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Changing functions of Central banks since 1930

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Changing functions of Central banks since 1930

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Content CHANGING FUNCTIONS OF CENTRAL BANKS SINCE 1930 A T h e sis P re s e n te d to th e F a c u lty o f th e D epartm ent o f Econom ics The U n iv e r s ity o f S o u th ern C a lif o r n i a In P a r t i a l F u lf illm e n t o f th e R eq u irem en ts f o r th e D egree M aster o f A rts by H isa h a ru Yamada S eptem ber 195*+ UMI Number: EP44742 All rights reserved INFORMATION TO ALL U SERS The quality of this reproduction is d ep en d en t upon the quality of the copy subm itted. In the unlikely event that the author did not se n d a com plete m anuscript and th ere a re m issing p ag es, th e se will be noted. Also, if m aterial had to be rem oved, a note will indicate the deletion. Dissertation Publishing UMI E P44742 Published by P roQ uest LLC (2014). Copyright in the Dissertation held by the Author. Microform Edition © P roQ uest LLC. All rights reserved. This work is protected against unauthorized copying under Title 17, United S ta te s C ode P roQ uest LLC. 789 E ast E isenhow er Parkw ay P.O . Box 1346 Ann Arbor, Ml 4 8 1 0 6 -1 3 4 6 £e. '£5 V n This thesis, written by .....................-Y a m a d a , - -Hi^ah-a-ru,.................................. under the guidance of h Faculty Comm ittee, and approved by all its members, has been presented to and accepted by the Faculty of the Graduate School in partial fulfillment of the requirements for the degree of ........................mS!EER„QF.-AB£S....................... .......................................... H*.. J.jt. .Be.ye 1 * . Dean Dean D ate Jannar:y* .1955-..... Faculty Committee, Chairman TABLE OF CONTENTS CHAPTER I . INTRODUCTION . . . . ......................................................... S ta te m e n t o f th e P roblem ........................................... Im p o rtan ce o f S tu d y . . . ...................................... D e f in iti o n s o f Terms Used . . . ................... C e n tr a l bank . . . . . ........................................... M onetary p o lic y ......................................................... F i s c a l p o lic y , , .................................................... P u b lic d e b t p o lic y . . ........................................... Q u a n tita tiv e c o n t r o ls ........................................... Q u a li ta t iv e c o n tr o ls . . . . . . ................... C re d it r a tio n i n g . . ............................................... A v a i l a b i l i t y o f money ........................................... R eal b i l l t h e o r y .................................................... .... R e d isc o u n t r a t e s ................... ................................. D isco u n t r a t e s ............................ . . . O pen-m arket o p e r a tio n s . . . . . ................... R eserv e re q u ire m e n ts . . . ............................. S e le c tiv e c o n t r o ls .................................................... L ong-term i n t e r e s t r a t e s ................................. . S h o rt-te rm i n t e r e s t r a t e s ................................. S ta te m e n t o f O rg a n iz a tio n in t o C h a p te rs . ♦ S ta te m e n t o f th e S o u rc es o f D ata ........................ CHAPTER / I I . THE HISTORY A N D THE CONCEPT OF CENTRAL BANKING The Bank o f E ngland a s a L eading C e n tra l B a n k ...................................... .............................................. The C oncept o f C e n tr a l Banking . . . . . . . The T heory o f C e n tra l Banking d u rin g th e 1 9 2 0 's ............................................................................ . I I I . RELATIONS BETWEEN THE CENTRAL BANK, THE GOVERN MENT, AN D THE SHAREHOLDERS ...................................... R e la tio n s o f th e C e n tr a l Bank Management to th e Government . . . . . . . . . ................... Indep en d en cy o f th e c e n t r a l hank . . . . . R e la tio n s o f th e Government and th e C e n tra l Bank among L eading C o u n trie s d u rin g th e 1 9 2 0 »s ................................................................................. O w n e rs h ip ........................................ ................................ G overning b o d ie s ...................................... . . . . P r o f i t s h a rin g .............................................................. O ther r e l a t i o n s ................... .... ................................ R e la tio n s o f th e Government and th e C e n tra l Bank among L eading C o u n trie s a t P re s e n t Ownership . .............................................................. G overning b o d ie s . . . . . ............................. P r o f i t s h a rin g ................................. . iv PAGE 8 9 16 21 23 23 23 25 26 28 33 35 36 36 39 ^7\ V CHAPTER PAGE O ther r e l a t i o n s ... .. . .. ^9 G en e ra l O b s e r v a t i o n s ................................................. . * + 9 S u b ju g a tio n o f c e n t r a l b a n k s ............................. * *9 D e s ira b le r e l a t i o n s o f th e c e n t r a l bank to th e governm ent . . . . . . . . . . . . . 51 R e la tio n s o f th e C e n tr a l Bank t o th e S h are h o ld e rs .............................* ..................................... 6 l C a p ita l, L egal L iq u id a tio n on D is s o lu tio n , and R eserv e Fund . 62 IV . NOTE ISSUES AN D R E SE R V E S................................................ 65 N ote I s s u e s and C re a tio n o f C re d it by th e C e n tra l B a n k ................................................................... 65 Gold r e s e r v e s ................................. .................................. 66 O ther c o l l a t e r a l o f n o te s and r e s e r v e s a g a in s t d e p o s its . . . . . ............................. 68 R eserv e R eq u irem en ts a g a in s t N otes and D e p o sit L i a b i l i t i e s d u rin g th e 1 9 2 0 's . . . 69 Canhda ....................................................................... 69 The Bank o f E ngland ........................ 71 The Bank o f F ra n ce ................................. 73 The Bank o f J a p a n ..................................................... . 75 The F e d e ra l R eserv e System ..... ................................. 76 vi CHAPTER PAGE R e serv e R eq u irem en ts a g a in s t N otes and D e p o sit L i a b i l i t i e s a t P re s e n t . . . . . . 79 The Bank o f Canada ........................ 79 The Bank o f E n g l a n d ....................................... 8 l The Bank o f F ra n ce ................................. 8 M - The Bank o f Jap an . . . . . . . . . . . . 85 The F e d e ra l R e serv e System .. .. . .. . 87 G en e ra l O b se rv a tio n s . . . . . . . . . . . . 90 The r e n u n c ia tio n o f th e g o ld s ta n d a rd . . 91 The d is c a r d o f th e r e a l b i l l th e o ry . . . 91 The g e n e ra l a s s e t th e o ry o r th e r e a l b i l l th e o ry . ................................ 92 A change in th e n a tu r e o f g o ld r e s e r v e s . 96 V. RELATIONS BETWEEN THE CENTRAL BANK, THE COM MERCIAL BANKS AND M O N EY M ARKET DURING THE i 1 9 2 0 ’S ............................................................................ 98 ; T y p ic a l C e n tra l B anking . . ............................ 98 R e d isc o u n t o p e r a tio n s 98 j O pen-m arket o p e r a t i o n s ....................... . 99 ! C o o p e ra tio n betw een th e c e n t r a l bank and i banks ................................ 100 D e a lin g s i n g o ld and f o r e ig n ex ch an g es . . 101 I n d iv id u a l C e n tra l Banks 102 i vii CHAPTER PAGE The Bank o f E ngland .................. 102 The Bank o f F ra n c e ......................................... 105 The Bank o f Jap an ............................... 108 The F e d e ra l R eserv e System . . . . . . . 110 V I. RELATIONS BETWEEN THE CENTRAL BANK, THE COMMERCIAL BANKS AND THE M O N EY M ARKET AT PRESENT ............................................................... . . . 11*+ I n d iv id u a l C e n tra l B anks' R e la tio n s w ith T h e ir Money M a r k e t ................................................ 11*+ The Bank o f C a n a d a .............................................. 11*+ The Bank o f E n g l a n d .............................................. 120 The Bank o f F r a n c e ................................... 131 The Bank o f Jap an . . . . . . . . . . . . 137 The F e d e r a l R eserv e System . . . .. . . 1 * + * + G e n e ra l O b se rv a tio n s ........................................... . 159 The d e c lin in g im p o rta n ce in r e d is c o u n t o p e r a tio n s ...................................................... 159 The e x te n s iv e and c o n tin u o u s u se o f open- m arket o p e r a tio n s ...................................................... 160 The a c tiv e u se o f r e s e r v e re q u ire m e n ts . 162 The i n t e g r a t i o n o f th e th r e e in s tr u m e n ts . 163 The c lo s e r to u c h w ith th e g e n e ra l p u b lic . 165 D evelopm ents o f c lo s e r o p e r a tio n a l r e l a - --------------------- t i o n s h ip s - w i th — th e -g o v e rn m e n t— .—.— .---------16- 7- viii CHAPTER PAGE S um m ary.......................................... 171 V II . CONCLUSION........................................................................... 17^ The D e c lin in g S ig n if ic a n c e in R e d isc o u n t O p e r a t i o n s ................................. . ............................ 17*+ The d is c a r d o f e l i g i b i l i t y re q u ire m e n ts . 17*+ The i n t e g r a t i o n o f r e d is c o u n t o p e r a tio n s , o p en -m ark et o p e r a tio n s and r e s e r v e r e q u i r e m e n t s ....................... 176 The C lo se r R e la tio n s w ith th e Government . 178 A d oubt on th e e f f e c t iv e n e s s o f th e i n t e r e s t r a t e d u rin g d e p re s s io n s . . . 178 D i f f e r e n t i a t i o n o f i n t e r e s t r a t e s . . . . 179 F is c a l p o lic y and d o u b ts on m o n etary p o lic y d u rin g p r o s p e r ity ............................. 183 S h o rtco m in g s in h e r e n t i n f i s c a l p o lic y and r e d is c o v e r y o f m o n etary p o lic y . . 187 C lo se r R e la tio n s w ith th e G e n e ra l P u b lic . 191 D e p o sit b u s in e s s ....................... 192 D ir e c t l o a n s ........................................................ . 193 O pen-m arket o p e r a tio n s . 19^ S e le c tiv e c o n t r o ls . . . . . . . . . . . 195 D ir e c t c o n tr o ls ......................................................... 197 M oral s u a s i o n s ............................................... 199 ix CHAPTER PAGE Exchange c o n tr o ls ......................................................... 201 S t a b i l i t y and c o n tr o l . . . . . . . . . . . . 202 Economic freedom and p u b lic c o n t r o ls . . . 202 E f f e c t i v e c o n tr o ls and th e l o c a t i o n of a u t h o r i t y ................................................ . . . . . 203 BIBLIOGRAPHY............................................................................ 211 LIST OF TABLES TABLE PAGE I . C a p ita l R a tio to Main L i a b i l i t i e s . . . . . . 6b I I . W h o lesale P r ic e Movements in F iv e O ther C o u n trie s . . . . . . . . . . . ........................ 9 * + I I I . N otes in C ir c u la t io n and D e p o sit L i a b i l i t i e s . 95 IV. O pen-M arket O p e ra tio n s and th e Money M arket a t C e n tra l Bank ............................. 113 V. The Im p o rtan ce o f R e d isc o u n t O p e ra tio n s a t th e Bank o f J a p a n ......................................................... 139 V I. R eserv e R eq u irem en ts Changing Ranges and R a tio s in E f f e c t ............................ l*+6 CHAPTER I INTRODUCTION ‘•S o c ia l economy h as alw ay s b ee n , and p ro b a b ly w i l l re m a in , a m o n etary economy. * ’■ * ■ The c e n t r a l b an k , t h e r e f o r e , w hich h as t i g h t c o n tr o l o v er th e s u p p ly , a v a i l a b i l i t y , and c o s t o f money, sh o u ld be o f a g r e a t im p o rta n c e and o f a l a r g e c o n c e rn . I . STATEMENT OF THE PROBLEM I t i s th e p u rp o se o f t h i s s tu d y (1 ) to p r e s e n t an o u tli n e o f ch an g in g f u n c tio n s o f c e n t r a l banks s in c e 1930; (2 ) t o com pare th o s e f u n c tio n s f o r s e v e r a l le a d in g c e n t r a l b a n k s; and (3 ) t o a n a ly z e th e p ro p e r s p h e re f o r th e s e c e n t r a l banks w ith a s p e c i a l a t t e n t i o n t o th e t h e o r e t i c a l b a s is f o r c e ^ r a l b an k in g o p e r a tio n s . The Banks t o be s tu d ie d and com pared a r e th e Bank o f C anada, th e Bank o f E n g lan d , th e Bank o f F ra n c e , th e Bank o f J a p a n , and th e F e d e r a l R e serv e S ystem o f th e U n ite d S ta te s # ^G eorge N. H alm , M onetary T h eo ry (sec o n d e d i t i o n ; P h ila d e lp h ia i The B la k is to n Cojnpany, 19^+6), p . 1* I I . IMPORTANCE OF STUDY M onetary p o lic y i s now in th e p ro c e s s o f "being r e d is c o v e re d on th e t h e o r e t i c a l l e v e l , a s w e ll a s th e p r a c t i c a l l e v e l . The em phasis on c e n t r a l bank c o n t r o l was c a r r i e d to g r e a t h e ig h ts in th e l a t e 1 9 2 0 's an d e a r l y 1 9 3 0 's . F a i lu r e s to m a in ta in a s t a b l e economy w ere a s c r ib e d t o th e sh o rtco m in g s o f th e c e n t r a l banks in s t e a d o f weak n e s s e s in h e r e n t in th e m ethods o f c o n t r o l . B ut a s th e G re a t D e p re s s io n d eep en ed , i n s p i t e o f th e d e s p e r a te e f f o r t s o f m o n etary a u t h o r i t i e s , a new p o lic y g r a d u a lly to o k th e p la c e o f m o n etary p o lic y . T h a t was f i s c a l p o lic y . D u rin g th e l a t e 1 9 3 0 's and th e w ar p e r io d , i t became p o p u la r to stam p m onetary p o lic y w ith th e stig m a o f a h e l p l e s s l y sim p le q u a n tity th e o r y . The in co m e-sp en d in g ap p ro a c h overw h elm in g ly o c c u p ie d th e th o u g h t o f many a c a dem ic e c o n o m is ts , a s w e ll a s o f p r a c t i c a l p o lic y p la n n e r s . F i s c a l p o lic y became th e rem edy f o r th e d e p r e s s io n d u rin g th e l a t t e r p a r t o f th e 1 9 3 0 's , su p p lem en ted by d i r e c t c o n tr o ls d u rin g t h e w a r. B ut th e o u tb re a k o f fo rm id a b le i n f l a t i o n in s e v e r a l E u ro p ean c o u n t r i e s , a s w e ll a s o th e r a r e a s a f t e r th e w ar, th e s u p p re s s e d I n f l a t i o n in th e U n ite d Kingdom, and th e grow ing p r e s s u r e o f i n f l a t i o n in th e U n ite d S t a t e s r e s u l t e d in th e r e d is c o v e r y o f th e im p o rta n c e o f m o n etary p o lic y . T h e r e f o re , i t seems v e ry a p p r o p r ia te to compare f u n c tio n s o f some c e n t r a l banks a s th e y a r e w ith th o s e o f th e same banks a s th e y w ere a q u a r te r o f a c e n tu ry a g o , so a s to o b ta in a view o f th e v i c i s s i t u d e s o f c e n t r a l b a n k in g . I I I . DEFINITIONS OF TERMS USED I t i s im p o s s ib le to d e f in e an y one te rm e x a c tly y e t in d e p e n d e n tly o f th e c o n te x t in w hich th e word i s u s e d . T h e r e f o re , i t m ust be n o te d t h a t th e d e f i n i t i o n s o f th e fo llo w in g te rm s a r e more o r l e s s s u b je c t to change a c c o rd in g to a c o n te x t. C e n tr a l b an k . A lth o u g h th e r e a r e v a r io u s t h e o r e t i c a l •WHT-ir Jn.