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Thu, 17 January 2019 18:23:31
Sri Lanka central banker writes on good money and bad
16 Jul, 2010 06:41:13
By W A Wijewardena
July 16, 2010 (LBO)- Ex-central bankers seldom write books on their experiences. Perhaps, the fear of re – living the traumatic experiences they would have undergone in handling economic crises in turbulent times may have dissuaded them from doing so.
But, occasionally, we have seen some ex – central bankers breaking that rule and coming out of self – imposed hibernation. When they do so, they do not write books, but drop bombshells. This is exactly what H N Thenuwara, ex – Assistant Governor of the Central Bank of Sri Lanka, has done when he published the book titled ‘Money, Inflation and Output’.

The book published by Global Policy Research Centre, Colombo and priced at Rs 1500 was launched before an audience of academics and bankers on the 14th of July, 2010 in Colombo.

The Copernicusan Observation

The cover page of the book, produced with silver lettering in a black background, carries a quotation by Nicolaus Copernicus dating back to 1529 AD. The quotation is reproduced in different font sizes with the words ‘GOOD MONEY’ and ‘BAD MONEY’ in the largest fonts so that even the most casual reader could not miss them. Thenuwara could not have chosen a better quotation to convey his message boldly and aloud.

The Copernicus’ quotation under reference reads as follows:
‘I have observed that in countries with GOOD MONEY the art and business flourish and there is wealth everywhere, while laziness, idleness and indifference prevail in countries where BAD MONEY is in circulation’.

It is important to note that Copernicus made this observation when there was no formal subject called economics or monetary theory and even nearly 250 years before the emergence of The Wealth of Nations by the father of modern economics, Adam Smith. Yet, Copernicus’ observation is valid for all the times like a ‘general truth’.

What is Good Money (or its Opposite, Bad Money)?

Good money represents money that leads to economic prosperity and bad money the opposite. Since money is simply a medium of exchange and cannot bring prosperity by itself, good money is linked to an economic policy package which is conducive for creating wealth. By the same token, bad money is represented by an opposite policy package that retards wealth creation.

This was amplified by the late Dr Goh Keng Swee, the first Finance Minister of Singapore, in an article he wrote to the Golden Jubilee Commemorative Volume of the Singapore Currency Board justifying the retention of the currency board system in his country despite it being a relic of the colonial masters.

In this article titled ‘Why a Currency Board?’ he argues as follows:
‘My Cabinet colleagues took careful note of these dramatic events as they unfolded on the world’s financial scene. None of us believed that Keynesian economic policies could serve as Singapore’s guide for economic well – being. Our economy was and is small and open. Financing budget deficits through central bank credit appeared to us as an invitation to disaster….The way to a better life was through hard work, first in schools, then in universities or polytechnics and then on the job in the work places. Diligence, education and skills will create wealth, not Central Bank credit’.

Hence, good money is money that fosters ‘diligence, education and skills’ which are the prime contributors to creating wealth and prosperity. Bad money is what would retard them, as observed by Copernicus' reference to ‘laziness, idleness and indifference’.

In a broader sense, any economic policy that fosters hard work is good money and any economic policy that hinders hard work is bad money.

What Thenuwara has synthesised in his book is this message passed down to us from time immemorial.

Economic history abounds numerous examples and episodes that vindicates this message.

Some Historical Examples

Nearly, one and a half centuries later, in France in 1680, the mercantilist Minister of Finance, Jean – Baptiste Colbert, is said to have approached a group of businessmen led by entrepreneur M Le Gendra and inquired what the private sector needed from the state. The pragmatist Gendra is said to have quipped ‘Laissez – nous faire’ or ‘Leave us alone’. This in fact led, about a century later, to the creation of the ‘non – intervention policy of the government in the economy’ known as laissez faire.

What businessman Gendra demanded of the Minister Colbert was that ‘don’t give us bad money, but only good money’.

Nearly five hundred years after Copernicus, in 2004 the Sri Lankan Finance Minister Dr Sarath Amunugama, was reported to have castigated four loss making public enterprises as ‘monsters of the day’. In fact, the learned Minister was talking about bad money being created by these enterprises because they were ingrained by ‘laziness, idleness and indifference’ as observed by Copernicus.

Unfortunately, the Minister did not hold office long enough to tame the so called monsters. The Central Bank Report for 2009 reports to us that those so called monsters have grown bigger over the years and, as if to provide further company to them, the country has created three more monsters or bad money creators in the style of Postal Department, Mihin Lanka budget airline and Sri Lankan Airlines whose management was taken over by the truly Sri Lankans in 2007. These seven enterprises, according to the Central Bank, have created bad money to the tune of Rs 50 billion as operational losses or just above one percent of the country’s GDP.

The desire to create bad money does not appear to be ending there. The recent renationalisation of the Sri Lankan Airlines and Shell Gas Company which have hitherto remained as good money creators are some examples in point.

If the new owners fail to continue them as good money and foster laziness, idleness and indifference instead, then, no one can stop Copernicus from laughing at us from his grave.

