M R Chatu Mongol Sonakul: National Central Bank and building world peace
Speech by Mr M R Chatu Mongol Sonakul, Governor of the Bank of Thailand, at the
27th International Conference on World Peace "Building a Culture of Peace in the New Millennium",
held in Bangkok on 1 December 2000.
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Members of the Professors World Peace Academy, Participants of the 27th International Conference
on World Peace, Ladies and gentlemen.
The history of central banking is normally agreed to have begun around four thousand years ago in the
Greece, Roman and other empires up to the middle ages when banks were put up primarily for the
purpose of getting finance for governments to wage war. So the first period of central banking cannot
very well be said to have been in conformity with the topic I've been asked to talk about here today,
which is entitled "National Central Bank and Building World Peace".
But in the sixteenth and seventeenth centuries and especially later on when industrialisation began in
earnest, there were great needs for finance for the many various industries that sprang up around that
time. Commercial banks and great finance houses became common but the limitations of the
technology of that period of using precious metals as currency became quickly apparent.
Commercial banks began issuing their own paper notes, for the amount of the valuable metals that
they had in stock being much more transportable. But human nature being what it is, they also began
issuing paper notes equivalent to the value of precious metal which they don't have in the vaults and
the various currencies issued by the various banks became devalued very quickly.
Another aspect to the whole thing is that people do cash in paper notes at times and banks have to hold
large reserves sometimes up to 30% of their liabilities in order to make sure that they have adequate
liquidity that may be used in case of unforeseen events.
The first central banks in its relatively modern form were therefore established to provide the function
of being the sole issuer of currencies and the single keeper of reserves as defined by law, notably the
Bank of England in 1694 and epitomised in a tome in 1873, Lombard Street by Bagehot, Editor at the
time of the Economist, where the concept of the Banking Department and the Note Issuing
Department was so clearly explained.
This gave credibility and value to paper currency and it was also a very much more efficient system in
that the single reserves at the central bank could be used by the many commercial banks who
thereupon kept much smaller contingencies, historically sometimes as low as 4 % of liabilities and
accessed the joint "reserves" at the central bank whenever necessary enabling a much more efficient
use of financial reserves than each bank having its own large reserves. Thus was born the term "banker
to the bankers" and "lenders of last resort".
Thus, in this way central banking for the first time really became a cornerstone of the building of
world prosperity and world peace.
Of course the single reserves might be sufficient under normal circumstances but when things get out
of hand, it may not be sufficient, and banks do shut down. The government and the central banks
thereupon undertook that most important function of building world peace, which is looking after the
poor and the disadvantaged, by putting up deposit insurance schemes, the first being in New York in
1829 but the first nationwide schemes being in Czechoslovakia in 1920 whereby at least the smallest
and the least knowledgeable depositors are protected.
Of course, a better alternative would be to try and make banks less liable to failure. Since banks are
often in an oligopolistic system or at the very least, they are leveraged by the ratio of debt to equity of
around 12:1, being the inverse of the capital adequacy ratio now defined by the Bank for International
Settlements to be at least 8%, and using other people's money in a way that normal companies cannot
do - the central bank then underpins the viability of commercial banks by supervising and examining
them so that sensible decisions are made and fraudulent activities are minimised.
Surprisingly, that may not even be the biggest way central banks contribute to world peace. For
nations taken individually, the biggest function deemed to be of the central banking is monetary
policy. By trading in foreign exchange, in local currencies, by credit extension, by rule making, and by
setting interest rates, the general level of economic activity can normally be influenced by the central
bank.
In so doing, central banks used to try to contribute to peace and prosperity by making sure that the less
advantaged or the more useful activities or social class and such like have better access to funds in
general or to the funds of the central bank, and in the extreme case even go so far as financing projects
and infrastructure.
In the modern world, it is now normally agreed that each national economy is so vast and complex that
central banks could be considered to have done very well if it just keeps the country stable and let
government build infrastructure and help the poor and private sector trade and invest to economically
develop the nation.
The recent trend is that, central banks are now given the sole task of keeping price stability, and is
given the independence to do that since if they have no independence, government will, at time ask it
to do things that are in conflict to that sole function.
Thus the modern central bank is really akin to keeping peace in the nation through enhancing stability
and it's other people's jobs to create wealth or turmoil as the case may be, the turmoil being a
necessary instrument in coming to the right policies or at time the wrong ones or in an ever worse
ending turmoil without apparent purpose as is so often the case in emerging markets.
But it certainly is not now deemed the function of the central bank to be doing this sort of thing. So
central bankers can now claim that they are basically trying to create peace and hopefully in a peaceful
economy, there will be better prosperity than a wildly gyrating one.