-Jl.. . . . a s w e ll a s p r a c t i c a l c o n c e p ts o f a c e n t r a l b an k , i n t h i s t h e s i s , a c e n t r a l bank means a n i n s t i t u t i o n ch a rg e d w ith th e r e s p o n s i b i l i t y o f r e g u la t i n g th e s u p p ly , a v a i l a b i l i t y , and c o s t o f money i n th e i n t e r e s t s o f th e g e n e ra l p u b lic , u n le s s o th e rw is e d e f in e d . M onetary p o l i c y . A p o lic y w hich a f f e c t s incom e and e x p e n d itu r e s , p a r t i c u l a r l y in th e p r i v a t e s e c t o r o f th e economy, by in f lu e n c in g th e volum e o f money a n d , th ro u g h i t , th e c o s t and a v a i l a b i l i t y o f borrow ed fu n d s . The C e n tr a l bank i s o r d i n a r i l y r e s p o n s ib le f o r i t . I F i s c a l p o l i c y . A p o lic y w hich a f f e c t s th e l e v e l o f incom e and sp e n d in g th ro u g h th e e f f e c t s on i t o f governm ent e x p e n d itu re s a n d /o r r e v e n u e s . The T re a s u ry i s u s u a lly r e s p o n s ib le f o r t h i s p o lic y . P u b lic d e b t p o l ic y . A p o lic y c o n c e rn in g th e f in a n c in g o f a b u d g et d e f i c i t , th e d i s p o s i t i o n o f a b u d g et s u r p l u s , and th e management o f p u b lic d e b t. P u b lic d e b t p o lic y i s a s y n t h e ti c p o lic y betw een m o n etary p o lic y and f i s c a l p o lic y . B oth th e c e n t r a l bank and T re a s u ry o r d i n a r i l y s h a re th e r e s p o n s i b i l i t y o f t h i s p o lic y e q u a lly . Q u a n ti ta t iv e c o n t r o l s . M onetary c o n tr o ls d e s ig n e d t o in f lu e n c e th e volum e o f c r e d i t more o r l e s s i r r e s p e c t i v e o f u s e . They have t r a d i t i o n a l l y c o n s t i tu t e d th e o u ts ta n d in g f e a t u r e o f c e n t r a l b a n k in g . Some q u a n t i t a t i v e c o n tr o ls can be e x e r c is e d o n ly w ith e f f e c t s o f q u a l i t a t i v e c o n t r o l s . R e d is c o u n t o p e r a tio n s , r e s e r v e r e q u ir e m e n ts , and open m ark et o p e r a tio n s a r e t y p i c a l in s tru m e n ts f o r q u a n t i t a t i v e c o n t r o l . Q u a l i t a t i v e c o n t r o l s . M onetary c o n t r o ls in te n d e d to r e g u l a t e th e p u rp o se f o r w hich c r e d i t i s e x te n d e d . E l i g i b i l i t y re q u ire m e n ts a r e a c l a s s i c a l o n e , w hereas m arg in re q u ire m e n ts and consum er c r e d i t c o n tr o ls a r e t y p i c a l l y m odern d e v ic e s f o r t h i s p u rp o s e . C r e d it r a t i o n i n g . The p ro c e s s o f a p p ly in g th e d e c is iv e c r e d i t s ta n d a r d s o f b a n k s . Com m ercial banks b o th ; in p r o s p e r ity and i n d e p r e s s io n somewhere draw a l i n e b ec au se o f i n s u f f i c i e n t c r e d it- w o r th in e s s o f p o t e n t i a l b o rro w e rs . A v a i l a b i l i t y o f money. The e f f e c t o f c r e d i t r a t i o n - in g on th e su p p ly o f c r e d i t ; a p o t e n t i a l a b i l i t y to o b ta in need ed c r e d i t a t a p r e v a i lin g i n t e r e s t r a t e . R e a l b i l l th e o r y . The t r a d i t i o n a l com m ercial banking th e o r y ; banks sh o u ld make o n ly s h o r t- te r m , s e l f - l i q u i d a t i n g and p ro d u c tiv e lo a n s in o rd e r t o in s u r e t h e i r own l i q u i d i t y ! and accom odate th e n eed s o f t r a d e . I t is th e e s s e n c e o f t r a d i t i o n a l q u a l i t a t i v e c o n t r o l s . T h is d o c t r in e s t i l l rem a in s em bodied, to some e x t e n t , i n v a r io u s e l i g i b i l i t y r e q u ir e m e n ts . R e d isc o u n t r a t e s . I n t e r e s t r a t e s w ith w h ich a c e n t r a l bank d is c o u n ts e l i g i b l e p a p e rs in th e c a p a c ity o f a c e n t r a l b an k , e x c lu d in g th e c a s e w here a c e n t r a l bank d i s c o u n ts e l i g i b l e p a p e rs d i r e c t l y from u lti m a t e b o rro w e rs . D isc o u n t r a t e s . I n t e r e s t r a t e s w ith w hich com m ercial banks d is c o u n t e l i g i b l e p a p e rs , in c lu d in g th e c a s e w here a c e n t r a l bank d is c o u n ts e l i g i b l e p a p e rs in th e c a p a c ity o f a com m ercial b a n k . O pen-m arket o p e r a t io n s . The p u rc h a se o r s a l e by a c e n t r a l bank in th e m ark et o f an y k in d o f p a p e r; governm ent s e c u r i t i e s o r o th e r s e c u r i t i e s , o r bankers* a c c e p ta n c e s o r f o r e ig n exchange g e n e r a lly . R e se rv e r e q u ir e m e n ts . The minimum c a s h o r i t s e q u iv a le n t r e s e r v e s to be k e p t w ith th e c e n t r a l bank by com m ercial banks i n o r d e r , m a in ly , to s e c u r e maximum mone t a r y c o n tr o l w h eth e r r e q u ir e d by law o r n o t . S e l e c t i v e c o n t r o l s . C o n tro ls on c r e d i t d i r e c t l y r a t h e r th a n on th e r e s e r v e s o f com m ercial b a n k s . They a r e d e s ig n e d to a f f e c t th e l e v e l o f p a r t i c u l a r ty p e s o f c r e d i t , su ch a s s to c k m ark et lo a n s , r e a l e s t a t e lo a n s , and consum er . c r e d i t s . L o n g -term i n t e r e s t r a t e s . I n t e r e s t r a t e s o r d i n a r i l y a p p l ic a b le to v a r io u s c r e d i t in s tru m e n ts w h ich have th e m a tu r ity o f more th a n one y e a r . T h is te rm , how ev er, w i l l be u se d lo o s e ly a s com pared w ith s h o r t- te r m i n t e r e s t r a t e s . S h o rt- te rm i n t e r e s t r a t e s . I n t e r e s t r a t e s o r d i n a r i ly a p p l ic a b le to th o s e c r e d i t in s tru m e n ts w h ich have th e m a tu r ity o f l e s s th a n one y e a r . T h is term w i l l be u se d lo o s e ly a s com pared w ith lo n g -te rm i n t e r e s t r a t e s . IV . STATEMENT OF ORGANIZATION INTO CHAPTERS The seco n d c h a p te r d e a ls h i s t o r i c a l l y w ith th e evo l u t i o n o f c e n t r a l banking* S p e c ia l a t t e n t i o n w i l l be g iv e n to th e h i s t o r y o f th e Bank o f E n g lan d in r e l a t i o n to v a r io u s c o n c e p ts o f a c e n t r a l bank* In c h a p te rs th r e e th ro u g h s i x , th e co m p ariso n and a n a ly s is o f p o w ers, c o n s tr u c tio n s , and f u n c tio n s o f c e n t r a l banks b etw een th e p r e s e n t and th e p r e - d e p r e s s io n p e rio d s i s p r e s e n te d . The l a s t c h a p te r w i l l e v a lu e r e c e n t d ev elo p m en ts and p r e s e n t some id e a s to im prove c e n t r a l b an k in g i n th e f u t u r e . V. STATEMENT OF THE SOURCES OF DATA The s o u rc e s o f d a ta a r e lim i te d to th o s e a v a i l a b l e a t th e G en e ra l L ib r a r y a t th e U n iv e r s ity o f S o u th e rn C a l i f o r n i a , and th e Los A n g eles P u b lic L ib r a r y , and th o s e p e r s o n a lly o b ta in e d d i r e c t l y from th e Bank o f E n g lan d , th e B oard o f G overnors o f th e F e d e ra l R e se rv e S y stem , o th e r c e n t r a l b a n k s, and th e Bank f o r I n t e r n a t i o n a l S e ttle m e n ts * When p o s s i b l e , p rim a ry s o u rc e s a r e u s e d , y e t , th e d i f f i c u l t y o f s e c u rin g f o r e ig n m a te r ia ls o f te n fo rc e d th e w r i t e r t o r e l y on se c o n d a ry so u rc e s* CHAPTER II THE HISTORY A N D THE CONCEPT OF CENTRAL BANKING " C e n tr a l b an k in g ” o r a ” c e n t r a l bank” d id n o t come t o th e p e o p le 's mind u n t i l th e t u r n o f t h i s c e n tu ry * Y e t, some c e n t r a l banks had d ev e lo p ed i n v a rio u s c o u n tr ie s o v er a lo n g p e rio d o f y e a r s . The p r o c e s s , how ever, had n o t alw ay s been a c o n s c io u s o n e, and a s y s te m a tic and c o n s i s t e n t te c h n iq u e had n o t y e t b een f o rm u la te d . The b u s in e s s o f c e n t r a l banks had been c a r r i e d on by th e whim an d a t th e d i s c r e t i o n o f in d iv id u a l m anagem ent. In many c o u n tr ie s one bank p r iv ile g e d w ith th e s o le o r th e p r i n c i p a l r i g h t o f is s u in g n o te s an d th e c a p a c ity to be th e g o v e rn m e n t's b an k e r and a g e n t g r a d u a lly came to assum e more and more th e r e s p o n s i b i l i t y o f a c e n t r a l b an k . The r e g u l a t i o n o f is s u in g n o te s s u b je c t to th e governm ent s u p e r v is io n and th e m ain te n an ce o f th e c o n v e r t i b i l i t y o f t h e i r n o te s w ere th e m ain f u n c tio n s o f th e s e b a n k s . As i n d u s t r i a l i z a t i o n w ent on and econom ic o r g a n iz a tio n s became more com plex, su c h p r iv ile g e d banks became th e c e n te r o f th e economy o f a g iv e n c o u n try a n d , some tim e s , o f s e v e r a l c o u n t r i e s , a c q u ir in g o th e r f u n c tio n s . Where a c e n t r a l bankc d id n o t s p o n ta n e o u s ly em erge due to p o l i t i c a l o r o th e r r e a s o n s , th e r e s t i l l e x is te d some o r g a n iz a tio n s w hich had f u n c tio n s s i m i la r to th o s e o f a c e n t r a l bank.-*- I . THE BANK OF ENGLAND AS A LEADING CENTRAL BANK Among th e e x i s t i n g c e n t r a l b a n k s, th e Bank o f E ngland was e s ta b li s h e d r e l a t i v e l y e a r l y and became th e m odel o f th o s e c e n t r a l banks form ed l a t e r . T h e r e f o re , i t w ould n o t be in a p p r o p r ia te to go r a p id l y th ro u g h i t s h i s to r y a s a h i s t o r y o f c e n t r a l b an k in g . "The e s ta b lis h m e n t o f th e Bank o f E n g la n d ," sa y s Clapham , "can be t r e a t e d l i k e many h i s t o r i c a l e v e n ts b o th g r e a t and s m a ll, e i t h e r a s c u r io u s ly a c c i d e n t a l o r a s a l l b u t i n e v i t a b l e . The s u s p e n s io n o f E xchequer paym ents by C h a rle s I I i n 1672, r u in e d th e G overnm ent’ s c r e d i t f o r s e v e r a l d ecad es to come, and th e K in g 's f i n a n c i a l d i f f i c u l t y became th e iF o r i n s t a n c e , th e U n ite d S t a t e s b e f o r e 1913> se e E s te r R o g o ff T au s, C e n tr a l B anking F u n c tio n s o f th e U n ite d S t a t e s T re a s u r y . 1789-19^-1 (New Y ork: Colum bia U n iv e r s ity P r e s s , 191+ 3 ) . A n o th er in s ta n c e i s Canada b e fo re 1935* See M ilto n L. S to k e s , The D evelopm ent and P re s e n t P o s itio n o f C e n tr a l B anking in"C anada ( P h il a d e lp h ia : 1 9 3 8 ), p p . l - l o . 2 jo h n C lapham , The Bank o f E n g lan d , V o l. I (Cambridge: A t th e U n iv e r s ity P r e s s , 1 9 ^ 5)5 P* 1* 10 p rim a ry r e a s o n f o r th e e s ta b lis h m e n t o f th e Bank o f E n g lan d . In l6 9 ^ , th e G overnor and Company o f th e Bank o f E ngland jrr&s e s ta b li s h e d w ith a c a p i t a l o f ^ l , 2 0 0 ,0 0 0 , a l l o f w hich was advanced to W illiam I I I and h i s Governm ent i n r e t u r n f o r th e power to is s u e n o te s up to th e same am ount. In 1697, th e c h a r t e r o f th e Bank was renew ed and i t s p r i v i l e g e s w ere e x te n d e d . The Bank n o t o n ly in c re a s e d i t s c a p i t a l a s w e ll a s i t s n o te i s s u e , b u t i t a ls o p r a c t i c a l l y o b ta in e d th e m onopoly o f p o s s e s s in g th e Governm ent b a l a n c e s . 3 By th e same A ct o f 1697, th o u g h Bank n o te s w ere n o t y e t K in g ’ s money, f o r g e r y o f th e B a n k 's n o te s was made p u n is h a b le w ith d e a th , th e p e n a lty f o r c lip p in g o r c o in in g th e K in g 's m oney.1 * 1 O b ta in in g th e p o s i t i o n o f p r i n c i p a l a g e n t f o r th e b u s in e s s o f th e E xchequer B i l l s i n 1 7 0 7 ,^ and o f th e N ational D ebt i n 1 7 5 1 the Bank had by 1776 become "by h a b i t n o t ! I by la w , b an k e r t o th e S ta te and m ost o f i t s d e p a r tm e n ts ."7 3V era C. S m ith , The R a tio n a le o f C e n tra l B anking (Londons P . S . King and Son, L t d ., 1 9 3 6 ), p . 1 0 . ^C lapham , op. c i t . , p . 50. 5 I b i d . . p . 59. ^A. A n d read es, H is to r y o f th e Bank o f E ngland l6*f0 to 190^ (seco n d e d i t i o n ; Londons P . S . King and Son, L t d ., 1 9 2 5 ), p p . 1 5 2 -3 . ^Clapham , p p . c i t . , p . 1 0 1 . ! 111 The power t o is s u e n o te s g iv e n to th e Bank by th e o r i g i n a l c h a r t e r was renew ed and e x te n d e d . When i n 1709 th e Bank’ s c h a r t e r was ren ew ed , i t o b ta in e d a n o th e r f a v o r a b l e c la u s e t h a t no firm o f more th a n s i x p a r tn e r s m ig h t is s u e n o te s p a y a b le a t demand or a t any tim e l e s s th a n s i x m onths in l? b 2 , th e Bank g o t th e p r i v i l e g e o f " e x c lu s iv e b an k in g business."9 The r e s u l t o f p r e s t i g e and in f lu e n c e p r a c t i c a l l y d ro v e o u t London p r iv a t e b an k e rs from th e n o te is s u in g b u s in e s s by 1780*-*-0 I t was n o t u n t i l 1826 t h a t o th e r J o i n t - s t o c k banks w ere g ra n te d th e r i g h t o f i s s u e , and th e n o n ly i f th e y w ere e s ta b li s h e d o u ts id e a s i x t y - f i v e m ile r a d iu s from L o n d o n .^ The p ro m in en t p o s i t i o n o f th e Bank in E n g lan d was n o t im p a ire d s e r i o u s ly by th e e x te n s io n o f t h i s p r i v i l e g e to j o i n t - s t o c k banks, f o r in 1833 l e g i s l a t i o n was e n a c te d w hich d e c la r e d o n ly th e Bank’ s n o te s to be l e g a l ten d er.^* 2 F i n a l l y , th e fam ous B anking A ct o f 18M+ p r a c t i c a l l y e s ta b li s h e d th e B ank’ s s o le monopoly o f n o te ^ A n d read es, o p . c i t . . p p . 122-23* 9 i b i d . , p . l*+8. lO S m ith , o p . c i t . . p . 1 1 . H A n d re a d e s , o p . c i t . , p p . 253-55* t .tiS-Y 3 -2 I b i d . . p p . 2 5 9 -6 2 . is s u e w ith some qualifications.-^ in p a s s in g , it i s n o te d t h a t g o ld r e s e r v e s w ere k e p t a g a i n s t n o te s a t th e r a t i o o f one f o r o n e, w ith th e am ount o f th e f i d u c i a r y is s u e o u t s ta n d in g , b e in g d e te rm in e d by th e B anking A ct o f 18M+. The s p e c i a l p o s it io n o f th e Bank v i s - a - v i s o th e r banks due to p a r t i a l m onopoly o f n o te is s u e and th e g ra d u a l e x p a n sio n o f i t s f u n c tio n a s th e b an k er o f th e Governm ent r a i s e d i t to th e p o s i t i o n o f a c e n t r a l b a n k . The b an k in g o r g a n iz a tio n o f B r i t a i n , a t whose c e n te r th e Bank l a y , was in some s o r t o f w orking o r d e r , i f a l s o in r a t h e r u n h e a lth y g ro w th , by th e s e v e n te e n e i g h t i e s a t l e a s t , . . T h ere was th e c e n t r a l Bank, i t s monopoly d e fin e d by la w , i t s f u n c tio n s o n ly by custom $ th e London p r i v a t e b a n k s, no lo n g e r i s s u e r s , b u t g r e a t h a n d le r o f Bank o f E ngland n o te s , w hich th e y u se d to s e t t l e d a i l y b a la n c e s among th e m se lv e s in a w e l l - o rg a n iz e d c l e a r i n g s y s t e m .^ The te n d e n c y to keep l a r g e r b a la n c e s w ith th e Bank grew a s tim e w ent o n , and by th e f i r s t q u a r te r o f t h e 1 8 th c e n tu r y , th e Bank had a lr e a d y come to be re g a rd e d a s th e c u s to d ia n o f th e c a sh r e s e r v e s o f th e p r i v a t e banks and o f 13por a d e t a i l , s e e The B anking A ct o f 18M+ c o n ta in e d in T . E . G re g o ry 's , S e le c t S t a t u t e s . Documents and R e p o rts R e la tin g to B r i t i s h B an k in g . ~ l8 ^2-1928V V o l. T (L ondon: O xford U n iv e r s ity P r e s s , 1929*5, p p . 1 3 ^ -3 5 , ^ C la p h a m , o p . c i t . . p . 1 6 6 . 13 th e c o u n try ’ s g o ld r e s e r v e by th e same to k e n . ^5 I t was acknow ledged by th e Bank D ir e c to r s , a s e a r l y a s i n 1827 ? t h a t n o te s is s u e s sh o u ld be so managed in a p e rio d o f d e c lin in g g o ld r e s e r v e s , accom panied by a d e c lin i n g n o te c i r c u l a t i o n , t h a t th e s t a b i l i t y o f f o r e ig n exchanges w ould . be p r e s e r v e d .16 The i n t e g r a t i o n o f th e w hole B r i t i s h b an k in g o r g a n i z a tio n w ith th e Bank a s i t s c e n te r marked r a p id ad v an ces a f t e r . 1 8 3 0 . The new ly b o rn j o i n t - s t o c k banks opened a c c o u n ts w ith th e B ank, fo llo w in g th e t r a d i t i o n o f p r iv a te b a n k s . A cco rd in g to G reg o ry , rta C e n tr a l Bank in th e tr u e s e n s e d id a c t u a l l y e x i s t , **^7 th o u g h th e men o f 1 8 3 0 d id n o t ta k e a C e n tr a l Bank f o r g r a n te d . A c h a r a c t e r i s t i c o f th e le n d e r o f l a s t r e s o r t o f a c e n t r a l bank was a lr e a d y found in th e Bank d u rin g th e p a n ic o f 1825• nWe l e n t i t , ” s a id Mr. Harman, on b e h a lf o f th e Bank o f E n g lan d , H by e v e ry p o s s ib le means and in modes we had n e v e r a d o p te d b e f o r e ; we to o k in s to c k on s e c u r i t y , we p u rch ased E xchequer b i l l s , we made ad v an ces on E xchequer b i l l s , we n o t o n ly d is c o u n te d o u t r i g h t , b u t we made ad v an ces on th e d e p o s it o f b i l l s o f exchange to a n immense 15por some in d i c a t i o n o f t h i s f a c t , s e e Clapham , o p . c i t . . V o l. I I , p . 1 1 8 ; and a l s o E v id en ce o f John H o rs le y P alm e r. E s q ., G overnor o f th'e Bank o f E ngland (T u e s d a y ,“2 9 th May I 0 3 2 ) c o n ta in e d i n G reg o ry , o p . c i t . « p p . 