks in the last article:
– Currency emission
– Stabilization of the exchange rate
– The issuance of licenses to commercial banks and this regulation
– Inflation control
– And so on
You can read it following the link: https://journalcdiamondcoin.info/en/aims-andaims-and-objectives-of-central-bank/
Based on the points above, it can be assumed that The Central bank is a part of the state system since all its functions are related to the population interests, but this is not true. I propose to consider it on the example of the Central Bank of the Russian for a more detailed understanding of this issue.
Independence of the Central Bank of the Russian from the state
The law states that in the tasks of the Central Bank of Russia it is not worth making a profit. Its function is to protect and maintain the stability of the national currency of the country. However, The Central Bank of the Russia is not financed from the state budget, but pays its expenses (for example, wages to employees) at the expense of the profits from its activities.
The law states that the property of the Central Bank is federal property and the bank only controls it. However, The Central Bank is not responsible for the obligations of The State and it is not responsible for the obligations of the Central Bank.
The Bank of Russia is completely independent in its actions, as it was said by President V.V. Putin: «Yes, our Central Bank, in accordance with the law, is an independent structure that is not controlled by the Government and acts independently. Moreover, this is a worldwide practice».
To whom does The Central Bank submit?
The Central Bank of the Russian is not part of any executive, legislative or judicial authority. All these three areas of government`s control can function independently regardless of the Central Bank, just like it does from them. Moreover, the Federal Law in the article «On the Central Bank of the Russia» states that the bank performs all functions assigned to it independently of other authorities.
Who controls its activities? The Bank of Russia each year sends an annual report to the State Duma, which tells about:
– Events, which were aimed at the implementation of the state monetary policy
– Data that were obtained in the analysis of monetary circulation of the Russian Federation
– Data obtained during the analysis of the currency situation of the country
– Financial activities
– Audit opinion on the annual financial statements of the Central Bank
– Information of the Central Bank’s chief auditor
The activities of the Bank of Russia are regulated by an auditor, who is appointed by the bank itself and reports to the chairman of the bank.
This is proves those fact that the structure of the Bank of the Russia operates completely independently of the state and it is not controlled. In 2017, President V.V. Putin noted at a press conference : «Control over the observance of laws in the Central Bank is exercised. The Prosecutor’s Office and other agencies are involved in this. There were no offenses»
Let us consider in more detail the laws that the Central Bank doesn`t violate. The first article states: «The Bank of Russia is a legal entity». The second article states that although the property of this financial institution (including foreign exchange reserves, buildings, tables, etc.) is owned by the state, it doesn`t have the right to dispose of this property without the permission of the Central Bank (which is a legal entity).
Article 4 states that the Central Bank of the country develops and conducts monetary policy in cooperation with the government of the country. That means, that it has a right doesn`t fulfill the orders of the authorities, but only take them into account, while performing some functions that are personally beneficial to the bank (or its management).
Article 6. The Bank of the Russian Federation may apply to international courts in order to protect its interests. That means that an agency, which should work in tandem with the government to improve the welfare of the population and maintain the national currency, can apply to an independent court with a lawsuit against the government to protect its interests, which is not a fact that it will connected with the interests of citizens. If the interests of the Central Bank and international organizations are similar, but at the same time its diverge from the Russian government and the people of the country, then it is expected that the Central Bank will win the case.
Article 22. The Bank of Russia has no right to lend to the Government of Russia. As V.V. Putin said, in international practice Central banks are often independent structures that function on its own. However, the Fed can lend to the economy of its country in the event of a budget deficit. The Bank of Russia cannot do this, however, it has the right to lend to the economies of other states.
There is more interesting. Article 23 states that all assets of the federal budget are kept at the Bank of Russia. However, we already found out that this agency is independent of the state and doesn`t have the right to answer for the obligations of the country. Moreover, if the Russian government decides to perform some kind of financial transaction with its assets, so at first it sends a request to the Ministry of Finance, and this agency concludes an agreement with the Bank of Russia. The operation can be carried out only if the Central Bank of the country agrees. However, the main financial institution of a country may not be subordinate to the Ministry of Finance.
What conclusion can be made based on the information above? The main financial institution of the country, which has a complete monopoly on controlling the issuance of the national currency and it is generally responsible for the welfare of the country’s citizens, is a private entity. It is not obliged to submit to the government of the country, the Ministry of Finance, but all the assets of the state are stored in the Bank of Russia.
This means that the government is not responsible for the obligations of the Central Bank, but the Central Bank is not responsible for the obligations of the government, but all the assets of the country are at the disposal of the Central Bank.
How did it happen that the main financial agency is completely autonomous and can act on the basis of personal prejudices, even if they disagree with the interests of the government and the population? In 1990, Boris Yeltsin signed the law «On the Central Bank of the RSFSR” (Bank of Russia)». Earlier in the USSR, the Central Bank was completely state-owned, but after the adoption of this law, it was abolished and all its assets and liabilities, as well as property, were transferred to the Bank of Russia.
What is the situation with other Central Banks?
Based on the words of V.V. Putin’s opinion about that many states using this practice on the independence of The Central Bank and we can conclude that in many countries The Central banks are private structures, which work not for the good of the country’s citizens, but on the basis of personal goals.
For example, the US Federal Reserve was created as a response to The Great Depression by commercial banks and it is also a private agency.
Is it bad or not?
We already found out that The Central banks, which essentially should be state-owned, are private and don’t subject to the authorities in fact. However, is it so bad? Not really. A certain share of The Central Bank`s independence should exist, because most often the government is concerned about short-term and medium-term goals and that may be connected to early elections. However, The Central Bank is determined to solve long-term problems. Therefore, independence is a kind of counterweight in a similar situation.
However, there should be objective limits to this independence so that the divergence of the interests between The Government and The Central Bank doesn`t reflecting on the economic situation of the country and the citizens welfare.