One of the most salient and important features of any country’s political organization and structure is how it relates to and manages its relationship with money in an effort to ensure the economic stability of the nation. Countries around the world are involved to greater and lesser degrees in the establishment, governance, and day-to-day practices of their central banks. The relationship between a country’s central bank and its government is one that is typically fraught with serious questions and political, economic, and social implications, especially in democratic systems. As Fraser (1994) points out, “[C]entral banks are created by government legislation and derive their powers from such legislation [so] they cannot be completely separate from the government” (p. 2). Nevertheless, many countries, especially in this period of intense modernization and globalization, are engaged in the process of examining what “the appropriate degree of separation” is between the central bank and the country’s government (Fraser, 1994, p. 2). This is particularly true in regions that are currently characterized by intensified development efforts and/or changes in the political and social systems of the country (Siklos, 2002). Two representative examples of such countries are China, which is experiencing unprecedented and rapid growth in its economy, and Russia, which has undergone significant political change in recent years and continues to examine the nature of relationships between the government and private enterprises. Both countries have experienced severe growing pains as they evaluate the role of the central bank in the countries’ plans for growth in the 21st century. While liberating central banks from the government’s total control may present considerable economic and political advantages, transitions to such systems have not been without their problems. Among the most significant of the challenges is widespread corruption of massive proportions and economic market volatility, which is characteristic of both countries despite their considerable differences.
Before beginning a specific discussion about central banks, is important to understand some of the basic concepts about central banks. Siklos (2002) defines a central bank as “a creature of the central government” (p. 7); it is the economic branch of a country’s operations. Far beyond its physical presence or structure, the central bank’s primary function is to safeguard the fiscal interests of a country and to stimulate economic growth to ensure national stability. Due to the close alignment between the country’s government and its central bank, then, the terms and quality of the relationship between the two entities will determine how stable the bank can be (Siklos, 2002). In systems where there is a nearly indistinguishable relationship between the government and the central bank, the government may exert its authority and influence to “push the economy to run faster and further than its capacity limits allow” (Fraser, 1994, p, 2). Furthermore, government officials have the tendency to use central bank policies and practices—and to change them—in such a way to fulfill temporary wants and needs. Fraser (1994) contends that dependent government-central bank relationships are frequently characterized by the government’s “temptation to incur budget deficits and fund these by borrowings from the central bank” (Fraser, 1994, p. 2). While this strategy may work for a brief period, it is difficult, if not impossible, to predict just how elastic the economy will be, and for how long it can sustain such abnormal demands (Fraser, 1994). People often think of the economy as a fine science, but as Fraser (1994) reminds us, that there are a number of variables that can, if tweaked in various ways, can produce unpredictable outcomes. Even when a country’s economy follows a pattern for awhile, it is not fully possible to know “precisely where the economy is in the cycle, or what in-built momentum it is generating… nor the length of the lags between policy changes and their impact on growth and inflation” (Fraser, 1994, p. 3).
Economist Milton Friedman first articulated this notion in his 1969 book, The optimum quantity of money: And other essays, in which he warned that “The danger is that the arrangements developed [in this sort of scheme] will provide an effective system for smoothing minor difficulties but only at the cost of permitting them to develop into major ones” (Friedman, 1969, p. 77). Friedman (1969) cites classical examples from the history of the central bank in the United States, including the precursors that precipitated the Great Depression. Friedman (1969) further cautions that close relationships between the government and its central bank will provide “palliatives that can at best smooth over temporary imbalances, [and] will encourage countries to postpone undertaking such fundamental adjustments to changed circumstances” (p. 78). In a worst case scenario, which is not at all improbable or unlikely, a domestic fiscal crisis caused by such short-term strategies can cause significant negative ripple effects across the entire global economy (Friedman, 1969). Despite the obvious implications of such short-sighted fiscal planning, this strategy is relatively common and has been “most regularly…resorted to in the post-[World ] War [II] period” (Friedman, 1969, p. 78).
The relationship between a government and a central bank is by no means a static one. As Siklos (2002) observes, governments and societies change, sometimes radically. Such is the case, for instance, in the two countries that will be studied here. When a government or a society changes, so, too, will its monetary policies and practices be susceptible to revision in order to support the new goals and objectives of the government (Siklos, 2002). Changes in the economic policies and practices of a country are necessary, of course, but they can also lead to various kinds of instability, making the country vulnerable to currency and market fluctuations. For these reasons, the topic of central bank independence has become an increasingly important topic to politicians, economists, and the public alike. Fraser (1994) contends that an independent central bank can help achieve price stability and control inflation more effectively than a central bank that is highly dependent upon the government. Research seems to corroborate this claim with empirical evidence. In their study of central bank independence, for instance, Banaian and Luksetich (1999) determined that the more independent a central bank is, the more likely it is to be able to ask a “force constraining the political system from using the monetary system to achieve [short-term] political goals that [may be] hostile to price stability” (p. 1). Thus, the position of the author is that a central bank that is independent from its government is an alternative that is preferable to a government-run or influenced central bank. The case studies of the central banks in China and Russia provide compelling examples of countries that are in a significant transitional moment and which are challenged to determine whether the current system should change to reflect contemporary political, economic, and social needs.