3 -6 . l^ G re g o ry , o p . c i t . . p . x . I b i d . , p . x i v . ST] am ount, in s h o r t , by e v e ry p o s s ib le mean c o n s i s t e n t w ith th e s a f e t y o f th e Bank, and we w ere n o t on some o c c a s io n s o v er n i c e . S e e in g th e d r e a d f u l s t a t e in w hich th e p u b lic w e re , we re n d e re d e v e ry a s s i s t a n c e in o u r power.’’I® A n o th er-d ev elo p m en t was a new c l e a r i n g sy ste m , e s ta b li s h e d in 185*0 w here c l e a r in g by t r a n s f e r o f Bank n o te s was abandoned and c l e a r in g by t r a n s f e r o f cheques draw n on ban k ers* cheques from c o u n try banks was new ly i n s t i t u t e d . - ^ A f te r a lo n g p e rio d o f th e Bank*s r e lu c ta n c e to assum e th e r e s p o n s i b i l i t y o f th e le n d e r o f th e l a s t r e s o r t a p r i o r i , th e Bank f i n a l l y came to a c c e p t th e p o s i t i o n , to w hich B agehot*s c o n t r ib u t io n was g r e a t . The Bank began to make e f f o r t s to m a in ta in n o t o n ly th e c u rre n c y b u t a l s o th e c r e d i t sy stem o f th e c o u n try on a sound b a s is a s th e im por ta n c e o f d e p o s it b a rk in g grew . The la r g e am ount o f f o r e ig n d e p o s its in th e London money m ark et gave t&e Bank th e p o s i t i o n o f w o rld c a sh r e s e r v e d e p o s ito r y . The su c c e e d in g c r i s e s o f 18W-7, 1857> and 1 866, made th e Bank aw are o f d e f e c ts in th e B anking A ct o f 18M+. The Bank r e a l i z e d th e n eed f o r ta k in g s te p s in good tim e s to p r o t e c t g o ld r e s e r v e s l^ H a w tley W i th e r s , ( e d . ) , q u o te d from W a lte r B a g e h o t's Lombard S t r e e t (London: Jo h n M urray, 192*0, p . £ 2 . 19ciapham , o p . c i t . . V o l. I I , p p . 2 5 0 -5 1 . i s ; F u rth e rm o re , i t was a l s o r e a l i z e d t h a t th e Bank, in c e r t a i n c a s e s , c o u ld a l l e v i a t e f i n a n c i a l p a n ic by th e a s s u ra n c e t h a t a l l l e g i t i m a t e re q u ire m e n ts w ould be met by th e B ank, a lth o u g h a t te m p o ra rily h ig h e r r a t e s and w ith th e o b je c t o f l i m i t i n g th e demand f o r accom m odation t o th e m ost u r g e n t n e e d s ,2® The u s e o f th e Bank r a t e a s a n e s s e n t i a l in s tru m e n t o f c r e d i t p o lic y was now e s ta b li s h e d and th e e f f e c t s o f a h ig h Bank r a t e w orked two ways i n o rd e r to sav e r e s e r v e s : o n e , th e d e p r e s s in g e f f e c t on th e d o m e stic m a rk e t; th e o t h e r , e f f e c t o f in d u c in g f o r e ig n c a p i t a l , th e r e f o r e gold r e s e r v e s , to e n te r th e B r i t i s h money m a r k e t , ^ The Bank r a t e pro v ed i t s e f f e c t iv e n e s s in th e c r i s e s o f 1873 and 18 9 0 , w ith o u t r e s o r t i n g t o th e s u s p e n s io n o f th e B anking A ct o f lSM f. The c r i s i s o f I 8 9 O i s w o rth y o f n o te . A lth o u g h th e Bank d id n o t e x te n d d i r e c t r e s c u e t o th e O verend, Gurney and Company, in 1 8 6 6 , i t headed a s y n d ic a te , in 1 8 9 0 , to g u a ra n te e th e l i a b i l i t i e s o f th e B a rin g s . T h at was th e f i r s t e x p e rie n c e o f th e Bank in th e r e s c u e o f a f i n a n c i a l company 2® Bagehot, £ £ . c i t . , p p . 178-97* 21 I b i d . . p p . 172-17V . 16 | i n o rd e r t o p re v e n t a p a n ic ,22 The s u c c e s s o f th e Bank o f E ngland in th e s e c r i s e s and i t s c o n tr ib u tio n s t o t h e v i c t d r y in th e F i r s t W orld War n o t o n ly added to i t s p r e s t i g e b u t i t a l s o le d th e w o rld i n t o a new p e rio d o f c e n t r a l b an k in g d u rin g th e 1920*s . I t w ould n o t be a n e x a g g e ra tio n to sa y t h a t th e r e h a s n e v e r been su ch a b r i l l i a n t a g e in b an k in g a s th e 1 9 2 0 's when many c e n t r a l banks w ere new ly e s ta b li s h e d in a s h o r t p e rio d h e re an d t h e r e 2^ and num erous books on c e n t r a l banks and c e n t r a l b an k in g w ere published^ in a d d i t io n to many a r t i c l e s . I I . THE CONCEPT OF CENTRAL BANKING A lth o u g h d u rin g th e 1920*s th e c e n t r a l banks o f th e v a r io u s c o u n tr ie s te n d e d to fo llo w th e p a t t e r n a s h i s t o r i c a l l y s e t f o r t h above by th e Bank o f E n g lan d , th e r e w ere and a r e s t i l l s u b s t a n t i a l d if f e r e n c e s in t h e i r c o n s t i t u t i o n a l S tr u c tu r e s and in t h e i r s t a t u t o r y p o w ers. The c h a r a c t e r i s t i c s and pow ers o f each c e n t r a l bank have been d e te rm in e d n o t o n ly by th e h i s t o r y o f th e b an k , b u t a l s o by th e s ta g e o f i n d u s t r i a l i z a t i o n to w hich th e c o u n try op ^ G r e g o r y , o p . c i t . , p . x x x v i i i . 2 3 c e n tr a l banks e s ta b li s h e d d u rin g th e 1 9 2 0 's amounted t o 1 8 , m ost o f w hich w ere fo u n d i n th e n e w ly -c re a te d s t a t e s o f E urope and i n C e n tr a l an d S o u th A m erica. b e lo n g e d . F u rth e rm o re , th e d e f i n i t i o n o f w hat c o n s t i t u t e s c e n t r a l b an k in g h as v a r i e d . T h e r e f o re , i t i s n o t s tr a n g e to f in d v a r io u s c o n c e p ts o f c e n t r a l b a n k in g . An h i s t o r i c a l f a c t t h a t m ost c e n t r a l banks w ere e s ta b li s h e d u n d e r th e s tr o n g in f lu e n c e o f a governm ent and have been c l o s e ly r e l a t e d to i t h a s pro d u ced a c o n c e p t o f c e n t r a l b a n k in g : a c e n t r a l bank i s one w hich h o ld s g o v ern ment d e p o s its and fu n d s in g e n e r a l, d e a ls w ith governm ent p L - lo a n s and s e rv e s a s a f i s c a l a g e n t f o r a g o v ern m en t. ^ C e n tr a l banks a lm o s t w ith o u t e x c e p tio n have been e n jo y in g a s u b s t a n t i a l o r co m p lete monopoly o f n o te i s s u e . No w onder th e r e i s a co n c ep t o f c e n t r a l b an k in g w ith s p e c i a l r e f e r e n c e to i t . S m ith d e f in e s a c e n t r a l b an k in g sy stem a s one ” in w h ich a s i n g l e bank h as e i t h e r a co m p lete o r a r e s id u a r y m onopoly i n th e n o te i s s u e . . . w hich g iv e s i t th e power to e x e r c is e c o n tr o l o v er th e t o t a l am ount o f c u rre n c y and c r e d i t a v a i l a b l e . 1 * 2? . . A n o th er c o n c e p t o f c e n t r a l b an k in g r e g a r d s a c e n t r a l bank a s an i n s t i t u t i o n to h o ld and c o n se rv e th e c o u n try * s 2^H enry P a rk e r W i l l i s , The T heory and P r a c tic e o f C e n tr a l B anking w ith S p e c ia l R e fe re n c e to A m erican E x p e ri ence 1 9 1^-19^5 (New Y ork: H arp er and B ro th e rs P u b lis h e r s , 1 9 3 5 ), P . 7 . 2?S m ith , o p . c i t . . p p . ltyT'-US. s to c k o f g o ld r e s e r v e s . B agehot s tr o n g ly em phasized t h i s c o n c e p t i n h i s g i f t e d Lombard S t r e e t , T h ere i s no p r e c is e p a ssa g e w h ich e n d o rse s th e above s ta te m e n t b u t th e fo llo w in g s e n te n c e s a r e am ple enough. The Bank o f E n g lan d m ust k eep a r e s e r v e o f “l e g a l te n d e r '1 to be u se d f o r f o r e ig n paym ents i f i t s e l f f i t , and to be u se d i n o b ta in in g b u ll i o n i f i t s e l f u n f i t . . . In o rd e r to f in d su c h g r e a t sums ( o f b u l l i o n ) , th e Bank o f E n g lan d r e q u ir e s th e s te a d y u s e o f a n e f f e c t u a l in s tru m e n t ( th e Bank r a t e ) . 2° A way to c o n se rv e r e s e r v e s d u rin g a p a n ic , a d v o c a te d by B ag eh o t, i s f o r a c e n t r a l bank to le n d a s f r e e l y a s p o s s i b l e , y e t a t a n e x o r b i t a n tl y h ig h i n t e r e s t r a t e . A c e n t r a l bank sh o u ld be th e le n d e r o f l a s t r e s o r t . H aw trey s e i z e s on t h i s p o in t and d e f in e s a c e n t r a l bank a s s u c h . "The C e n tr a l Bank i s th e le n d e r o f l a s t r e s o r t . T h a t i s th e t r u e s o u rc e o f i t s r e s p o n s i b i l i t y f o r th e c u r r e n c y ," 27 A n o th er way o f d e f in in g c e n t r a l b an k in g i s t h a t i t i s b an k in g f o r b a n k e rs . J u s t a s a n in d iv i d u a l n ee d s to b o rro w , to d e p o s i t ite m s f o r c o l l e c t i o n o r a s a fu n d a g a i n s t / ' w h ich to d raw , o r t o p la c e money in s a f e t y , so a bank may a n d does f e e l e x a c tl y s i m i l a r n e c e s s i t i e s . A c e n t r a l bank ^ B a g e h o t, o p . c i t . . p . *+6. 2?G . R . H aw trey , "The A rt o f C e n tr a l B a n k in g ," The A r t o f C e n tr a l B anking (London, Longmans, G reen and Company, 193377 p . 1 1 6 . 19j s h o u ld , a c c o rd in g to t h i s d e f i n i t i o n , h o ld th e r e s e r v e fu n d s' f o r o th e r banks and d is c o u n t p a p e r f o r th em . " A ll im por t a n t c o u n t r i e s , ” sa y s H a r t, l,h av e 'c e n t r a l b a n k s '—w hich s ta n d i n much th e same r e l a t i o n to com m ercial banks t h a t com m ercial banks do to th e p u b l i c ." 2® Some o th e r ec o n o m ists s e e t h e - e s s e n t i a l f u n c tio n o f a c e n t r a l bank in th e m a in te n an ce o f t h e s t a b i l i t y o f th e m o n etary s t a n d a r d .29 The m a in te n an ce o f th e " c o n v e r ti b i l i t y ” o f a c o u n t r y 's c r e d i t i s th e m ain f u n c tio n o f a c e n t r a l b a n k . I t s d u ty i s fu n d a m e n ta lly in th e p u b lic i n t e r e s t and i s b e s t d e le g a te d t o a s in g le p u b lic i n s t i t u - r t i o n , in s t e a d o f b e in g d iv id e d among many banks w hose u se o f th e s e p r i v i l e g e s may c o n f l i c t w ith p u b lic w e lf a r e . A n o th er v iew p u ts em phasis on p o lic y o b je c tiv e s o f a c e n t r a l b an k . A cc o rd in g to t h i s , c e n t r a l b an k in g may be view ed a s a k in d o f b an k in g w hich m anages th e g e n e ra l s t r u c t u r e o f money, b an k in g and c r e d i t on b e h a lf o f th e com m unity w ith s p e c i a l a t t e n t i o n to a s t a b i l i z e d p r ic e sy s te m . Shaw sa y s t h a t : 2® A lb ert S a ilo r d H a r t, Money. D ebt and Econom ic A c t i v i t y (se c o n d e d i t i o n ; Hew Y ork: P r e n t i c e - H a l l , I n c . , I 9W ) , p . 9*f. 2 9 c . H . K isch and W. A. E lk in , C e n tr a l Banks (L ondon: M a cm illa n 'a n d Company, L t d ., 1 9 3 0 ), p . 7 ^ . 20i i i a t r u e C e n tr a l Bank h as a s i t s prim e f u n c tio n th e f i x i n g o f a d o m e stic d is c o u n t r a t e , an d in f i x in g su ch r a t e i t w i l l c o n s id e r p r im a r ily d o m e stic c o n d itio n s ( o f in d u s t r y , com merce, Governm ent f in a n c e , e t c . ) *3° In s p i t e o f th e s e v a r ie d d e f i n i t i o n s , i t w ould n o t he f a r from t r u t h t o s a y t h a t a t y p i c a l c e n t r a l bank o f th e 1 9 2 0 f s was th e key t o th e m o n etary and b a n k in g sy stem o f a c o u n tr y , and p erfo rm ed a l l o r m ost o f th e f o llo w in g fu n c tio n s f o r th e b e n e f i t o f th e c o u n try : th e r e g u l a t i o n o f c u rre n c y , b an k in g and f i s c a l s e r v ic e s f o r th e g o v ern m en t, th e c u s to d y o f d o m e stic and i n t e r n a t i o n a l r e s e r v e s , th e m a in te n an c e o f d o m e stic c r e d i t c o n d i tio n s , th e r e s p o n s i b i l i t y a s th e le n d e r o f l a s t r e s o r t , th e s e ttle m e n t o f c l e a r in g b a la n c e s among b a n k s , and th e c o n t r o l o f c r e d i t . • \ A lth o u g h th e r e w ere many doubts31 on th e p o s s i b i l i t y o f a c e n t r a l bank b e in g a b le t o s t a b i l i z e p r ic e l e v e l s and exchange r a t e s , r e l y i n g on th e r u l e s o f th e game, th e 1 9 2 0 *s co n c en su s seem ed to e n t r u s t th e c e n t r a l bank w ith su ch a d u ty , g iv in g i t th e power t o change th e r e d is c o u n t r a t e and t o c a r r y on o p en -m ark et o p e r a t io n s . 3 % . A. Shaw, The T h eo ry an d P r in c ip le s o f C e n tr a l B anking (London: S i r I s a a c P itm an and S o n s, L t d . , 1 9 3 0 ), p p . 139-ifO. 3^-For in s t a n c e , s e e T . E . G reg o ry , "What can C e n tr a l Banks R e a lly D o ,” A m erican Econom ic R eview . XV (M arch, 1925^ 53-59. 2lj i I I I . THE THEORY OF CENTRAL BANKING ! DURING THE 1 9 2 0 ’S The s i g n i f i c a n c e o f c e n t r a l b an k in g came t o i t s h e ig h t d u rin g th e 1 9 2 0 ’ s . 3^ I t was c o n s id e re d to be i n d i s p e n s a b le f o r s e c u r in g sound c r e d i t c o n d itio n s i n a c o u n try a s w e ll a s e f f e c t i n g r e a s o n a b le s t a b i l i t y o f p r i c e s . The p r i n c i p l e was sim p le th o u g h ’’n e v e r l a i d down in p r e c i s e te r m s .” 33 in e s s e n c e , c e n t r a l b an k in g was p u rs u in g d o m e stic c r e d i t p o lic y a c c o rd in g to th e r u l e s o f th e game. I f th e f ix e d r e l a t i o n b etw een n a t i o n a l c u r r e n c ie s and g o ld i s m a in ta in e d , s t a b i l i t y o f ex ch an g e i s s e c u re d and p r ic e s t a b i l i t y i s o b ta in e d , w hich i s e s s e n t i a l t o th e b e s t i n t e r e s t o f th e com m unity. The m a in te n an ce o f th e g o ld s ta n d a r d —an u n lim ite d o b l i g a t i o n assum ed by c u rre n c y a u t h o r i t i e s to buy and s e l l g o ld o r i t s e q u iv a le n t a t a f ix e d p r i c e — i s p erfo rm ed by th e c e n t r a l m o n etary a u t h o r i t i e s th ro u g h ch a n g in g th e r e d is c o u n t r a t e an d o p en -m ark e t o p e ra t io n s .3 ^ C r e d it p o l i c i e s sh o u ld be g u id e d by th e s t a t e o f 3 2 see R e s o lu tio n s P ro p o sed by th e Com m ission on C ur r e n c y and E xchange and A dopted U nanim ously by th e C onference a t i n t e r n a t i o n a l F ifla n c ia l C oniefrehce. JbrusS'el c o n ta in e d in The Recom m endations and the~A d p iic a tT o n V o l. 1 ( B r u s s e l: L eague o f N a tio n s , 1 9 2 2 ), p p . 2 2 3 -2 6 . 33Rag n a r N u rk se , I n t e r n a t i o n a l C u rren cy E x p e rie n c e : L esso n s o f th e In te r-W a r P e rio d (New ‘ Y ork: U n ite d N a tio n s , 1 W ) , P . 6 7 . ^ S e e K isc h and E lk in , o p . c i t . , p p . 2-5» th e g o ld r e s e r v e . A lth o u g h r e d is c o u n t p o lic y sh o u ld be made to m eet th e b u s in e s s n e e d , i t had to be w ith in th e l i m i t s s e t by th e g o ld r e s e r v e . C lo se c o rre sp o n d e n c e b e tw een th e s u p p ly o f money and th e volum e o f b u s in e s s was c o n s id e re d to be a c c o m p lish e d i f banks c o n fin e d t h e i r le n d in g to lo a n s w h ich w ere p r o d u c tiv e , s h o r t- te r m , and s e lf - liq u id a t in g .35 T h is p ro c e s s was more o r l e s s a u to m a tic . What a c e n t r a l bank had to do was to a c c e l e r a t e e q u i l i b r a t i n g movements i f d is e q u ilib r iu m c o n d itio n s w ere in d ic a te d by a change in th e g o ld r e s e r v e s . And t h i s p a s s i v i t y o f c e n t r a l b an k in g d e c i s i v e l y d e te rm in e d an i d e a l r e l a t i o n b etw een a c e n t r a l bank and i t s g o v ern m en t. 3 5 see Jo h n P ark e Young, The I n t e r n a t i o n a l Economy ( t h i r d e d i t i o n 5 New Y o rk : The R onald P re s s Company, 1 9 5 1 ), p p . 2 9 2 -9 3 . CHAPTER III RELATIONS BETWEEN THE CENTRAL BANK, THE GOVERNMENT, A N D THE SHAREHOLDERS I . RELATIONS OF THE CENTRAL BANK M A N A G EM EN T TO THE GO V ERN M EN T In d ep en d en cy o f th e c e n t r a l b a n k * The th o u g h t p r e v a i l i n g d u rin g th e 1 9 2 0 's on th e r e l a t i o n s h i p o f th e managem ent o f th e c e n t r a l bank t o th e governm ent was c l e a r l y e x p re s s e d in a r e s o l u t i o n a d o p te d i n 1 9 2 0 a t th e B r u s s e l I n t e r n a t i o n a l F in a n c ia l C o n fe re n c e : "B anks, and e s p e c i a l l y Banks o f I s s u e , sh o u ld be f r e e d from p o l i t i c a l p r e s s u r e and sh o u ld be co n d u c te d s o l e l y , i n th e l i n e s o f p ru d e n t f in a n c e T h ere i s no q u e s tio n a b o u t th e f a c t t h a t th e c e n t r a l bank o f a c o u n try h as a s p e c i a l r e l a t i o n s h i p to th e g o v ern m e n t. The e f f e c t s o f i t s r e d is c o u n t p o lic y and o p en - m a rk e t o p e r a tio n s on c r e d i t , g o ld r e s e r v e s , n o te i s s u e s , an d th e p u rc h a s in g power o f th e s ta n d a r d c u r r e n c y , a r e o f S ee B e s o lu tio n s P ro p o sed by th e Com m ission on C ur re n c y and E xchange and A dopted U nanim ously by th e C o n feren ce a t I n t e r n a t i o n a l F i n a n c ia l C o n fe re n c e . B r u s s e l c o n ta in e d in The Recom m endations an d t h e i r A p p lic a tio n V o l. I ( B r u s s e l; L eague o f N a tio n s , 1 9 2 2 ), p . 2 2 b . 