The Thenuwara Thesis

In his book, Thenuwara has argued cogently and forcefully that though the introduction of money has greatly increased the welfare of the nations, its incessant increases have done the opposite. The way out, according to him, is the choice of a responsible monetary authority or a central bank that could exercise the utmost discipline in creating money.

Thenuwara argues that the central bankers have been led by a false notion of being in control of what they do. Commercial banks can multiply money by resorting to their multiple credit creating mechanisms and governments can add to it by resorting to deficit financing funded through borrowings from abroad, banks and central banks. When the overall money so created is in excess of what the people need to hold, the excess money chasing after the goods and services will raise prices. When this happens continuously, it brings about inflation and inflation brings untold pains to everyone.

He has argued, by quoting comparative data from other countries, that it is low inflation or good money coupled with strong institutions and good governance which has supported sustainable economic growth. Sri Lanka’s score card in this respect is very weak, even when compared with a neighbour like Singapore. During 1950 to 2005, Singapore’s bad money creation has virtually remained flat despite its rapid economic transformation from a poor third world economy to a developed nation. During the same period, Sri Lanka’s reserve money creation, when presented as an index, has increased from 100 in 1950 to well over 22,000 in 2005 (Figure 7.2 on page 135). What was Sri Lanka’s per capita GDP during this period? Thenuwara has not given a time series on this, but one could extract this number from various central bank publications. Accordingly, the country’s per capita GDP has increased from US $ 120 in 1948 to US $ 1197 in 2005.

So, Thenuwara’s Thesis is loud and clear: The bad money policy pursued by the country during the post independence period has simply immiserised the nation making it a laggard not only among the developed nations, but also among its poor neighbours.

The Way – out

Thenuwara suggests that as a way – out, the central bank should be made independent, strong institutions should be established and a proper governance structure should be put in place. While these are necessary to ensure prosperity and wealth creation, he also cautions that a central bank which is not accountable and transparent is more damaging than a subdued central bank. This is because in the absence of accountability and transparency, the central bank will spawn the problem of moral hazard which according to him is a ‘plague more serious than the lack of independence’.

He therefore, suggests that the discipline brought about by being a member of a currency union is more binding on authorities than the legally ensured ‘independence’ of a central bank. The truth of this is evident from how the European Union reacted to the hidden bad money policies of Greece, Portugal and Spain recently. But how practicable is this suggestion to Sri Lanka? If Sri Lanka joins a South Asian Monetary Union, it will be worse since the other countries in the region are worse bad money creators than Sri Lanka.

Money, Inflation and Output: A must Read by Everyone

Though Thenuwara is a first class mathematician and an econometrician, he has taken care not to introduce any mathematical equation or model to his book. This he has done in consideration of the general reader who is automatically put off by the sight of mathematical equations. It has been written lucidly in simple language. The book’s value has been greatly enhanced by the comparative data he has presented from the rest of the world. He has proven that a great mind can always talk to other less – endowed minds by using verbal methods.

What was Thenuwara’s objective of writing this book? Was it to take an aim at his former colleagues? No, since the book is both country and period neutral. He has not displayed any open allegiance to any particular school of economic thought, but presented facts as they are to prove his points. I feel that all he has done in the book is to vindicate the wisdom of Copernicus that good money leads to enterprise and prosperity, while bad money brings about misery, laziness and economic woes.

The book is therefore a must read by everyone.

The writer is a retired deputy governor of the Central Bank of Sri Lanka. To read previous columns in the series go to the WatchTower section on the main navigation panel or click on the links below. He can be reached on

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7. Sundaree Kariyawasam-Depanama Sep 03
Thenuwara must be congratulated for this excellent book. It is very well written. One thing noticed was there was no mention of his former boss among the people he acknowledged as those who helped him with this enterprise.

With the latest assertion of PBJ that CB should fall inline with Govt's policy it is interesting to see how CB will have an independent monetary policy device for best interest of the country.

Over to you G'nor.

6. Mitrapala Waduthanthri Aug 20
U-Turn skillfully negotiated. Thenuwara should be in Formula One racing.
5. Navidi SL Jul 19
I appreciate the lucid critique and hoping to get hold of a copy soon.

However, WAW suggesting that ‘the book is both country neutral and period neutral’. I am wondering how this book can incite policy makers to take actions to improve wealth creation in Sri Lanka. Hope it is not another superficial academic manual without offering way forward proposals.

Independence of the Central Bank alone would not create wealth for the country

4. Harry Jul 19
Thenuwara has now now only opened his eyes.In contrast, WA Wijewardena was a man who voiced to do the best and got sidelined.
3. ishara Jul 19
This is Real Singapore story!

Singapore parliament consist of 86 seats 84 for government.dictator!

Other Unique feature is both thenuwera

2. kawdaboy Jul 19
An excellent book that some of our academics should consider reading and a must for university students.
1. Teeskey Jul 18
I was unable to attend the book launch, but the review by WAW does justice to HNT.

We are glad that HNT has put his retirement into some productive work and it should be an eye opener for those who are now within the CB.