In a peaceful economy, growing stably at a high but sustainable rate, one cannot expect that there will
be no criminals hidden deep down somewhere inside the society. A new instrument has therefore been
added to the arsenal of monetary policy and financial supervision in the anti-money laundering
legislations.
The first anti-money laundering legislation was issued in 1970 by the US government. The mechanism
is generally that cash deposit of more than the minimum stipulated amount would be examined.
In the case of Thailand, this legislation was issued in April and became effective in August 1999. The
central bank participated fully in the draft and cooperates with its implementation.
We have taken the option though that central banks should be trying to put up a good system for
people to operate in rather than having another prime function of catching thieves and criminals, and
in this legislation therefore a new independent government office has been put up dedicated solely to
the pursuit of the articles of the legislation.
We sit on the committee under the legislation as I have just said, and cooperate wherever we can to
make sure its execution is effected and effective. This is another occasion where central banks
contribute directly to peace in that criminal activities which by nature are not peaceful is kept to a
minimum.
Speaking of criminal activities, vote buying in an election is also a criminal activity and although
legislation makes it difficult for us to tackle this problem, we cooperate with the Neutral National
Election Commission in tracking down movement of funds and we have assigned an assistant
governor to directly coordinate with this Commission.
The banking laws in Thailand at present though is that banking activity is secret and this inhibits us
from doing as much as we could to help in curbing this criminal activity. New legislations, both in the
central bank act and financial institution act will empower the central bank to have much more ability
to manage the nature of commercial banks and will follow the principle of transparency when we shall
be able to do much more for such an important event as a national election and hopefully then
commercial banks would be much less inclined to cooperate in less than virtuous activities.
Whilst it is probably true central banks of the modern era spend so much time in trying to stabilise
national events, the biggest single cause of untold misery, poverty, death and famine in the modern
economy is probably neither disease nor natural events, but it is the ever more frequent financial and
currency crises and many central banks in many economies have been helpless in this prevention.
There are now many international fora to tackle these problems, but all of them now are bent on
making emerging markets behave themselves better with a better system, monitor themselves better
and monitor what's going on in the rest of the world, the latter is actually an impossibility.
All financial transaction of significance is now computerised. A central bank with any kind of
competence will have good access within the nation and understand and manage their own destiny.
Given a reasonable government and even minimal legal system, each nation should be able to keep
peace and stability.
But international transaction is something else. No amount of computer capability will enable you to
access the computers of the money centers of other countries, and of the off-shore center of the world.
These are vast sum that we are talking about, directed at an opportune moment on markets which are
not yet sophisticated, deep or varied and for political or financial reasons are at the time vulnerable
somehow.
In Thailand, for instance in 1997, the amount of non-resident baht moved in that year was 900 billion
dollars when our total GNP was only 140 billion dollars.
When that kind of money moves against a nation, there is really no way a reasonable defence could be
made. Of course, the important powers of the world say that the country should behave itself better,
but one has to ask a question why important powers of the world try to make sure that each country
behaves itself, yet allows the international monetary system to behave totally as it wishes without due
regard to responsibility or the misery and famine that such events could cost.
The obvious answer is that all the major important money centers and funds are in the advanced
countries and the major countries systems being much more diverse is less liable to collapse when
there are large movements of funds in any particular sector.
Banking in Thailand for instance provides 77% of all credit available in the country at this moment
while in the US it is only 26%.
Before you ask, we are of course trying to rectify this, trying to get banking down to 55% of total
credit by the year 2010, and in the last three years, somehow we have got the debt market which was
before then nonexistent to be double the size of the stock market.
But it takes life times and generations to change people's habits and the nature of the country. The
world monetary system could in fact be monitored quite easily if the superpowers of the world would
only wish it to be done. It sends forces to keep peace in other countries, so it could quite just as well
impose a system , a world monetary system that would significantly reduce this kind of crisis. But the
only crisis which might have affected the superpowers were the LTCM crisis of the 1998 and the
Asian crisis of 1997 and it soon became apparent that the suffering could mainly be kept to the poor
nationsand so it looks as though nothing good is going to happen in the international arena.
Let me end my statement therefore by saying that before coming here I looked at the list of speakers
and participants and was truly impressed by the diversity and excellence. I have therefore tried to put
some interesting thoughts in the area of national central banking for your perusal.
All of us here wish for peace and prosperity in the world. Each of us a little bit or a lot depending on
the occasion can contribute to peace. So I truly hope that whenever the opportunity arise we will do
our part to try and put up a better world monetary system at which tasks the emerging countries are so
powerless.