2 b , i v i t a l c o n c e rn t o th e g o v ern m en t. F u rth e rm o re , th e v i c i s s it u d e s o f th e c e n t r a l bank a r e d i r e c t l y c o n n e c te d w ith th o s e o f th e governm ent b e c a u se o f i t s f u n c tio n s a s a b a n k e r and f i s c a l a g e n t f o r th e g o v ern m en t. N e v e r th e le s s , th e s t r o n g , in d e p e n d e n t c e n t r a l bank i s d e s i r a b l e f o r th e re a s o n s t h a t ; i f th e c o n t r o l o f th e o p e r a tio n s o f th e C e n tr a l Bank l i e s d i r e c t l y o r i n d i r e c t l y w ith tjie G overnm ent, i t becom es f a t a l l y e a s y f o r th e Governm ent to f in a n c e i t s e l f f o r a tim e by means o f book e n t r i e s and s h o r t lo a n s from th e Bank, a c o u rs e w hich i s th e f i r s t s t e p tow ard c u rre n c y d e p r e c ia t io n and i n c o n v e r t i b i l i t y . 2 an d t h a t : th e n e tw o rk o f f i n a n c i a l and com m ercial l i f e i s so i n t r i c a t e , and th e d e c is io n s o f th e Bank on im p o rta n t p o in ts h av e su ch w id e s p re a d r e s u l t s , t h a t a l l i n t e r e s t s a r e n o t a f f e c t e d in th e same w a y ... I f th e G overnm ent h a s a c o n t r o l l i n g in f lu e n c e o v er th e Bank, th e r e a r e o b v io u s ways by w hich th e more p o w e rfu l i n t e r e s t s i n th e c o u n try can t r y to e n fo rc e t h e i r w is h e s . The ro a d i s open f o r p o l i t i c a l i n t r i g u e , and th e r e can be no s a fe g u a rd t h a t th e p o lic y o f th e Bank w i l l be c a r r i e d on w ith o u t b ia s a s n a t i o n a l i n t e r e s t r e q u i r e . 3 Y e t, th e in d ep en d en ce i s s u b je c t to a q u a l i f i c a t i o n . F o r , i n an ex trem e n a t i o n a l em ergency, a l l governm ents h av e assum ed and o u g h t to assum e th e r e s p o n s i b i l i t i e s o f ^C. H . K isc h and W. A . E lk in , C e n tr a l Banks (L ondon: M acm illan and Company, L t d ., 1 9 3 0 ), p . 2 2 . 3lbid., pp.,22-2 3. 25 c o n t r o ll in g money and c r e d i t in o rd e r to prom ote th e b e s t n a t i o n a l i n t e r e s t . In su ch an em ergency,econom ic a c t i v i t i e s d o m e stic a s w e ll a s i n t e r n a t i o n a l , a r e o r d i n a r i l y so much d is tu r b e d by v a r io u s f a c t o r s t h a t th e p ro m o tio n o f th e b e s t n a t i o n a l i n t e r e s t th ro u g h g o v ern m en tal c r e d i t c o n tr o l by f a r e x c e e d s th e a d v a n ta g e s o b ta in e d by th e in d e p en d en c e o f th e c e n t r a l bank com plying w ith th e r u l e s o f th e gam e. The r e j e c t i o n o f th e c e n t r a l bank u t t e r l y s u b ju g a te d t o th e governm ent d o es n o t , how ever, mean t h a t th e g o v ern ment sh o u ld be i n d i f f e r e n t a l t o g e t h e r , e i t h e r a s to th e c o n s t i t u t i o n a l s t r u c t u r e o f th e c e n t r a l bank and i t s d i r e c t i o n , o r a s to th e g e n e r a l sh ap in g o f th e r e l a t i o n b etw een th e bank and th e g o v ern m en t. The co m p lete in d e pendence o f th e c e n t r a l bank i s p ro b a b ly an i d e a l t o w hich c o u n t r ie s can o n ly a p p ro x im a te i n d i f f e r e n t d e g r e e s , a c c o rd in g to t h e i r s t a t e o f econom ic d ev e lo p m e n t, t h e i r t r a d i t i o n s , and t h e i r s o c i a l s t r u c t u r e s . T h e re fo re , i t i s j n o t s tr a n g e t o f in d v a r io u s p a t t e r n s o f th e r e l a t i o n b e tw een th e governm ent and th e bank in c o n c re te c a s e s e x i s t i n g i n th e 1 9 2 0 's . I I . RELATIONS OF THE GOVERNM ENT AND THE CENTRAL BANK A M O N G LEADING COUNTRIES DURING THE 1 9 2 0 'S I T here a r e th r e e a s p e c ts i n w hich th e r e l a t i o n I shows u p : o w n e rsh ip , g o v e rn in g b o d ie s , and p r o f i t 26 d i s t r i b u t i o n . Owner s h i p . The q u e s tio n o f o w n ersh ip o f th e c e n t r a l bank i s n a t u r a l l y a s s o c ia te d w ith t h a t o f c o n t r o l . The in d e p e n d en c e o f a c e n t r a l bank i s m axim ized u n d er owner s h ip by th e g e n e r a l p u b lic or by th e com m ercial b an k s, and th e s u b o r d in a tio n to th e governm ent i s g r e a t e s t u n d er o w nership by th e g o v ern m en t. I t i s n o te d , how ever, t h a t no p r i v a t e o w n ersh ip i s so a b s o lu te a s to d is p e n s e w ith th e governm ent s h a rin g o f i t s p r o f i t s and l o s s e s . The Bank of E ngland was a j o i n t - s t o c k company e s ta b li s h e d by A ct o f P a r lia m e n t. The o r i g i n a l c a p i t a l was ^ 1 , 2 0 0 , 0 0 0 , w hich had been in c r e a s e d tc w ^ l1 + ,5 3 3 , 0 0 0 , by 1929• Any one c o u ld become a s h a re h o ld e r by th e o r d in a r y p ro c e s s o f buying i t s s to c k th ro u g h th e S to c k E x ch an g e.1 * The Bank o f F ra n c e was a l s o an o r d in a r y s h a re h o l d e r s ’ b an k , b u t a p a r t o f i t s o r i g i n a l c a p i t a l o f F r . 3 0 ,0 0 0 ,0 0 0 was s u b s c rib e d by th e T r e a s u r y .5 The c a p i t a l as o f 1929 was F r . 1 8 2 ,5 0 0 ,0 0 0 . 1 + R. S . S a y e rs , Modern B anking (London* O xford U ni v e r s i t y P r e s s , 1938)> P* 73- ^K enneth M ack en zie, The B anking S ystem s o f G re at B r i t a i n . F ra n c e . Germany, and th e U n ite d S t a t e s o f A m erica ( t h i r d e d i t i o n ; Londons M acm illan and Company, L t d ., 19*+7), p p . 1 2 8 -2 9 . 27 j The Bank o f Ja p a n was a j o i n t - s t o c k bank e s t a b l i s h e d by th e Bank o f Ja p a n A c t. The i n i t i a l c a p i t a l was Yen 1 0 , 0 0 0 , 0 0 0 , and th e a u th o r iz e d c a p i t a l , a s i t s to o d in 1929? was Yen 6 0 ,0 0 0 ,0 0 0 . A lth o u g h in d iv i d u a ls and c o rp o r a t i o n s c o u ld o b ta in s h a re s o f th e Bank, g o v ern m e n tal p e r m is s io n was r e q u ir e d i n ad v an ce in o rd e r t o a s s u r e th e z n a t i o n a l c h a r a c te r o f th e B ank. The Governm ent a c t u a l l y h e ld h a l f o f th e t o t a l c a p i t a l a t i t s commencement and th r e e y e a rs l a t e r i t t r a n s f e r r e d a l l s h a re s i t h e ld to th e Impe r i a l H o u se h o ld .7 From i t s e s ta b lis h m e n t, th e F e d e r a l R e se rv e System i n th e U n ite d S t a t e s h as b een u n lik e th e banks m en tio n ed a b o v e . Ho p a r t o f th e c a p i t a l h a s b een o r i s s u b s c rib e d e i t h e r by th e p u b lic o r th e G overnm ent, th o u g h th e o r i g i n a l F e d e r a l R e se rv e A ct d id p e rm it th e is s u e o f c a p i t a l t o th e g e n e ra l p u b lic and th e G overnm ent.^ The s to c k o f th e F e d e r a l R e se rv e Banks was and s t i l l i s s u b s c rib e d a c c o rd in g to th e c a p i t a l s to c k and s u r p lu s o f a member b a n k .9 E ach ^ S e i j i r o U sam i, rtThe Bank o f J a p a n ,° C o n c ise E co nom ic D ic t io n a r y . 7 9 ^ -9 6 . ?L o c. c i t . C f. K isc h an d E lk in , o p . c i t . . p . M+. ®Kisch and E lk in , p p . c i t . . p p . 7 and *+5. ^ F e d e ra l R e se rv e A ct o f 191^ w ith Amendments u p to 1928 (W ash in g to n , D . Cs U n ite d S t a t e s G overnm ent P r i n t in g O f f ic e , 1 9 3 0 ), S e e . 28 member bank m ust buy s to c k i n i t s F e d e r a l R e serv e Bank e q u a l t o t h r e e p e r c e n t o f i t s own c a p i t a l and s u r p lu s . G overning b o d ie s . I t was q u i t e n a t u r a l to presum e t h a t th e governm ent had some in f lu e n c e i n re g a rd to th e c o n s t i t u t i o n o f th e g o v e rn in g body o f th e c e n t r a l bank b e c a u se o f th e c a r d i n a l Im p o rtan ce o f th e l a t t e r i n th e eco n ay . B ecause th e E n g lis h Bank A ct was p a s se d a t a tim e when l a i s s e z f a i r e was m ost p o p u la r, th e Bank o f E ngland was c o m p le te ly in d e p e n d e n t o f th e G overnm ent, a t l e a s t on p a p e r. The a f f a i r s o f th e Bank w ere e n t r u s t e d w ith a C o u rt c o n s is tin g o f a G o v ern o r, a D ep u ty -G o v ern o r, and tw e n ty - f o u r D i r e c t o r s . JULthough i t was p u r e ly fo rm a l b u s in e s s , th e s to c k h o ld e r s e le c te d th e d i r e c t o r s f o r a y e a r a t th e s h a re h o ld e r s m e e tin g . In r e a l i t y , i t was s e l f - e l e c t i n g p r o c e s s . D ir e c to r s w ere e l i g i b l e f o r r e e l e c t i o n and th e n o rm al p r a c t i c e was to r e e l e c t them from y e a r to y e a r . The j t I G overnor h e ld o f f i c e f o r two y e a rs and was r e g u l a r l y su c ceeded by th e D e p u ty -G o v e rn o r.^ H is p la c e i n t u r n was ta k e n by th e o ld e s t D ir e c to r who had n o t h e ld o f f i c e . S e n i o r i t y among D ir e c t o r s , t h e r e f o r e , was a c o n t r o ll in g f a c t o r . The p re c e d e n t o f a G overnor s e rv in g o n ly two y e a rs 10Sayers, oj). c i t . , pp. 73- 7^ • was n o t fo llo w e d a f t e r 191*+. New D ir e c to r s were i n . f a c t co -o p te d by th e e x is t i n g C o u rts. The p o s itio n s were open n o t o n ly to a lim it e d c la s s o f e x e c u tiv e s (u s u a lly young men o f prom ise) o f C ity f in a n c ia l h ouses but even c e r ta in fo r e ig n e r s w ere e le c t e d d uring th e 1920 * 8 .1 1 No D ir e c to r co u ld be con n ected w ith a j o in t - s t o c k bank. A new con v e n tio n fo r ch o o sin g a Governor was formed a f t e r Mr. Montagu Norman occu p ied th e c h a ir fo r y e a r s , breaking th e p rev io u s r o u t i n e .! 2 The in j e c t io n o f te c h n ic a l knowledge in to th e Court was done through th e appointm ent o f o u t sta n d in g Bank o f f ic e r s a s D ir e c to r s and D eputy-G overnors.13 The Governor and two D eputy-G overnors o f th e Bank o f F rance were a p p o in ted by th e P r e sid e n t o f th e R ep u b lic on th e p ro p o sa l o f th e F inance M in is te r . None o f th e th r e e cou ld be members o f th e French P a rlia m en t. In th e G eneral C ou n cil th e y re p r ese n ted th e e x e c u tiv e power— “th e r ig h t o f cen su re and o p p o sitio n .* '!1 4 ' No s p e c if ie d term o f th e se Hjohn Clapham , The Bank o f E n g la n d . V o l. I I (Cam b r id g e : A t th e U n iv e r s ity P r e s s , 19l+5)> P* *+1® * 12S a y e r s , o p . c i t . . pp. 7*+-75« 1 3 i b i d . . pp. 7 7 -7 8 . l ^ o b e r t J . L em oine, “The B anking S ystem o f F ra n c e ,*1 F o re ig n B anking S y ste m s. H . P a rk e r W i l l i s and B. H. B eek h art ( e d . ) (L ondon: S i r I s a a c Pitm an and S o n s, L t d ., 1929)> P . 551- 30 | o f f i c e r s was l a i d down, hen ce th e y h e ld o f f i c e a t th e p le a s u r e o f th e P r e s id e n t o f F ra n c e , The G overnor d i r e c t e d a l l th e Bank*s b u s in e s s , and th e im p o rta n c e o f h is o f f i c e was s t r e s s e d by th e la w .3*5 The G e n e ra l C o u n c il c o n s is te d o f th e G o v ern o r, th e two D e p u ty -G o v e rn o rs, f i f t e e n R e g en ts an d t h r e e A u d ito r s , ch o sen by th e G e n e ra l A ssem bly o f th e Bank o f F ra n c e who w ere th e two h u n d red s l a r g e s t s h a r e h o ld e r s . O nly F re n c h c i t i z e n s w ere e l i g i b l e , and each R eg en t had t o own a t l e a s t t h i r t y s h a re s o f s to c k i n th e B ank. T h ree R e g en ts w ere ch o sen from th e T re a s u ry d i s b u rs in g a g e n ts , f i v e o f th e R e g en ts and th e t h r e e A u d ito rs i w ere ch o sen fro m s to c k h o ld e r s who w ere a c t i v e i n com m ercial ; and i n d u s t r i a l e n t e r p r i s e s , and one R eg en t had t o r e p r e s e n t a g r i c u l t u r e . Terms o f th e R e g en ts w ere f i v e y e a r s , and those o f A u d ito r s , th r e e y e a r s . The G e n e ra l C o u n c il was r e s p o n s i b l e f o r t h e a d m in is t r a tio n o f th e Bank and th e co n d u c t o f i t s b u s in e s s . The G e n e ra l A ssem bly had no s u b s t a n t i a l power e x c e p t th e one m en tio n ed above. 3*6 The G overnor o f th e Bank o f Ja p a n was a p p o in te d by th e G overnm ent on I m p e r ia l n o m in a tio n , and th e V ic e - G overnor w ith I m p e r ia l a p p ro v a l f o r f i v e y e a r s , b o th b e in g ■ ^K isch and E lk in , o p . c i t . . p . 2 6 3 . 3-^Lo c. c i t . 31 i e l i g i b l e f o r re a p p o in tm e n t. D ir e c to r s w ere a p p o in te d by th e F in a n c e M in is te r from tw ic e a s many c a n d id a te s e l e c t e d by th e G e n e ra l M eeting o f s h a r e h o ld e r s . The te rm o f o f f i c e was f o u r y e a r s . Members w ere e l i g i b l e f o r re a p p o in tm e n t. A u d ito rs w ere e l e c t e d a t th e G e n e ra l M eeting f o r th r e e y e a r s , and w ere e l i g i b l e f o r re a p p o in tm e n t. An A d m in is tra t i v e B o ard , c o n s i s t i n g o f th e G o v ern o r, V ic e -G o v e rn o r, and f o u r D i r e c t o r s , d e c id e d a l l m a tte rs r e l a t i n g t o th e Bank, in c lu d in g th o s e o f r e d is c o u n tin g , p u b lic lo a n s and b o n d s. I f th e G overnor c o n s id e re d th e d e c is io n o f th e A d m in is t r a t i v e B oard im p ro p er h e c o u ld c o n s u lt w ith th e G en e ra l C o u n c il c o n s is tin g o f th e G o v ern o r, V ic e -G o v e rn o r, D ir e c t o r s and A u d ito r s . He was a l s o o b lig a te d to r e p o r t a d e c is io n o f a n y m e etin g c o n s id e re d a s c o n tr a r y to th e A ct o r B y-law s t o th e G overnm ent. The G e n e ra l C o u n c il was e n t r u s t e d w ith th e b u s in e s s o f p r o f i t d i s t r i b u t i o n , i n t e r n a l r e g u l a t i o n s , e s ta b lis h m e n t o f b ra n c h e s and d e p o s its f o r s a f e k e e p in g , a l l o f w h ich w ere s u b j e c t to th e F in a n c e M in is te r * s a p p r o v a l. 17 B e sid e s th e s e o rg a n s , C o m p tro lle rs a c t i n g u n d e r th e d i r e c t i o n o f th e F in a n c e M in is te r s u p e rv is e d a l l m a tte rs c o n n e c te d w ith th e o p e r a tio n s o f th e B ank. 17Ibid.. pp. 306-307. 32 I The F e d e r a l R e se rv e S ystem o f th e U n ite d S t a t e s was o r i g i n a l l y u n lik e o th e r c e n t r a l b a n k s, c o n s is t in g o f a g ro u p o f tw e lv e F e d e r a l R e se rv e B anks, w ith a F e d e r a l % R e se rv e B oard a s a lo o s e c e n t r a l c o o r d in a to r o f th o s e B an k s. ° H ow ever, g r e a t e r c e n t r a l i z a t i o n o f p o w ers, th ro u g h o p en -m a rk et and o th e r o p e r a t io n s , w as u n d e r way by th e m id - tw e n tie s .^ 9 The F e d e r a l R e se rv e B oard c o n s is te d o f th e S e c r e ta r y o f th e T re a s u ry and C o m p tro lle r o f th e C u rren cy a s ex o f f i c i o m em bers, and s i x members a p p o in te d by th e P r e s id e n t w ith th e a p p ro v a l o f th e S e n a te , n o t more th a n one o f whom c o u ld come from an y one F e d e r a l R e se rv e d i s t r i c t . The P r e s id e n t was r e q u i r e d , i n m aking s e l e c t i o n , to h av e r e g a r d to f a i r r e p r e s e n t a t i o n o f f i n a n c i a l , a g r i c u l t u r a l , in d u s t r i a l an d co m m ercial i n t e r e s t s and g e o g ra p h ic a l d i v i s io n s o f th e c o u n tr y . The te rm o f th e s i x members was tw e lv e y e a r s . One o f th e s i x a p p o in tiv e members was d e s ig n a te d t>y th e P r e s id e n t a s G o v ern o r, “ th e a c t i v e e x e c u tiv e o f f i c e r ,* 1 an d one a s V ice -G o v e rn o r o f th e F e d e r a l R e se rv e B o a rd . The S e c r e ta r y o f T re a s u ry was e x - o f f i c i o C hairm an o f th e B o a rd . 1®G. L . B ach, F e d e r a l R e se rv e P o lic y M aking: A S tu d y i n G overnm ent Econom ic P o lic y F o rm a tio n (New Y ork: A lf r e d A . K nopf, 1 9 5 0 ), p . 6 . ^ I b i d . , p . 9> and a l s o s e e C. 0 . H ard y , C r e d it P o l ic i e s o f th e F e d e r a l R e se rv e S ystem (W ashington D. C .: B ro o k in g s T n s t i t u t i o n , 1 9 3 2 ), p p . l t f - 6o . 