The central bank is telling us something that is untrue. This is not, if we think about it, quite what we desire our servants to be doing. We do, after all, hire and pay these people in the bureaucracy to do things for us. At least, in a free society, that's how it works -- a useful guide to the freedom and liberality of a place being whether those public servants actually act that way.
The central bank isn't; so perhaps we should change how that central bank is run then? To take this statement: “Before allowing any foreign currency for trading, the central bank has to maintain an exchange standard, and stability in line with the IMF standard, he said.” That's from the spokesman of the Bangladeshi central bank and it's in reference to people being allowed to use the Indian rupee in foreign trade. It's also complete nonsense. There's no requirement for there to be stability in a foreign exchange rate, no standard that has to be met.
The Bangladeshi Taka, the Indian Rupee, they're just pieces of paper -- or if we think about bank accounts, units of account. Numbers in a computer even. If we import rice from India -- no, just imagine we do that -- then it doesn't matter what unit of account we use to do so. We could measure the amount of pieces of paper to be passed over in return in US dollars, rupees, taka, or -- if we wanted to get really wild with is -- oranges (the fruit that is) or the Kazakhstani Tenge.
For, with trade, we really are just saying that “I'll give you this in return for that nice thing you've got that I want.” Of course, it's much easier if we all use some common thing to determine who gets paid what. That's what money is, what currencies are -- ways of being able to pay for things without having to use barter, my chickens for your rice. But that's all they are, those currencies, there's nothing mystical about them at all.
Pieces of paper, numbers in a computer, that's it.
What the central bank actually means is that it desires to control what we do. Therefore it hedges the use of different currencies around with rules and tests which don't have to be there. The insistence that the Indian rupee cannot be used in trade has nothing, at all, to do with the intrinsic value of using the rupee in trade -- it's to do with the central bank being able to control whether we trade using rupees.
And why are we allowing our public servants to control what we may do in this manner?
Think it through for a moment. The bank is insisting that taka to dollars and then dollars to rupees -- which is how they insist trade with India should be paid for -- is somehow different from taka to rupee. Which it isn't, except for the one little point: If the central bank only has to deal with one exchange rate, Tk/USD, instead of hundreds to every currency on the planet, then it's easier for the central bank to control the exchange rate. Which is the only reason for their insistence that there be that one exchange rate, rather than hundreds, used in trade.
Because they wish to control.
At which point, well, why would we allow them to do this? The answer being that we shouldn't. It is true that if we simply moved to a proper free market in foreign exchange -- anyone may buy or sell however much, at whatever price, of whatever they like -- then some people will go bust. That does indeed happen in markets. It will even be true of the occasional bank along the way. But then it's also true that we desire to remove from the marketplace those who are idiots with money.
So that's that aim achieved then.
It really does end up here that the only reason for any controlled foreign exchange market is that those doing the controlling wish to control us. Not something we should be willing to put up with – we're adults, we're free people, let us do as we wish. Rather than hiding behind non-existent IMF requirements before we can use rupees to pay for rice from India.
Tim Worstall is a senior fellow at the Adam Smith Institute in London