33 The F e d e r a l R e se rv e B oard was empowered to r e g u l a t e th e o p en -m a rk e t o p e r a tio n s o f th e F e d e r a l R e se rv e B anks, to re v ie w and d e te rm in e r e d is c o u n t r a t e s o f th e F e d e r a l R e serv e B an k s, to exam ine F e d e r a l R e se rv e Banks and member b a n k s, to p ro v id e r e d is c o u n tin g f a c i l i t i e s among o r b etw een th e F ed e r a l R e se rv e B anks, t o r e g u l a t e r e s e r v e s r e q u ir e m e n ts , t o r e g u l a t e F e d e r a l R e se rv e n o te is s u e and t o p e rfo rm o th e r s u p e r v is o r y and s e r v i c e a c t i v i t i e s . A F e d e r a l A d v iso ry C o u n c il was i n s t i t u t e d t o e x e r t a d v is o r y p o w ers, c o n s is tin g o f one r e p r e s e n t a t i v e fro m e ach F e d e r a l R e se rv e d i s t r i c t . The B oard o f D ir e c t o r s o f e a c h F e d e r a l R e se rv e Bank was empowered t o a d m in is te r th e a f f a i r s o f th e Bank u n d e r th e law an d th e s u p e r v is io n o f th e F e d e r a l R e se rv e B o ard . The B oard o f D ir e c t o r s o f e ach R e se rv e Bank c o n s is te d o f n in e m em bers, th r e e e l e c t e d by and r e p r e s e n t a t i v e s o f member b a n k s ; th r e e e l e c t e d a l s o by member banks from co m m ercial, a g r i c u l t u r a l an d o th e r i n d u s t r i a l c i r c l e s ; t h r e e d e s ig n a te d by th e F e d e r a l R e se rv e B o a rd , one o f whom was d e s ig n a te d by th e F e d e r a l R e se rv e B oard a s th e F e d e r a l R e se rv e A g e n t. The te rm o f o f f i c e o f e a c h D ir e c to r was t h r e e y e a r s . ^ P r o f i t s h a r i n g . The c e n t r a l b an k , a s th e n o te -issu in g 20The above f o u r p a ra g ra p h s s o l e l y r e l y on F e d e r a l R e se rv e A ct o f 191^ w ith Amendments u p t o 1 9 2 8 . ” o r g a n iz a tio n f o r a c o u n try , i s g iv e n a p r o f i t a b l e c o n c e s s io n o f a p u b lic n a t u r e . I t i s t h e r e f o r e a p p r o p r ia te f o r th e bank to s h a re i t s p r o f i t s w ith th e g o v ern m en t. P r o f i t s h a r in g i s a l s o u t i l i z e d t o s e c u re sound c e n t r a l b an k in g p r a c t i c e s , p re v e n tin g p r o f i t c o n s id e r a tio n from overw helm in g i t s b u s in e s s . In E n g la n d , th e governm ent d id n o t ta k e i n th e gen e r a l p r o f i t s o f th e B ank, b u t th e Bank o f E n g lan d made c e r t a i n s t a t u t o r y paym ents t o th e G overnm ent b e fo re 1 9 2 8 . The C u rren cy and M otes A ct o f 1928 p ro v id e d t h a t th e n e t p r o f i t s o f th e n o te c i r c u l a t i o n a r e p a y a b le in t h e i r e n tire ^ - t y t o th e E xchequer.^*- I n F ra n c e , th e G overnm ent le v ie d a n a n n u a l stam p t a x ! on a c e r t a i n p a r t o f i t s n o te c i r c u l a t i o n , i n a d d i t i o n to o th e r s p e c i f i c c o n t r i b u t i o n s . I n 1 9 1 8 , th e Bank was new ly o b lig a te d to pay a n am ount e q u iv a le n t to th e n e t e x c e ss d i s t r i b u t e d w henever i t p a id a n a n n u a l n e t d iv id e n d in e x c e s s o f F r . 2*+0 p e r s h a r e . The G overnm ent, f u rth e rm o re , b e n e f i te d from F r . 3 b i l l i o n f r e e ad v an ee a g a i n s t th e s e c u - r i t y o f a T re a s u ry b o n d . ^ A lth o u g h exem pt from s h a r in g i t s p r o f i t s w ith th e G overnm ent, th e Bank o f Ja p a n was r e q u ir e d t o pay a ta x 21K isc h and E lk in , o p . c i t . . p . HO. 2 2l q c . c i t . on i t s c o n v e r tib le n o te s Is s u e d a g a in s t s e c u r i t i e s a t th e r a t e o f one and o n e - f o u r th p e r c e n t p e r annum, e x c e p t on th o s e advanced a t an i n t e r e s t o f one p e r c e n t or l e s s o r w ith o u t i n t e r e s t to th e G overnm ent. 23 In th e U n ite d S t a t e s , th e F e d e r a l B eserv e Banks w ere o b lig a te d t o pay a s i x p e r c e n t d iv id e n d to th e s to c k h o l d e r s . Ten p e r c e n t o f a l l e a rn in g s o v er s i x p e r c e n t w ent i n t o a r e s e r v e f u n d , ^ and th e re m a in in g n in e ty p e r c e n t i n e x c e s s o f s i x p e r c e n t w ent i n t o th e U n ite d S t a te s T re a s u ry a s a f r a n c h i s e t a x . O ther r e l a t i o n s . C e n tr a l b an k s a s a m a tte r o f c o u rse m anaged th e governm ent a c c o u n ts and th e b u s in e s s c o n n e c te d w ith n a t i o n a l d e b ts and a c te d a s f i s c a l a g e n t f o r th e gov e rn m e n t, g e n e r a lly w ith o u t s p e c i f i c r e m u n e ra tio n .2 ^ They w ere a l s o g e n e r a lly r e q u ir e d to make v a r io u s r e p o r t s t o j i r\C g o v e rn m e n ts. ° i 2 3 i b i d . . p . 310; T o sh ih ik o Y o sh in o , **Tax on F id u c ia ry , Notes,** S tu d ie s on Our F in a n c ia l System (Tokyo: J its u g y o n o - N ip p o n sh a, 1 9 5 2 ), p p . lb 2 -h 6 . 2l+K is c h and E lk in , op,, c i t . , p . 51. 2^F or i n s t a n c e , se e i b i d . . p . 2 6 5 . 2^F or in s t a n c e , se e i b i d . . p p . 2*+5 and 3 1 3 . ............................... 3 6 : I I I . RELATIONS OF THE GOVERNM ENT AN D THE CENTRAL BANK A M O N G LEADING COUNTRIES AT PRESENT The G re a t D e p re s s io n , th e Second Weir Id Mar and th e p o stw a r d i f f i c u l t i e s h av e m arked g r e a t ch an g es i n th e r e l a t i o n s h i p o f th e tw o . A lth o u g h f o r m a liz a tio n s o f changes o c c u rre d in th e p o stw a r p e r io d , th e y had b ee n s t e a d i l y u n d e r way s in c e th e b e g in n in g o f th e 1 9 3 0 *s . 27 O w n ersh ip . A f te r lo n g d e b a te s an d s t u d i e s , th e Bank o f Canada A ct was e n a c te d i n 193^* Tk© t o t a l c a p i t a l o f th e Bank o f Canada o f $ 5 ?0 0 0 ,0 0 0 was s u b s c rib e d by th e p u b l i c . A lie n s and c h a r te r e d banks w ere p r o h ib ite d to h o ld s h a re s o f th e B ank. The v i c t o r y o f th e L ib e r a l p a r t y i n 1935 b ro u g h t a m a jo r ity o f th e s h a re s o f th e Bank u n d e r G overnm ent o w n ersh ip by a d d in g new c a p i t a l o f a n o th e r 1 5 ,0 0 0 ,0 0 0 i n o rd e r t o " g iv e th e G overnm ent a p red o m in a n t i n t e r e s t i n th e o w n ersh ip a s w e ll a s th e e f f e c t i v e c o n t r o l to th e B ank. " ^ T h is was m e re ly th e f i r s t s t e p to w ard co m p lete n a t i o n a l i z a t i o n o f th e B ank. In 1 9 3 8 , Mr K in g , on th e 2?F or a d e t a i l , s e e M ilto n L S to k e s , The D evelopm ent and P r e s e n t P o s itio n o f C e n tr a l B anking in Canada ( P h il a - d e l p h i a : 1 9 3 8 ) , p p . 27-1767" 2 8 i b i d . . p . 2 2 2 . ___________ b a s is o f p o l i t i c a l e x p e d ie n c y , p ro c la im e d th e co m p lete n a t i o n a l i z a t i o n o f th e B a n k .2^ The c a p i t a l was re d u c e d to th e o r i g i n a l am ount o f $ 5 ,0 0 0 ,0 0 0 , The M in is te r o f F in a n c e h o ld s th e s h a re s o f th e Bank and i t s c a p i t a l may be i n c r e a s e d from tim e to tim e . T h u s, th e p r e s e n t s t a t u s o f th e Bank o f Canada was fo u n d e d .3 ° The o w n ersh ip o f th e Bank known by th e name o f th e ‘’Old Lady o f T h re a d n e e d le S t r e e t 1 1 changed hands from p r iv a te c i t i z e n s t o th e G overnm ent in 19^5* On i t s a s su m p tio n o f pow er, th e L abor Governm ent s t a r t e d th e n a t i o n a l i z a t i o n o f th e Bank o f E n g lan d t o s e c u re th e f u l l c o o p e ra tio n o f th e E n g lis h b an k in g s o c ie ty i n an e f f o r t to f u r t h e r i t s f u l l em ploym ent p o l i c y . 3 -* - The Bank o f E n g lan d A c t, 19*+6 was e s t a b l i s h e d " to b r in g th e c a p i t a l s to c k o f th e Bank o f E n g lan d i n t o p u b lic o w n ersh ip an d b r in g th e Bank u n d e r p u b lic c o n t r o l . ” 32 The w hole o f th e e x i s t i n g c a p i t a l s to c k o f th e Bank was t r a n s f e r r e d to th e T re a s u ry in exchange f o r “G overnm ent S to c k s " b e a rin g th r e e p e r c e n t i n t e r e s t . 29 ib id . . p . 2 8 0 . 3 ° rh e s e two p a ra g ra p h s r e l y on i b i d . , p p . 1 7 7 - 2^ 7 * 3^-For a d e t a i l o f th e h i s t o r i c a l a t t i t u d e o f L abor to th e Bank o f E n g la n d , s e e R o b e rt A. B rad y , C r i s i s in B r i t a i n (B e rk e le y , C a l i f o r n i a : U n iv e r s ity o f C a lif o r n i a P r e s s , 1 9 9 0 ), p p . M f-5^. 32The Bank o f E n g lan d A c t. 19*4-6. 9 and 1 0 , G eorge V I, C h a p te r 2 7 . . ____ 38 The Bank o f F ra n c e s t a r t e d i t s c a r e e r as th e n a t i o n a l i z e d c e n t r a l bank in 19*+6 p r i o r t o th e n a t i o n a l i z a t i o n o f th e Bank o f E n g lan d . The n a t i o n a l i z a t i o n , th o u g h a p a r t o f an o v e r - a l l n a t i o n a l i z a t i o n p ro g ram , was m e re ly a f o r m a l i z a ti o n o f th e r e l a t i o n s h i p o f th e two w hich had e x is te d s in c e 1 936. At t h a t tim e , th e Bank had been th o ro u g h ly r e o r g a n iz e d to m eet th e re q u ire m e n ts o f th e G overnm ent and th e d e s i r e o f th e p u b lic f o r a d e f l a t i o n a r y p o l i c y . 33 The t o t a l c a p i t a l h e ld by th e p u b lic was t r a n s f e r r e d t o th e S t a t e i n ex change f o r n e g o tia b le bonds d e l iv e r e d by th e Bank. The bonds pay l e s s th a n two p e r c e n t i n t e r e s t . 31 * - In J a p a n , th e Bank o f Jap an was th o ro u g h ly r e o rg a n iz e d a t th e v e ry b e g in n in g o f th e Second W orld War a s an Im p o rta n t l i n k i n m o b iliz a tio n . As a r e s u l t , th e G overnm ent came t o h o ld more th a n h a l f o f th e t o t a l c a p i t a l o f th e Bank, Yen 5 5 ? 0 0 0 ,0 0 0 . How ever, s in c e F acism was o v erw h elm in g ly p o p u la r a t t h a t tim e , th e o w n ersh ip o f th e 3 3 s e e , M ack en zie, o p . c i t . , p . 1 2 9 . 3*+Law No. H-5-015 o f December 2 , 19*+5 re g a rd in g th e N a t i o n a l i z a t i o n o f th e Bank o f F ra n c e and th e L arge Banks and r e g a rd in g th e O rg a n iz a tio n o f C r e d it, c o n ta in e d in th e ^ F re n ch B anking N a ti o n a li z a t io n Law,** F e d e r a l R eserv e B u l l e t i n . XXXII (May, 1 9 ^ 6 ), p p . I+ 8 3 - 8F : 39 | Bank was k e p t n o m in a lly i n p r iv a te h a n d s .35 Even th e s u r r e n d e r and o c c u p a tio n o f Jap an and th e a c c e s s io n o f th e S o c i a l i s t p a r ty t o pow er d id n o t change th e o w n ersh ip o f th e Bank o f Ja p a n , w hich i s s t i l l n o m in a lly i n p r i v a t e h a n d s . The o w n ersh ip o f th e F e d e r a l R e serv e Banks have s u rv iv e d th e g r e a t h i s t o r i c a l e v e n ts s in c e th e end o f th e 1 920*s w ith o u t any c h a n g e . The B anking A ct o f 1933> how e v e r , r e q u ir e d th e R e serv e Banks to u se o n e - h a lf o f t h e i r ac c u m u late d s u r p lu s — $1 3 9 , 0 0 0 , 0 0 0 — t o p u rc h a s e non d iv id e n d p ay in g s to c k o f th e F e d e ra l D e p o s it In s u ra n c e C o r p o r a tio n . Today, n in e ty p e r c e n t o f n e t e a rn in g s o f th e F e d e r a l R e serv e Banks above s ix p e r c e n t a r e p a id i n t o th e U n ite d S t a t e s T re asu ry .3 & G overning b o d ie s . G overning b o d ie s , more th a n any th in g e l s e , show c l e a r l y th e ch an g es i n th e r e l a t i o n o f t h e c e n t r a l bank t o th e g o v ern m en t. By th e Bank o f Canada A c t, 193*+> th e Bank was u n d er t h e m anagem ent o f a B oard o f D ir e c to r s composed o f a 35T oshih ik o Y osh ino, M A H isto r y o f th e Bank o f J a p a n ,” o&. c i £ . , pp. 69-73* 3 % . H. S te in e r and E l i S h a p iro , Money and Banking ( th ir d e d it io n ; New York: Henry H olt and Company, 1953)> p p. 2 7 5 -7 7 . k o G o v ern o r, a D e p u ty -G o v ern o r, and se v en D ir e c t o r s w ith th e D eputy M in is te r o f F in a n c e a s a n ex o f f i c i o member w ith o u t v o te * The f i r s t t h r e e o f f i c e r s w ere to be a p p o in te d by th e , D ir e c t o r s w ith th e a p p ro v a l o f th e G o v e rn o r-in -C o u n c il f o r a te rm o f se v e n y e a r s . S even D ir e c t o r s w ere to be e l e c t e d from among d i v e r s i f i e d o c c u p a tio n s by th e g e n e r a l m e etin g o f th e s h a r e h o ld e r s f o r a te rm o f f i v e y e a r s . A lie n s and th o s e p o s i t i v e l y engaged i n p o l i t i c s w ere d i s q u a l i f i e d f o r th o s e o f f ic e s * The G overnor was th e c h i e f e x e c u tiv e o f th e Bank w ith a b s o lu te v e t o , and was e n t r u s t e d w ith a u t h o r i t y t o a c t i n c o n n e c tio n w ith th e c o n d u c t o f th e b u s in e s s o f th e Bank i n a l l m a tte rs n o t s p e c i f i c a l l y r e s e r v e d by th e A ct o r B y-law s f o r th e B oard o r th e E x e c u tiv e C om m ittee, o r a m e etin g o f th e s h a r e h o ld e r s . An E x e c u tiv e C om m ittee, c o n s is tin g o f th e G o v ern o r, D ep u ty -G o v ern o r, a D ir e c t o r s e l e c t e d by th e B o a rd , and th e D eputy M in is te r o f F in a n c e had a l l th e pow ers o f th e B oard when th e B oard was n o t in s e s s i o n . 37 The Bank o f Canada A c t Amendment A c t, 1 9 3 6 , a u th o r iz e d th e M in is te r o f F in a n c e to a p p o in t th e m a jo r ity o f th e D ir e c t o r s on th e a p p ro v a l o f th e G o v e rn o r-in -C o u n c il. The G o v ern o r’ s a b s o lu te v e to was s u b s t i t u t e d by a 37T hese two p a ra g ra p h s s o l e l y r e l y on Bank o f Canada A c t. 2 * 4 — 25? G eorge V ., C h a p te r V3 . s u s p e n s iv e v e to s u b je c t to th e a p p ro v a l o f th e G o v ern o r- in - C o u n c il. The Bank o f Canada A c t Amendment A c t, 1 9 3 8 , changed th e s t r u c t u r e o f th e g o v e rn in g body f u r t h e r w ith i t s t o t a l n a t i o n a l i z a t i o n , A new ly r e o r g a n iz e d Bank c o n s i s ts o f a G o v ern o r, a D ep u ty -G o v ern o r, and e le v e n D ir e c t o r s w ith th e D eputy M in is te r o f F in a n c e a s a n ex o f f i c i o member, The M in is te r o f F in a n c e i s a u th o r iz e d to a p p o in t D ir e c to r s f o r a te rm o f t h r e e y e a r s . D ir e c t o r s a r e e l i g i b l e f o r r e a p p o in tm e n t. 39 S in c e 1 9 3 8 , th e r e h a s been no change in th e o r g a n i z a t i o n . ^ In E n g la n d , th e N a t i o n a l i z a t i o n A ct o f th e Bank o f E n g lan d e s t a b l i s h e s th e new C o u r t,c o n s is ti n g o f a G o v ern o r, a D eputy G o v ern o r, an d s i x t e e n D i r e c t o r s . A l l th e s e o f f i c e r s a r e a p p o in te d by H is M a je s ty . The te rm o f o f f i c e s o f th e G overnor and o f th e D eputy G overnor i s f i v e y e a r s . The te rm o f th e D ir e c to r s i s f o u r y e a r s , an d fo u r o f them r e t i r e ea c h y e a r . A ll th e s e o f f i c e r s a r e e l i g i b l e f o r r e a p p o in tm e n t. Members o f th e H ouse o f Commons o r a l i e n s a r e 3 8 T h is p a ra g ra p h s o l e l y r e l i e s on Bank o f Canada A ct Amendment A c t. 1 9 3 6 . 1 , Edward V I I I , C h a p te r 2 2 . 3 9 T h is p a ra g ra p h s o l e l y r e l i e s on Bank o f Canada A ct Amendment A c t. 1 9 3 o . G eorge V I ., C h a p te r 1 +2. ^ S e e Bank o f Canada A ct a s i t s ta n d s a t p r e s e n t . n o t e l i g i b l e f o r th e s e o f f ic e s * "The T re a s u ry may from tim e to tim e g iv e su c h d i r e c t i o n s to th e Bank a s , a f t e r c o n s u lt a t i o n w ith th e G overnor o f th e B ank, th e y t h in k n e c e s s a r y i n th e p u b lic I n t e r e s t . " 1 ^ The C o u rt o f D ir e c to r s a r e i n c h a rg e o f m anaging th e a f f a i r s o f th e B ank, s u b je c t to th e a b o v e -m e n tio n e d T re a s u ry d i r e c t i o n s . The is s u a n c e o f d i r e c t i o n s to th e Banks, w h ich a r e deemed to be n e c e s s a r y f o r th e p u b lic i n t e r e s t , a r e s u b j e c t to th e a p p ro v a l o f th e T re a s u r y . 1 * ' 2 In F ra n c e , th e Bank o f F ra n c e Amendment A c t, 1936, r e o r g a n iz e d th e c o m p o sitio n o f th e G e n e ra l C o u n c il. A new ly r e o r g a n iz e d G e n e ra l C o u n c il I s com posed o f th e G o v ern o r, th e D e p u ty -G o v e rn o rs, tw e n ty C o u n c ilo r s , two o f whom r e p r e s e n te d th e s h a r e h o ld e r s , n in e r e p r e s e n te d th e econom ic and s o c i a l i n t e r e s t g ro u p s o f th e c o u n try , and n in e r e p r e s e n te d g o v ern m e n ta l f i n a n c i a l d e p a rtm e n ts and i n s t i t u t i o n s . Of th e tw e n ty C o u n c ilo r s , two r e p r e s e n t th e s h a r e h o ld e r s ; one th e N a tio n a l Econom ic C o u n c il; one S av in g s b a n k s ; one th e p e rs o n n e l o f th e Bank o f F ra n c e ; s i x N a tio n a l F e d e r a tio n o f C onsum ers' C o o p e ra tiv e s , G e n e ra l C o n fe d e ra tio n o f F re n c h A r t i s a n s , A ssem bly o f P r e s id e n ts ^ h e Bank o f E n g lan d A c t. 19*+6. A r t . b ( 1 ) . ^ 2T h is p a ra g ra p h h e a v ily r e l i e s on The Bank o f E n g lan d A c t. 19*t6. o f Chambers o f Commerce o f F ra n c e , G e n e ra l C o n fe d e ra tio n o f L a b o r, P erm anent A ssem bly o f P r e s id e n ts o f Chamber o f A g r i c u l tu r e , and P r o f e s s io n a l Com m ercial S e c tio n s o f th e N a tio n a l Econom ic C o u n c il, a l l o f them b e in g s u b j e c t to th e s e l e c t i o n by th e M in is te r o f F in a n c e ; th r e e th e M in is te r s o f F in a n c e , o f N a tio n a l Economy, and o f th e C o lo n ie s ; one th e F in a n c e S e c tio n o f th e C o u n c il o f S t a t e ; one th e Mouve- m ent G e n e ra l d es F o n d s; one th e C a is s e d es D ep o ts e t Con s i g n a t i o n s ; one th e C r e d it F o n c ie r ; one th e C r e d it N a tio n a l one th e C a is s e N a tio n a le du C r e d it A g r ic o le . The G e n e ra l C o u n c il o f th e Bank was a llo w e d to d e le g a te i t s pow ers to a p erm an en t c o m m itte e , c o n s is t in g o f th e G o v ern o r, th e D eputy G o v e rn o rs, an d f o u r C o u n c ilo r s , (o n e a p p o in te d by th e M in is te r o f F in a n c e from among th e ex o f f i c i o members and t h r e e a p p o in te d by th e G e n e ra l Council).^ A lth o u g h th e N a t i o n a l i z a t i o n A c t o f 19*^6 d id l i t t l e t o change th e G overnm ent-B ank r e l a t i o n s h i p , a n a d v is o r y N a tio n a l C r e d it C o u n c il e s t a b l i s h e d by th e same A ct p ro v id e d th e Bank o f F ra n c e w ith more p r e s t i g e and ch an ces to g e t i n c l o s e r to u c h w ith v a r io u s G overnm ental D ep artm en ts ^ T h i s p a ra g ra p h s o l e l y r e l i e s on Law M odifying and C o m p letin g th e Laws and S t a t u t e s w h ich G overn th e Bank o f F ra n c e c o n ta in e d i n th e ‘‘F re n c h F i n a n c ia l L e g i s l a t i o n , ” F e d e r a l R e se rv e B u l l e t i n . XXII (A u g u st, 1 9 3 6 ), p p . 7 0 5 - 7 0 7 . __n i and i n s t i t u t i o n s In J a p a n , s in c e th e Bank o f J a p a n A c t o f 19*+2 e x te n d e d g o v ern m e n tal c o n t r o l o v e r th e Bank to a n ex trem e d e g r e e , m aking n o t o n ly th e m anagem ent g o v e rn m e n ta lly a p p o i n t i v e , b u t a l s o deem ing a l l Bank em ployees a s g o v ern m e n ta l em p lo y ees, some am endm ents h av e b een m a d e . A n ew ly form ed P o lic y B oard c o n s i s t s o f se v e n m em bers: th e G overnor o f th e Bank o f J a p a n , two ex o f f i c i o members from th e M in is te r o f F in a n c e and th e Econom ic S t a b i l i z a t i o n B o a rd , two fro m f in a n c e (one from c o u n try b a n k in g , one from c i t y b a n k in g ), one fro m commerce and i n d u s t r y , and one fro m a g r i c u l t u r e . The l a s t f o u r members a r e a p p o in te d by th e C a b in e t w ith th e c o n s e n t o f b o th H ouses o f th e D i e t . The te rm o f th e a p p o in tiv e s i s f o u r y e a r s , and th e y a r e e l i g i b l e f o r re a p p o in tm e n t. The ch a irm an o f th e B oard i s e l e c t e d by th e m u tu a l v o te o f th e m em bers. The a p p o in tiv e members a r e p r o h i b i t e d from e n g a g in g i n p o l i t i c a l a c t i v i t i e s . The P o lic y B oard i s e n t r u s t e d w ith d u ti e s " to f o r m u la te , d i r e c t a n d /o r s u p e r v is e c u rre n c y r e g u l a t i o n , c r e d i t c o n t r o l and o th e r b a s ic m o n etary p o l i c i e s , p e r t a i n i n g to l ^ h i s p a ra g ra p h s o l e l y r e l i e s on Law Ho. ^ 5 - 0 1 5 .o p . c i t . ^ Y o s h in o , l o c . c i t . ^ forhe Bank o f Ja p a n Law. C h a p te r 1 - 2 , A r t . 1 3 - 2 .____ th e o p e r a tio n s o f th e b u s in e s s o f th e Bank, th e f u n c tio n s o f th e Bank o f Ja p a n a s th e c e n t r a l b an k , and i t s co n t r a c t u a l r e l a t i o n s w ith o th e r f i n a n c i a l i n s t i t u t i o n s in o rd e r t o m eet th e re q u ire m e n ts o f th e n a t i o n a l econom y. B e sid e s th e P o lic y B o a rd , a G o v ern o r, a D ep u ty - G o v ern o r, t h r e e D i r e c t o r s , two A u d ito r s , an d a few A d v iso rs a r e a p p o in te d to manage th e a f f a i r s o f th e Bank, com plying w ith a p o lic y d e te rm in e d by t h e P o lic y B o a rd . The G overnor an d th e D eputy G overnor a r e a p p o in te d by th e C a b in e t. D ir e c t o r s a r e a p p o in te d by th e M in is te r o f F in a n c e from among th o s e recommended by th e G o v ern o r. The te rm o f th e G overnor and D eputy G overnor i s f i v e y e a r s . T h a t o f D ir e c t o r s fo u r y e a r s , t h a t o f A u d ito rs th r e e y e a r s , and t h a t of A d v iso rs two y e a r s . B e sid e s th e v a r io u s re q u ire m e n ts o f th e a p p ro v a l o f th e M in is te r o f F in a n c e f o r s p e c i f i c b u s in e s s , th e Bank o f Ja p a n i s s p e c i f i c a l l y u n d e r th e s u p e r v is io n o f th e M in i s te r . He can M i f deemed p a r t i c u l a r l y n e c e s s a r y f o r th e a tta in m e n t o f th e o b je c t o f t h e Bank o f J a p a n , o rd e r t h e Bank to u n d e r ta k e an y n e c e s s a r y b u s in e s s , o r o rd e r a l t e r a t i o n s in th e By-Laws a s w e ll a s o th e r n e c e s s a r y a c t i o n s .* ^ 7 The C o m p tro lle r o f th e Bank o f J a p a n , u n d e r th e d i r e c t i o n o f * * 7 l b i d . . C h a p te r V I, A r t . h3 th e M in is te r i s i n c h a rg e o f s u p e r v is in g th e b u s in e s s o f th e Bank.**^ By th e U n ited S ta t e s Banking A ct o f 1935? th e F ed era l R eserve Board was a b o lis h e d and th e Board o f Governors o f th e F ed era l R eserve S ystem , w ith str o n g c e n t r a liz e d pow ers, was new ly e s t a b lis h e d . The S e c r e ta r y o f th e T reasury and th e C om ptroller o f th e Currency b ein g rem oved, th e Board i s composed o f se v en members ap p oin ted by th e P r e sid e n t w ith th e co n sen t o f th e S e n a te . The term o f o f f i c e i s fo u r te e n y ea rs and th e term s a r e so arranged a s to have but one new appointm ent ev ery two y e a r s , r e t i r i n g member n o t b ein g e l i g i b l e fo r rea p p o in tm en t. The P r e sid e n t a p p o in ts one member a s th e chairman and an oth er v i c e - chairm an. The term o f th e s e two o f f i c e s i s fou r y e a r s . In 1933j C ongress made s t a tu t o r y p r o v is io n s fo r an Open Market Committee (w hich had in t e r n a lly e x is t e d s in c e 1922) and made i t s o p e r a tio n s u b je c t to t h e g e n e r a l re g u la t io n s o f the B o a r d .^9 The Banking A ct o f 1935 changed th e membership o f th e Committee and gave i t th e power t o make F ed era l R eserve Banks comply w ith p o l i c i e s adopted by ^ T h i s p a ra g ra p h h e a v ily r e l i e s on th e Bank o f Ja n a n Law. ^ C h a r l e s L . P r a t h e r , Money and B anking ( f o u r th e d i t i o n ; C h icag o ! R ic h a rd D . I r w in , I n c . , 19*+9)j pp. V65- *f66. th e C om m ittee. The new C om m ittee c o n s i s ts o f th e se v e n members o f th e B oard o f G o vernors and f i v e r e p r e s e n t a t i v e s o f th e F e d e r a l R e se rv e B an k s. The Banking A ct o f 1935 a ls o p rovided th a t a P r e s i d en t and f i r s t v ic e - p r e s id e n t o f each F ed era l R eserve Bank a re ap p oin ted fo r a term o f f i v e y ea rs by th e Board o f D ir e c to r s o f th e Bank, s u b je c t to th e ap p roval o f th e Board o f Governor s . 50 P r o f i t s h a r i n g . R o t o n ly th e c o m p le te ly n a t i o n a l iz e d c e n t r a l banks b u t a l s o o th e r c e n t r a l b a n k s , a s th e p u b lic , n a t i o n a l c h a r a c t e r i s t i c o f th e c e n t r a l banks b e comes c l e a r l y r e a l i z e d , a r e su p p o sed to s h a re t h e i r p r o f i t s w ith th e governm ent a s a m a tte r o f c o u r s e . The Bank o f Canada i s r e q u ir e d to pay th e w hole o f s u r p lu s to th e R e c e iv e r G e n e ra l a f t e r d e d u c tin g p r o v is io n s f o r b u s in e s s r e q u ir e m e n ts , i n t e r e s t p ay m en ts, an d a r e s t fu n d ( s u r p l u s ) .53- In E n g la n d , th e n a t i o n a l i z e d Bank o f E n g lan d i s o b lig a te d to pay a n n u a lly t o th e T re a s u ry th e sum o f 5 0 rh e se th r e e p a ra g ra p h s h e a v ily r e l y on th e F e d e r a l R e se rv e A ct a s Amended to O cto b er 1 . 1935 (W ash in g to n , D .C : U n ite d S t a t e s G overnm ent P r i n t i n g O f f ic e , 1935)> S e c . 10 an d 1 2 . 53-Bank of Canada Act. Art. 28. hS 8 7 3 j l 80 o r su c h l e s s o r g r e a t e r sum a s may be a g re e d upon betw een t h e T re a s u ry and th e B a n k .52 In F ra n c e , a lth o u g h th e N a t i o n a l i z a t io n o f th e Bank o f F ra n c e Law p ro v id e d t h a t paym ent o f i n t e r e s t on n e g o t i a b le bonds d e l iv e r e d by th e Bank i s made by th e Bank u n d e r a g u a ra n te e o f th e T re a s u r y , th e p r o v is io n s o f p r o f i t d i s p o s a l were to be made by a law to be e n a c te d l a t e r .5 3 I n J a p a n , th e Bank o f Ja p a n i s r e q u ir e d to pay i t s p r o f i t to th e G overnm ent a f t e r f i v e p e r c e n t o r l e s s d iv id e n d s to th e s h a r e h o ld e r s and p r e s c r ib e d r e s e r v e s a r e d e d u c te d . 5 * + The F e d e r a l R e se rv e Banks w ere by th e B anking A ct o f 1 9 3 3 r e l i e v e d o f p a y in g a f r a n c h is e ta x in ex change f o r u s in g o n e - h a lf <of t h e i r a c c u m u la te d s u r p lu s t o p u rc h a s e n o n -d iv id e n d p a y in g s to c k o f th e F e d e r a l D e p o s it In s u ra n c e C o r p o r a tio n . H ow ever, in 19*+7j th e T re a s u ry in v o k ed th e a u t h o r i t y to le v y a n i n t e r e s t c h a rg e on F e d e r a l R e se rv e n o te s is s u e d t o th e R e se rv e Banks and n o t c o v e re d one h u n d red p e r c e n t by g o ld c e r t i f i c a t e c o l l a t e r a l , and b eg an to c o l l e c t a b o u t n in e ty p e r c e n t o f n e t e a rn in g s o f th e 5% he Bank o f E n g lan d A c t. 1 9 ^ 6 . A r t . I C*+). 53law No. 1+5-015 o f Decem ber 2 , 19*+5. A r t . 2 and 3 . 5% he Bank o f Ja p a n Law. A r t . 39• 1*9 F e d e r a l R e se rv e B anks. The re m a in in g e a rn in g s a r e tu rn e d i n t o s u r p lu s a c c o u n t a f t e r d e d u c tin g s ix p e r c e n t f o r d i v i d e n d s .55 Though th e p r o v is io n s o f th e law s r e l a t i n g to th e s e c e n t r a l han k s a r e d i f f e r e n t in d e t a i l , i n th e o p in io n o f t h i s w r i t e r th e p r i n c i p l e t h a t th e governm ent i s p r im a r ily e n t i t l e d to s h a re in th e e a rn in g s o f c e n t r a l banks i n c i d e n t a l t o t h e i r b u s in e s s i s , and ought t o b e , u n iv e r s a l l y a d o p te d and p r a c t i c e d . O ther r e l a t i o n s . T h ere i s no change w o rth y o f m e n tio n in g h e r e . IV . GENERAL OBSERVATIONS S u b ju g a tio n o f c e n t r a l b a n k s . The co m p ariso n o f c e n t r a l banks a t two d i f f e r e n t tim e s c l e a r l y shows s te a d y b u t s tro n g movements to w ard s th e co m p lete c o n t r o l o f c e n t r a l ban k s by th e p u b lic , e i t h e r th ro u g h n a t i o n a l i z a t i o n o r i n t e n s i v e a s w e ll a s e x te n s iv e i n t e r v e n t i o n by th e g o v e rn m e n ts. Why h a s th e in d e p en d en c e o f th e c e n t r a l b an k , w h ich was so o f te n ta lk e d o f and so w id e ly a c c e p te d a q u a r t e r o f a c e n tu r y ag o , b een f o r g o tt e n ? 5 5 ih is p a ra g ra p h h e a v ily r e l i e s on S te in e r and S h a p ir o , o p . c i t . , p p . 2 7 5 -7 7 . Some e c o n o m ists f in d an answ er i n th e f a c t s o f th e a b o l i t i o n o f th e g o ld s t a n d a r d ^ and o f i t s i n t e r n a l im p li c a t i o n s . As h as been m en tio n ed a b o v e ,57 th e c e n t r a l bank was m e re ly an i n s t i t u t i o n t o f o llo w th e r u l e s o f th e gam e. B ecau se o f i t s v e ry p a s s i v i t y , th e governm ent c o u ld le a v e th e c e n t r a l bank f r e e a s lo n g a s th e l a t t e r v o l u n t a r i l y c o o p e ra te d w ith th e fo rm e r w ith in th e ra n g e th e r u l e s o f th e game p e r m itte d a n d , i n f a c t , c lo s e c o n ta c ts b etw een th e two e x i s t e d . ’’The change in a t t i t u d e , ” sa y s K r iz , ’’to w ard th e r o l e o f governm ent o c c u rre d a s lo n g ago a s th e e a r l y t h i r t i e s , w ith th e abandonm ent o f th e g o ld s ta n d a rd d u rin g th e d e p r e s s io n and th e a d o p tio n o f a cheap money p o l i c y . ” 58 W ith th e g o ld s ta n d a rd g o n e, no sim p le r u l e s c o u ld be l a i d down. G uidance was n e c e s s a r i l y so u g h t from th e g o v ern m e n t. The cheap money p o l i c y , on th e o th e r h an d , gave th e g o v e rn m ent a v e s te d i n t e r e s t i n a l o w - i n t e r e s t m o n etary p o lic y and th e war f in a n c e e x ig e n c ie s a c c e le r a te d th e s e t r e n d s . A n o th er ec o n o m ist a t t r i b u t e s th e f a l l o f in d e p e n d en c e 56M iroslav A. K r iz , "Central Banks and the S tate Todav.” The American Economic Review. XXXVIII (SeDtember. 19W j p. 5 7 T . 57Cf. ante. . pp. 21-22. 58lCriz, op.» c i t . , p. 570 51 to th e r e a s o n t h a t "an a tte m p t to e s t a b l i s h U to p ia n r e s t r i c t i o n s , r i g i d i n th e o r y , b u t weak o r u n e n fo rc e a b le i n p r a c t i c e , i s u n r e a l i s t i c , **59 t h e r e f o r e , th e c e n t r a l bank sh o u ld be g u id e d in i t s r e l a t i o n s w ith th e governm ent by a r e a l i s t i c a p p r e c ia t io n o f what i s p o s s i b l e . A n o th er re a s o n may be found i n th e s p e c ia l s i t u a t i o n s t h a t a r o s e i n v a r io u s c o u n t r i e s . F or i n s t a n c e , th e i n t e n s i f i c a t i o n o f th e G overnm ent c o n t r o l o v er th e Bank o f F ra n c e , i n 1 936, would n o t have o c c u rre d i f th e Bank o f F ra n c e had n o t r e f u s e d c r e d i t t o th e T re a s u ry , w hich le d t o t h e G o v ern m en t's d o w n fa ll more th a n o n c e . A n o th er i n s ta n c e i s th e n a t i o n a l i z a t i o n o f th e Bank o f C anada. N a t i o n a l i z a t i o n o f th e Bank would n o t h av e happened i f th e demand f o r s o c i a l c r e d i t had n o t b een a f a c t o r t o be reck o n e d w ith .^ O D e s ir a b le r e l a t i o n s o f th e c e n t r a l bank t o th e g o v e rn m e n t. On th e w h o le, th e d ev elo p m en t o f c l o s e r r e l a t i o n s h i p s b etw een th e c e n t r a l bank and th e governm ent i s i n e v i t a b l e . But t h i s d o es n o t mean t h a t th e governm ent can ^ R o b e r t T r i f f i n , Monetary and Banking Reform in Paraguay (W ashington, D. C: Board o f G overnors o f th e F e d er a l R eserve System , 1 9 ^ 6 ), p . 73• ^ O sto k e s, 0£ . c i t . . p p . 2 3 8 - ^ 0 . o r sh o u ld d o m in ate th e c e n t r a l b an k . A cco rd in g to B a c h ^ and o th e r e c o n o m is ts ,^2 g o v ern m en t h a s , and h a s h a d , a te n d e n c y t o f o r g e t a sound m o n e ta r y - f is c a l p o lic y i n f a v o r o f one b ased on p o l i t i c a l e x p e d ie n c y . T h e r e f o re , th e governm ent sh o u ld n o t d o m in ate th e c e n t r a l b an k . N e v e r th e le s s , th e c lo s e c o o p e ra tio n i s so b a d ly needed t h a t t h e r e sh o u ld be some k in d o f l e g a l a rra n g e m e n t t o e f f e c t u a t e c o o p e ra tio n — f o r I n s ta n c e , th e e s ta b lis h m e n t o f a new N a tio n a l M o n e ta ry -F is c a l C o u n c il. ^ S e n a to r D ouglas r e p r e s e n t s a n o th e r s c h o o l o f th o u g h t. He c o n te n d s t h a t m o n e tary p o lic y can be c l e a r l y s e p a r a te d fro m d e b t p o li c y , f i s c a l p o l i c y , and th e r e s t o f th e g o v e rn m e n t’ s econom ic p o l i c i e s . T h e re fo re : p rim a ry pow er and r e s p o n s i b i l i t y f o r r e g u l a t in g th e s u p p ly , a v a i l a b i l i t y , and c o s t o f c r e d i t i n g e n e r a l s h a l l be v e s te d in th e d u ly c o n s t i t u t e d a u t h o r i t i e s o f th e F e d e r a l R e serv e S ystem , and t h a t T re a s u ry a c tio n r e l a t i v e t o money, c r e d i t , and t r a n s a c t i o n s in th e f e d e r a l d e b t s h a l l be made 6^-Bach, op., c i t . . p p . 2 0 8 -2 0 ; and a l s o G. L. B ach, "The F e d e r a l R e serv e and th e T r e a s u r y ,” H arv ard B u s in e s s R eview . XXIX (N ovem ber, 1 9 5 1 ), PP. 2 9 -3 9 . th o u g h t w hich p r e v a ile d d u rin g th e 1920*s s u rro u n d in g th e League o f N a tio n s sh o u ld be r e c a l l e d i n t h i s c o n n e c tio n . 63B ach, ’’F e d e r a l R e serv e P o lic y M ak in g ,” p p . c i t . . p p . 2 1 8 -1 9 . 53 c o n s i s t e n t w ith th e p o l i c i e s o f th e F e d e r a l R e se r v e . 6 * + The Patm an Com m ittee r e t r e a t s a l i t t l e fro m th e D o u g las C om m ittee*s p o s i t i o n . I t recommends t h a t th e F e d e r a l R e se rv e an d th e T re a s u ry n eed to be ro u g h ly co e q u a l i n s t a t u s , e a c h b a s i c a l l y r e s p o n s i b le f o r i t s own d e c is io n s b u t e a c h w o rk in g c o o p e r a tiv e ly . The P r e s id e n t s h o u ld s e e k t o c o o r d in a te th e econom ic p o l i c i e s o f th e Governm ent by d i s c u s s io n w ith a l l p a r t i c i p a t i n g a g e n c ie s , in c lu d in g th e F e d e r a l R e s e rv e . A cc o rd in g t o th e Patm an C om m ittee, a new e x p e rim e n ta l, c o n s u l t a t i v e N a tio n a l M o n e ta ry -F is c a l C o u n c il c o n s i s t i n g o f f i v e or so m ajor ag en cy h ea d s i s d e s i r a b l e . A c l e a r e r C o n g re s s io n a l d i r e c t i v e to th e F e d e r a l R e se rv e w ould be h e l p f u l in p ro v id in g a more r e a l i s t i c and r e s p o n s i b le b a se f o r e x e r c is e o f F e d e r a l R e se rv e in d e p e n d e n c e .^ In E n g lan d w here th e n a t i o n a l i z a t i o n w en t on w ith o u t ^ R e p o rt o f th e S ubcom m ittee on M o n etary . C r e d it and F i s c a l P o l i c i e s o f th e J o i n t C om m ittee on th e Econom ic R e p o r t. C o n g ress o f th e U n ite d S t a t e s , S l s t C o n g re s s, 2nd S e s s io n (W ash in g to n , D . Cj U n ite d S t a t e s P r i h t i n g O f f ic e , 1 9 5 0 ), re p ro d u c e d i n Law rence S . R i t t e r , Money and E co nom ic A c t i v i t y (B o sto n : H oughton M if f lin Company, 1 9 5 2 ), p . 2 0 8 . 6 % e p o r t o f th e S ubcom m ittee on G e n e ra l C r e d it Con t r o l and D eb t M anagement o f th e J o i n t C om m ittee on th e Econom ic R e p o r t. C o n g ress o f th e U n ite d S t a t e s , S2hd C o n g re s s, 2nd S e s s io n (W ash in g to n , D. C: U n ite d S t a t e s P r i n t i n g O f f ic e , 1 9 5 2 ), 5^! m e e tin g s e r io u s o p p o s i t i o n ,^6 a u n iq u e r e l a t i o n b etw een th e G overnm ent an d th e Bank o f E n g lan d i s e s t a b l i s h e d . A lth o u g h th e s h a re s o f th e Bank a r e t o t a l l y h e ld by th e G overnm ent, th e Bank o f E n g lan d A c t, 19*+6, p r e s c r ib e d th e r e l a t i o n v e ry w i s e ly . The T re a s u ry may, from tim e to tim e , g iv e su c h d i r e c t i o n s to th e Bank a s i t th in k s n e c e s s a r y i n th e p u b lic i n t e r e s t , b u t o n ly “a f t e r c o n s u l ta t i o n w ith th e G overnor o f th e Bank*"^7 T h ese w ords w ere d e l i b e r a t e l y i n s e r t e d a t th e r e q u e s t o f L ord C a tto , G overnor o f th e Bank o f E n g la n d . The u lti m a t e power seem s to r e s t w ith th e governm ent on p a p e r, y e t i t s power i s s t r i c t l y l i m i t e d by cu sto m . The d e c is io n t o r e t a i n th e th e n G o v ern o r, L ord C a tto , an d a n e f f e c t i v e C o u rt o f D i r e c t o r s , i n s t e a d o f r e p la c in g them c l e a r l y in d ic a t e d th e r e c o g n i tio n o f “ th e b a s ic m e r its o f th e p r e s e n t s y s te m .“ 68 And, u n d e r L ord C a tto 1s m anagem ent, “ th e fo rm a l change in reg im e h as been a c c o m p lis h e d , a s m ost in fo rm ed p e o p le e x p e c te d i t w ould b e , ^^Even th e h ead o f t h e o p p o s itio n p arly , C h u r c h ill m e n tio n ed t h a t n a t i o n a l o w n ersh ip o f th e Bank o f E n g lan d d o es n o t r a i s e an y m a tte r o f p r i n c i p l e and t h a t th e r e a r e im p o rta n t exam ples i n th e U n ite d S t a t e s and in our D om inions o f c e n t r a l b an k in g i n s t i t u t i o n s s i m i l a r l y owned an d o p e r a t e d . 6?The Bank o f E n g lan d A c t. 19*+6. A r t . ( 1 ) . 68"The- B a n * B i l l , " The E c o n o m ist. CXLIV (O c to b e r 1 3 , 19*+5), P . 5 3 2 . w ith o u t th e s l i g h t e s t h i t c h . ” 69 F u rth e rm o re , L ord C a tto was s u c c e e d e d , in 19**8, by C. E . C o b b o ld , fo rm e r D ep u ty - G o v ern o r, t r a i n e d u n d e r th e M ontagu Norman re g im e . H is a p p o in tm e n t gave th e C ity a s p e c i a l s e n s e o f s a t i s f a c t i o n w ith a lo n g fa m ily t r a d i t i o n o f b an k in g b e h in d h im .? 0 In summ ary, th e Bank o f E n g lan d s t i l l k eep s r e l a t i v e in d e p en d e n c e i n th e G overnm ent. Not I t s In d ep en d en ce seem s to be more th a n t h a t . The Bank o f E n g lan d an d th e G overnm ent, n o t th e m ere T re a s u r y , seem to be ro u g h ly c o e q u a l i n s t a t u s i n p r a c t i c e , th e fo rm e r r e p r e s e n tin g th e lo n g t r a d i t i o n o f th e C ity . Even i n Ja p a n w here th e Bank o f Ja p a n h as f o r i t s o b je c t th e c o n t r o l o f c r e d i t " p u r s u a n t t o th e n a t i o n a l p o l i c y , *'73- and w here th e M in is te r o f F in a n c e " m a y ... o rd e r th e Bank t o u n d e rta k e any n e c e s s a r y b u s in e s s , o r o rd e r a l t e r a t i o n s i n th e By-Laws a s w e ll a s o th e r n e c e s s a r y actions, "72 th e p r e s e n t G overnor Ieh iraad a h a s h e ld h is o f f i c e f o r a b o u t a d e c a d e 7 3 w h ile th e M in is te r o f F in a n c e 69»The New G o v e rn o r." The E c o n o m ist. C L V (O cto b er 16. p . 6 3 7 . ----------------------- 7C*rhe [Times, O cto b er 15) 19!*3. 7lT h e Bank o f Ja p a n Law, A r t . 1 . 7 2x,oc. c i t . 73The Bank o f J a p a n : H i s t o r i c a l S k e tc h (Tokyo: The Bank o f J a p a n , 1 9 $ 2 j, p . 7* y g i I has changed i t s head s e v e r a l tir o e s . By h is r e l a t i v e l y lo n g e x p e r ie n c e , th e Governor le a d s n o t o n ly th e P o lic y Board as an e le c t e d Chairman o f th e Board, but a ls o th e M in iste r o f Finance* in s p i t e o f p r o v isio n s in th e Law. T hus, governm ents have brought c e n t r a l banks under t h e ir c o n t r o l, and o n ly a few doubt i t s a p p r o p r ia te n e s s . D is c u s s io n s c e n te r around th e T rea su ry -C en tra l Bank r e l a t io n s h ip , n o t th e G overnm ent-C entral Bank r e la t io n s h ip . Is t h i s r ig h t? C e r ta in ly , th e T reasury has a ten d en cy to n e g le c t sound fis c a l-m o n e ta r y p o lic i e s , a s many have p o in ted o u t. Y e t, i s th e T reasury th e o n ly one w hich has su ch an i n c l i n a tio n ? I f , th e r e f o r e , th e government has a t i g h t c o n tr o l o f th e c e n tr a l bank, i t i s m ost l i k e l y th a t an unsound fis c a l-m o n e ta r y p o lic y may be pursued fo r p o l i t i c a l ex p e d ie n c y even i f th e c e n tr a l bank keeps about equalT O ice in th e governm ent w ith th e T rea su ry . The e s ta b lish m e n t o f a new c o o r d in a tin g o r g a n iz a tio n betw een th e T reasury and th e c e n tr a l bank, fo r in s ta n c e , a N a tio n a l Econom ic C o u n c il, even though th e f i r s t p o in t i s con ced ed , i s s u b je c t to a n o th er c r i t i c i s m . The c h a r a c te r i s t i c s o f governm ent o r g a n iz a tio n s b ein g what th e y a r e , th e new o r g a n iz a tio n would ten d to cla im a v o ic e betw een th e two as i t b u ild s new v e s te d i n t e r e s t s . T hus, th e new 57 o r g a n iz a tio n would b rin g in th e need to c o o r d in a te th e th r e e in s te a d o f m in im izin g th e d if f e r e n c e s o f th e tw o . Even i f th e new o r g a n iz a tio n sh ou ld work v e r y w e l l , i t s v ery s u c c e s s would ten d to make th e o r g a n iz a tio n as p ow erful a s th e T rea su ry , p lu s th e c e n t r a l bank, s u b je c tin g th e two to i t s e l f . T his i s u n d e sir a b le from th e v ie w p o in t o f adequate d is t r ib u t io n o f th e power among d ep a rtm en ts. There i s no d e n ia l th a t th e c e n tr a l bank should s e r v e th e p u b lic i n t e r e s t , n o t th e i n t e r e s t o f a group o f p e o p le . Y e t, th e su b o r d in a tio n o f the c e n tr a l bank even t o th e governm ent, n o t to th e T rea su ry , i s f u l l o f d anger, a s has been se en in many h i s t o r i c a l in s t a n c e s . The m ost d e s ir a b le form o f th e r e l a t i o n seem s to th e w r ite r to be one w hich se c u r e s th e r e a so n a b ly firm in d e pendence o f th e c e n tr a l bank from th e governm ent. As th e r e a r e checks and b a la n c es among th e l e g i s l a t i v e , j u d i c i a l , and a d m in is tr a tiv e b ra n ch es, so th e r e sh ou ld be checks and b a la n ces betw een th e government and th e c e n t r a l bank. Of c o u r s e , th e c e n t r a l bank sh ou ld n o t be a s in depend en t as th o se th r e e , but a t l e a s t i t sh ou ld be more in depend en t th an many th in k i t ought to b e . The B r it is h c a s e i s very s u g g e s tiv e in t h is p o in t. Though th e Bank i s s u b je c t even to d ir e c t io n s o f th e T reasury on p ap er, i t seems to b e , in p r a c t ic e , re a so n a b ly 58 in d e p e n d e n t o f th e G overnm ent, n o t t o sa y o f th e T re a s u r y . The G overnm ent h a s shown la r g e c o n s id e r a ti o n to w ard th e lo n g t r a d i t i o n o f th e C ity , and th e Bank h a s th u s k e p t th e in d e p e n d en c e o f th e Bank when i t was p r i v a t e l y owned. Bach a rg u e s t h a t s in c e * i t i s i m p l i c i t and e x p l i c i t i n o u r c o n s t i t u t i o n a l sy stem t h a t th e p u b lic sh o u ld u l t i m a te ly c o n t r o l our m o n e tary p o lic y th ro u g h p o l i t i c a l v o tin g f o r co n g ressm en and th e P r e s i d e n t , "71 * i t i s u n q u e s tio n a b le t h a t th e p u b lic sh o u ld c o n tr o l m o n etary p o li c y . Y e t, i t i s d o u b tf u l t h a t p u b lic c o n tr o l sh o u ld be o b ta in e d o n ly th ro u g h e l e c t i o n . M onetary p o lic y n e e d s a l o t o f t e c h n i c a l know ledge and i n s u l a t i o n from p a r t y p o l i t i c s . As S e n a to rs and C ongressm en come from th e d i f f e r e n t con s t i t u e n t s and y e t th e y e q u a lly r e p r e s e n t th e same p u b lic , t h e r e sh o u ld e x i s t some way t o r e p r e s e n t th e p u b l i c , above re q u ire m e n ts b e in g ta k e n i n t o c o n s i d e r a t i o n . As a m a tte r o f f a c t , th e Bank o f E n g la n d 's e f f o r t t o b ro ad en th e c irc le s i from w here D ir e c t o r s a r e r e c r u i t e d (n o t o n ly from f in a n c ia l! b u t a l s o from co m m ercial, i n d u s t r i a l c i r c l e s and q u it e r e c e n t l y from la b o r ) can be u n d e rs to o d a s p o in tin g t o t h a t ^ B a c h , "The F e d e ra l R e serv e and th e T r e a s u r y ," o p . c i t . . p . 3 8 . 59 end.75 The m ost im portant* th in g i s t o d is c o v e r a m ethod w h ich r e a s o n a b ly w e ll r e p r e s e n t s th e p u b l i c . i n a way d i f f e r e n t from o r d in a r y e l e c t i o n , y e t s u i t i n g t h e i r own s o c i a l - p o l i t i c a l c o n d i tio n s . Once i t was th o u g h t p o s s i b le t o r e p r e s e n t th e p u b lic th ro u g h s h a r e h o ld e r s by p ro v id in g many q u a l i f i c a t i o n s to th e e l i g i b i l i t y o f s h a r e h o ld e r s and t h e i r pow er, a s in C anada, i n 193^* Y e t, i t i s lo n g s in c e t h a t t h i s id e a h a s b ee n d is c a r d e d . By th e Bank o f Canada A ct, 1 9 3 8 , i t i s p rovid ed th a t , th e D ir e c to r s s h a ll be s e le c t e d from d iv e r s i f i e d occu p ation s. In F ra n c e , th e c o m p o s itio n o f th e G e n e ra l C o u n c il w e ll i n d i c a t e s th e p u b l i c , th o u g h g o v e rn m e n ta l r e p r e s e n t a t i o n lo o k s r a t h e r s tr o n g . I t h a s b een m a in ta in e d by some t h a t th e F re n c h a p p ro a c h d o es n o t r e p r e s e n t th e p u b lic , b u t m e re ly r e p r e s e n t s v a r io u s i n t e r e s t g ro u p s . Y e t, t h i s c r i t i c i s m f o r g e t s th e e s s e n t i a l n a tu r e o f dem o cracy , o r th e i n h e r e n t c h a r a c t e r i s t i c o f e l e c t i o n . The dem ocracy w hich e x i s t s a t p r e s e n t i s b ased on th e id e a t h a t a s lo n g a s e ach r e p r e s e n t a t i v e r e p r e s e n t s h i s own c o n s ti t u e n ts , he can r e p r e s e n t th e p u b lic th ro u g h a g g re g a te v o te s i n th e D ie t. 75see, Brady, op. c i t . , p. 59* 60 i In th e same w ay, th e o c c u p a tio n a l r e p r e s e n ta tio n , i f i t co v ers a number o f in t e r e s t groups la r g e enough, can r e p r e s e n t th e p u b lic through a g g r e g a te v o te s in th e G eneral C o u n c il. In Japan, th e same p a tte r n o f e f f o r t i s m a n ife st in th e co m p o sitio n o f th e P o lic y Board. A lthough Governmental r e p r e s e n ta tio n i s h ere al&o r a th er stro n g in number, i t i s m o d ified by ta k in g away v o te s from ex o f f i c i o members. In th e U n ited S t a t e s , th e P r e sid e n t i s in th e s e l e c t i o n o f members o f th e Board re q u ir ed to ch o o se no more than one from a s in g le F ed er a l R eserve D i s t r i c t and to a tte m p t t o se cu r e a s u it a b le r e p r e s e n ta tio n o f d if f e r e n t p a r ts o f th e co u n try and o f d if f e r e n t econom ic i n t e r e s t s , in c lu d in g a g r ic u lt u r e , in d u s tr y , commerce and f in a n c e . A ls o , each F e d e r a l R eserve Bank has to have th r e e B and th r e e C D ir e c t o r s , in a d d it io n t o th r e e A D ir e c to r s (bankers} In p a s s in g , i t must be n o ted th a t th e term o f most o f f i c e s ten d s to be lo n g e r than u sed to b e . T h is w i l l c e r t a in ly c o n tr ib u te to th e independence o f th e c e n tr a l bank. In sum, i t can be s a id w ith o u t much o b je c tio n th a t th e p a st q u a rter o f a cen tu ry has w itn e sse d th e e x te n s io n o f p u b lic c o n tr o l o f c e n tr a l banking power, and many e f f o r t s have been d ev o ted to fin d in g an ad eq uate system w h ich " ‘ 6 1 1 s e c u r e s th e p u b lic c o n t r o l w ith o u t to o many u n d e s ir a b le e f f e c t s in h e r e n t in th e s o - c a l l e d p o l i t i c a l c o n t r o l . T hese e f f o r t s a r e w o rth w h ile s i n c e . t h e n eed o f i n t e n s i f y i n g p u b lic c o n t r o l f u r t h e r i s m ost l i k e l y to be a d v o c a te d . Y. RELATIONS OF THE CENTRAL BANK TO THE SHAREHOLDERS The d ev e lo p m en ts o f th e c l o s e r e l a t i o n s h i p betw een th e c e n t r a l bank an d th e governm ent means g ra d u a l b u t s te a d y movements to w ard s th e co m p lete s e p a r a tio n o f th e s h a r e h o ld e r s o f th e c e n t r a l bank fro m th e m anagem ent o f th e c e n t r a l b a n k . I t w i l l n o t be n e c e s s a r y t o com pare pow ers o f th e s h a r e h o ld e r s in th e 1920*s and a t p r e s e n t . Even d u rin g th e 1920*s , i t was deemed to be a p p ro p r i a t e to r e s t r i c t th e s h a r e h o ld e r s ' pow ers i n o rd e r t h a t th e p o lic y o f th e c e n t r a l bank c o u ld n o t be c o n d u c te d from th e v ie w p o in t o f s h a r e h o ld e r s ' p r o f i t s , an d t h a t no p a r t i c u l a r group o f s h a r e h o ld e r s c o u ld be a b le to e s t a b l i s h p r e d o m in an t c o n t r o l . ^6 And e v e ry c e n t r a l bank s tr o n g ly r e s t r i c t e d th e power o f th e s h a r e h o ld e r s by cu stom ?? o r by ?6 K isch and E l k i n , o p . c i t . , p p . 6 ^ -6 6 . ??F o r i n s t a n c e , th e Bank o f E n g lan d b e fo re 19*+6, s e e H . E . B u tso n , "The B anking S ystem o f th e U n ite d K ing dom ," W i l l i s an d B e e k h a rt, o p . c i t . . p p . 1 1 5 1 -5 2 . 62 law . 78 A q u a r t e r c e n tu r y a f t e r 1 9 3 0 , th e Banks o f C anada, o f E n g la n d , an d o f F ra n c e changed to governm ent o w n e rsh ip . The Bank o f J a p a n Law do es n o t have an y p r o v is io n f o r a s h a r e h o ld e r s m eetin g and th e p o s i t i o n o f th e s h a r e h o ld e r s i s l i t e r a l l y th e same a s bond h o ld e r s and n o n -v o tin g common s t o c k h o l d e r s .7 9 T h u s, th e p ro b lem a s to how much v o ic e th e s h a r e h o ld e r s sh o u ld h av e in th e m anagem ent o f th e c e n t r a l banks h a s b een s o lv e d i n p r a c t i c e . I t w ould seem t h a t th e p r e s c r ib e d pow ers o f th e s h a r e h o ld e r s in v a r io u s bank a c t s a r e m e re ly a r e l i c o f th e p a s t . V I. CAPITAL, LEGAL LIQUIDATION O N DISSOLUTION, AND RESERVE FUND A u t h o r i t ie s i n c e n t r a l b an k in g s t a t e d , a t th e end o f th e 1 9 2 0 ‘ s , t h a t th e c e n t r a l bank s h o u ld h av e a d e q u a te c a p i t a l i n o rd e r n o t o n ly t o a c q u ir e b u s in e s s p re m is e s and e q u ip m e n t, b u t a l s o to g iv e c o n fid e n c e to th e d e p o s ito r s an d n o te h o ld e r s a s w e ll a s to p ro v id e f i n a n c i a l power f o r m aking i t s e l f f e l t i n th e money m a rk e t. And i t w as a l s o 7^For in s t a n c e , th e Bank o f J a p a n , s e e K isc h an d E l k i n , o p . c i t . , p . 3 0 8 . 79 jh e Bank o f Japan Law. .63! m a in ta in e d t h a t th e c a p i t a l o f th e c e n t r a l bank s h o u ld n o t be l a r g e enough t o l e t th e c e n t r a l bank make r i s k y i n v e s t m ent i n o r d e r to e a r n r e a s o n a b le p r o f i t s on t h a t am ount o f c a p i t a l . ^ B ut a m ere co m p ariso n a t two d i f f e r e n t tim e s o f th e c a p i t a l r a t i o t o o th e r m ain l i a b i l i t i e s (T a b le I ) o f some c e n t r a l banks ( s u b j e c t t o in e x a c tn e s s due to th e la c k o f a d e q u a te s t a t i s t i c s ) w ould seem t o show th e i r r e l e v a n c e o f th e c a p i t a l r a t i o t o th e above r e q u ir e m e n ts . Or r a t h e r l e t u s s a y , i t h as l a r g e l y l o s t i t s m eaning s in c e th e 1 9 2 0 's b e c a u se o f th e s u b o r d in a tio n o f th e c e n t r a l bank t o th e governm ent and th e a b o l i t i o n o f th e g o ld s ta n d a r d . P ro v is io n s f o r r e s e r v e fu n d s an d l e g a l l i q u i d a t i o n on d i s s o l u t i o n a l s o b e a r th e s ig n o f th e change i n th e i n t e n s i t y o f governm ent c o n t r o l , b u t i t seem s u n n e c e s s a ry to r e f e r t o th e s e h e r e . ^O K isch and, E lk in , o p . c i t . . p p . ^ 2 -^ 3 • 6k TABLE I CAPITAL RATIO TO MAIN OTHER LIABILITIES The The The The Bank Bank Bank Bank F e d e r a l o f o f o f o f R e se rv e Canada E n g lan d F ra n c e Ja p a n Banks 1929 o r 3 0 - 0 .0 3 8 0 .0 2 2 0 .0 6 7 0 .1 7 0 1953 o r 5k 0 .0 6 ^ 0 .0 0 9 6 0 .0 2 6 0 .0 8 1 0 .0 0 2 CHAPTER IV NOTE ISSUES AND RESERVES I . NOTE ISSUES AN D CREATION OF CREDIT BY THE CENTRAL BANK The two e s s e n t i a l re q u ire m e n ts o f l e g i t i m a t e n o te i s s u e s a r e e l a s t i c i t y an d s o u n d n e s s . The n o te c i r c u l a t i o n sh o u ld o p e r a te a u t o m a t ic a lly an d he c a p a b le o f ex p an d in g an d c o n t r a c t in g a c c o rd in g to th e l e g i t i m a t e c u rre n c y r e q u ire m e n ts o f b u s in e s s and th e g e n e r a l p u b l i c . On th e o th e r h a n d , s u c h e l a s t i c i t y s h o u ld n o t be enough t o w eaken th e s e c u r i t y o f th e n o te s and sh a k e p u b lic c o n fid e n c e o r f a c i l i t a t e th e c r e a t i o n o f un so u n d econom ic c o n d i tio n s . I t had b een f ir m ly e s t a b l i s h e d by th e 1920*8 t h a t o n ly th e m o n o p o lized n o te is s u e s by th e c e n t r a l bank c o u ld m eet th e s e two r e q u ir e m e n ts . G overnm ent is s u e i s l i k e l y to be u n d u ly i n e l a s t i c i f i t p u rs u e s a sound m o n etary p o lic y , y e t to o e l a s t i c an d unsound i f i t f in d s i t s e l f in f i n a n c i a l d i f f i c u l t i e s . T h e re i s a l s o th e c o n s ta n t menace o f o v e r - is s u e i f th e n o te is s u in g power i s e n t r u s t e d w ith co m p etin g co m m ercial banks w hose p rim a ry c o n s id e r a ti o n i s p r o f i t m aking .3- I t was a l s o re c o g n iz e d t h a t sound m o n etary c o n d i t i o n s , due to th e d ev elo p m en t o f d e p o s it b a n k in g , r e q u i r e r e s e r v e s n o t o n ly a g a i n s t n o te s b u t a l s o a g a i n s t d e p o s it l i a b i l i t i e s . The f a c t t h a t o ld e r c e n t r a l banks a r e n o t r e q u ir e d t o m a in ta in r e s e r v e s a g a i n s t d e p o s it l i a b i l i t i e s i s m e re ly a n h i s t o r i c a l a c c i d e n t . I t o n ly i n d i c a t e s th e f a c t t h a t l e g i s l a t i o n u s u a l l y la g s a lo n g way b e h in d th e o r y . p u rp o s e s , d o m e stic an d i n t e r n a t i o n a l . D o m e s tic a lly , th e y a r e d e s ig n e d t o g iv e n o te h o ld e r s a n a s s u ra n c e t h a t t h e i r n o te s a r e alw ay s c o n v e r t ib le i n t o la w f u l m oney, e s p e c i a l l y g o ld . I n t e r n a t i o n a l l y , th e y a r e su p p o sed to be a n i n s t r u m ent w h ich ch an g es d o m e stic m o n etary c o n d itio n s , a c c o rd in g t o i n t e r n a t i o n a l m o n etary c o n d itio n s th ro u g h ch an g es in r e s e r v e s , n am ely , g o ld h o ld in g .3 -kl. H. K isc h and W. A . E l k i n , C e n tr a l B anking (Londons M acm illan an d Company, L t d . , 1 9 3 0 ), p p . 7‘ + -76: and a l s o H enry P a rk e r W i l l i s , The T h eo ry an d P r a c t i c e o f C e n tr a l B anking w ith S x e c ia l R e fe re n c e to A m erican E x p e r i- (New Y o rk : H arp er an d B ro th e rs P u b lis h e r s , G old r e s e r v e s . R e se rv e re q u ire m e n ts h av e two ^ K isch and E l k i n , o p . c i t . . p p . 8 0 -8 2 . 3 i b i d . . p p . 8 8 - 9 0 . 671 F u rth e rm o re , th e r a t i o n a l e o f l e g a l re q u ire m e n ts f o r r e s e r v e s i s t h a t th e c e n t r a l bank ca n n o t be re g a rd e d a s i n f a l l i b l e I t i s t h e o r e t i c a l l y c o n c e iv a b le f o r th e c e n t r a l bank to r e g u l a t e n o te is s u e s r e a s o n a b ly , r e g a r d le s s o f th e s t a t e o f r e s e r v e s w ith o u t h u r tin g p e o p le s 1 c o n f i d en ce' i n i t s n o te s and to p a s s on th e i n t e r n a t i o n a l r e q u ire m e n ts to d o m e stic money m a rk e ts in a way o th e r th a n r e s e r v e re q u ire m e n ts * Y e t, i t was th o u g h t d e s i r a b l e to s e t a l i m i t to th e e x p a n s io n o f c u rre n c y an d c r e d i t t o a v o id e x c e s s iv e is s u e s and to p r e v e n t th e d ev elo p m en t o f u nsound econom ic c o n d i tio n s , w h ich may h ap p en b e c a u se o f t h e f a l l i b i l i t y o f th e c e n t r a l bank*s ju d g m e n t, r e q u ir in g th e c e n t r a l bank to m a in ta in a c e r t a i n am ount o f l e g a l r e s e r v e s As a r e s u l t , d o m e stic m o n etary p o lic y was made s u b j e c t to i n t e r n a t i o n a l m o n etary c o n d itio n s th ro u g h l i n k in g n a t i o n a l c u rre n c y t o g o ld o r i t s e q u i v a l e n t . In o th e r w o rd s, by c o n n e c tin g n a t i o n a l c u rre n c y to g o ld i n one way o r a n o th e r , i t was p r e f e r r e d t o m a in ta in a s t a b l e m o n etary s ta n d a r d , a s t a b l e ex change r a t e and a s t a b l e p r ic e s t r u c t u r e among th e v a r io u s c o u n tr ie s t o th e m a in te n a n c e o f * * I b id . , p p . 8 1 -8 2 5l o c , c i t . 68 ; d o m e stic p r o d u c tio n and em ploym ent, and th e a l l e v i a t i o n o f th e e f f e c t s o f o u ts id e sh o c k s on a d o m e stic econom y.^ O th er c o l l a t e r a l o f n o te s an d r e s e r v e s a g a i n s t d e p o s i t s . The e l a s t i c i t y o f n o te is s u e s an d d e p o s it l i a b i l i t i e s s e c u re d by ch an g es i n g o ld h o ld in g i s s tr e n g th e n e d by f i d u c i a r y is s u e s an d th e c r e a t i o n o r d e s t r u c t i o n o f c r e d i t s , b ack ed by e l i g i b l e p a p e r w h ich in c r e a s e o r d e c r e a s e a c c o rd in g to th e n ee d o f t r a d e and th e g e n e r a l p u b l i c , an d t h e i r so u n d e ss i s r e a s s u r e d by s t r i c t e l i g i b i l i t y re q u ire m e n ts f o r r e d is c o u n t an d c o l l a t e r a l b e h in d n o t e s , a s d e te rm in e d by law o r by d i s c r e t i o n . ? A lth o u g h th e s t a t e o f r e s e r v e s d u rin g th e 1 9 2 0 's was f a r fro m th e t h e o r e t i c a l r e q u ir e m e n ts ,^ th e id e a t h a t r e s e r v e s s h o u ld be o n ly g o ld and a p r o p o r ti o n a l am ount o f p a p e rs w h ich embody s h o r t - te r m , s e l f - l i q u i d a t i n g and p ro d u c tiv e lo a n s was w id e ly a c c e p t e d .9 c D S ee G eorge N. Halm , I n t e r n a t i o n a l M onetary Co o p e r a tio n (C h ap e l H ill., N o rth C a r o lin a : The U n iv e r s ity o f N o rth C a ro lin a P r e s s , 1 9 ^ 5 ), p . 2 1 . ^ W i l li s , o £ . c i t . , p p . 2*f8-53» ®The Bank o f E n g lan d c o u ld make lo a n s on v a r io u s k in d s o f s to c k s a t 1 /2 p e r c e n t h ig h e r r a t e th a n th e Bank r a t e , s e e W a lte r E a r l S p a h r, The F e d e r a l R e se rv e S ystem and th e C o n tro l o f C r e d it (New Y o rk : The M acm illan Company, 1 9 3 1 ), p p . 6 1 -6 2 . ^Kisch and E lk in , op. c i t . . p. 133* 6 9 1 i I t was th o u g h t p o s s i b le t h a t i f n o te i s s u e s and th e - c r e a t i o n o f c r e d i t a t th e c e n t r a l bank a r e l i m i t e d t o s h o r t te rm , s e l f - l i q u i d a t i n g and p r o d u c tiv e p u rp o se s a n d , f u r t h e r m ore, i f t h e i r maximum r a t i o to g o ld h o ld in g i s l e g a l l y d e te rm in e d , t h e r e w ould be no e x c e s s iv e e x p a n s io n o f c u r re n c y an d c r e d i t an d th e d ev elo p m en t o f un so u n d econom ic c o n d itio n s due to th e m is judgm ent o f th e central, b a n k .- ^ T h u s, th e a u t o m a t ie it y o f th e 1 9 2 0 's c e n t r a l b an k in g was f ir m ly e s t a b l i s h e d on th e g ro u n d s o f th e s p e c ie - f lo w th e o r y an d th e r e a l b i l l th e o r y . Y e t, r e g u l a t i o n s a s to r e s e r v e s v a ry c o n s id e r a b ly i n d i f f e r e n t c o u n t r i e s . E v ery c o u n try had d e v e lo p e d h e r own r e s e r v e r e q u ire m e n ts a d a p te d to h e r econom ic c o n d itio n s and s ta g e o f d e v e lo p m e n t. I I . RESERVE REQUIREMENTS AGAINST NOTES A N D DEPOSIT LIABILITIES DURING THE 1 9 2 0 'S C an ad a. E v e ry c h a r te r e d bank was p e r m itte d , u n d e r th e Bank A c t, to is s u e i t s own n o te s i n d e n o m in a tio n s o f $ 5 an d m u ltip le s t h e r e o f , t o th e l i m i t o f i t s p a id -u p c a p i t a l . A ta x o f one p e r c e n t was im posed by th e G overn m ent on t h i s i s s u e . D u rin g th e cro p -m o v in g s e a s o n th e banks m ig h t is s u e a d d i t i o n a l n o te s up to f i f t e e n p e r c e n t 10Jo h n P ark e Young, The I n t e r n a t i o n a l Economy ( t h i r d e d i t i o n ; New Y orks The R o n ald P re s s Company, 1951)* p p . 292-3* — 7 0 ; i o f t h e i r u n im p a ire d p a id -u p c a p i t a l and r e s t , on -which th e G overnm ent l e v i e d a f i v e p e r c e n t p e r annum i n t e r e s t c h a rg e . A f t e r 1 9 1 3 1 th e banks w ere a u th o r iz e d to is s u e n o te s in e x c e s s o f th e am ount p r e v io u s ly a llo w e d to an y am ount, p ro v id e d th e same am ount o f g o ld o r D om inion n o te s was d e p o s ite d w ith a B oard o f T r u s t e e s . The Bank A bt d id n o t p ro v id e f o r s p e c i f i c minimum c a s h r e s e r v e s , y e t th e banks w ere r e q u ir e d to m a in ta in f o r t y p e r c e n t o f t h e i r c a s h r e s e r v e s i n D om inion n o t e s . In t u r n , th o u g h th e D om inion n o te is s u e was b a s e d on th e Bank o f E n g lan d p r i n c i p l e o f a l i m i t e d f i d u c i a r y is s u e u p to 191*+ (when th e F in a n c e A c t, 191*+? was e n a c te d a s a w ar m e a s u re ), th e F in a n c e A c t, 1923> p ro v id e d t h a t th e M in is te r o f F in a n c e c o u ld m ake. a d v a n c e s o f D om inion n o te s t o th e c h a r t e r e d ban k s and to th e s a v in g s banks upon th e p le d g e o f a p p ro v e d s e c u r i t i e s , bonds an d co m m ercial p a p e rs .1^ T h e re was no i n d i c a t i o n t h a t th e T re a s u ry B oard r e g u la te d th e volum e o f th e D om inion n o te s e x c e p t by c h a rg in g r e l a t i v e l y c o n s ta n t i n t e r e s t r a t e s on a d v a n c e s o f th e n o t e s . I n sum, i n Canada th e r e w ere no l e g a l g o ld r e s e r v e s a g a i n s t th e D om inion n o te s n o r a g a i n s t bank n o t e s , and m ost c o l l a t e r a l o f th e D om inion n o te s c o n s is te d o f G overnm ent -^For th e k in d s o f c o l l a t e r a l in d e t a i l , s e e M ilto n L. S to k e s . The D evelopm ent and P r e s e n t. P o s itio n o f C en tra l Banking i £ UIRadA C g ^ m d e iTSTa-r i ^ )TT>fr.' f e -Xfr._ --------T . . . _ _ _ ^ I bonds an d s e c u r i t i e s in s t e a d o f r e a l b i l l s . In o th e r w o rd s, s o - c a l l e d c e n t r a l b an k in g d id n o t e x i s t i n C anada, th o u g h c e r t a i n f u n c tio n s o f a c e n t r a l bank w ere c a r r i e d o n , no d o u b t, by th e T re a s u r y , u n d e r th e F in a n c e A c t an d by th e c h a r te r e d b a n k s . N e ith e r th e s p e e ie - f lo w th e o ry n o r th e r e a l b i l l th e o r y was a p p lie d to C a n ad ian b an k in g p r a c t i c e s . And t h e i r d e f ic ie n c y c o u ld have b een p a r t l y a t t r i b u t e d to th e l a c k o f a c e n t r a l bank.*1 -2 N e v e r th e le s s , i t m ust h o t be f o r g o t t e n t h a t th e e f f o r t s t o e s t a b l i s h a m odern c e n t r a l bank b a se d on th e two p r i n c i p l e s were w e ll u n d e r way a t th e end o f th e 1920* s.-^ The Bank o f E n g la n d . The Bank r e e s t a b l i s h e d th e v i r t u a l m onopoly o f n o te is s u e by th e C u rre n c y an d Bank N o tes A c t, 1 9 2 8 , a f t e r th e i n t e r v a l o f a b o u t a d e c a d e . The A c t r e a f f ir m e d th e o ld p r i n c i p l e o f th e Bank o f E n g la n d f s n o te i s s u e —a l l n o te is s u e d o v er and above a f i x e d f i g u r e , / 2 6 O m i l l i o n i n 1 9 2 8 , w ere t o be c o v e re d one h u n d re d p e r c e n t by g o ld . H ow ever, a new c la u s e was a d d e d . A lth o u g h th e f i d u c i a r y is s u e was l i m i t e d to th e above f i g u r e , a n in c r e a s e c o u ld be e f f e c t e d i f " i t i s e x p e d ie n t. " I 1 * T hen, 12T hese f o u r p a ra g ra p h s r e l y on i b i d . , p p . 1 - 2 6 , 13S e e , i b i d . . p p . 1 3 -5 1 . % h e C u rre n c y and Bank N o tes A c t. 1 9 2 8 . A r t . 8 . 72 j th e Bank m ig h t a p p ly to th e T re a s u ry f o r p e rm is s io n to ex c ee d i t f o r a p e r io d o f n o t more th a n s i x m o n th s. The T re a s u ry had pow er to renew t h i s a u t h o r i t y , u n t i l two y e a rs had e la p s e d from th e tim e when i t was f i r s t g r a n te d , b u t s h o u ld th e Bank s t i l l d e s i r e a n in c r e a s e d f i d u c i a r y i s s u e , P a r lia m e n ta ry s a n c tio n was r e q u i r e d .3-5 The c o m p le te s e p a r a ti o n o f th e b a n k in g an d is s u e f u n c tio n s , e s t a b l i s h e d i n 18M+, was a l s o m a in ta in e d . In s p i t e o f th e f a c t t h a t n o te is s u e was s t r i c t l y lin k e d to g o ld movements a s m e n tio n ed a b o v e , no s t a t u t o r y r e s t r i c t i o n was im posed on b a n k in g r e s e r v e s , n a m e ly , d e p o s it l i a b i l i t i e s T h is gave a n e l a s t i c i t y i n t o th e E n g lis h m o n etary sy ste m w h ich o th e rw is e w ould h av e b een i n a r i g i d fra m e . The B ank’ s p r o p o r tio n ( th e p e rc e n ta g e o f th e g o ld r e s e r v e s t o d e p o s it l i a b i l i t i e s ) changed c o n s id e r a b ly from tim e to tim e .3-6 The c o v e r o f th e f i d u c i a r y is s u e c o n s is te d o f f o u r ite m s ; G overnm ent d e b t, o th e r G overnm ent s e c u r i t i e s , o th e r s e c u r i t i e s an d s i l v e r c o i n . A lth o u g h th e G overnm ent s e c u r i t i e s w ere p re d o m in a n t in v o lu m e, ( n i n e t y - f i v e p e r c e n t in 1 9 2 9 ), t h e r e was a te n d e n c y t o s u b s t i t u t e r e a l b i l l s l5 T h is p a ra g ra p h r e l i e s on K isc h and E l k i n , o p . c i t . . p p . and G re g o ry , o p . c i t . , p p . 385-91* *^ see W alter L e a f, Banking (Hew York: Henry H o lt and Company, 1 9 2 7 ), pp. M-1-H3* 73 fo r Government s e c u r i t i e s On th e o th e r hand, in th e Banking D epartm ent, th e Bank h eld , in 1929 > o n ly se v en and o n e -h a lf per c e n t o f th e t o t a l a s s e t in sh o r t-te r m , s e l f - l i q u i d a t i n g h i l l s — th e T reasu ry h i l l s and com m ercial h i l l s —y e t , th e Bank op era t io n s w ere c e n ter ed around th e s e a s s e t s . 1® T hus, th e r e a l h i l l th e o ry was in p r a c t ic e , n e v e r t h e le s s , i t must he k ep t in mind th a t th e Bank d id make a d v a n ces, a l s o , on th e c o l l a t e r a l o f s to c k exchanges and Government lo n g -ter m bonds To t h i s e x t e n t , th e r e a l h i l l th e o r y was in b rea ch . U n fo r tu n a te ly , th e r e i s n o t any a v a ila b le d ata to in d ic a t e i t s r a t i o in ‘‘D isc o u n ts and Advances .**20 The Bank o f F ra n ce. A lthou gh th e r e was no s t ip u l a t i o n reg a rd in g th e p ro p o rtio n o f n o te s to be co v ered by g o ld , and o n ly th e maximum n o te is s u e was f ix e d p r io r to !7 h . ¥ . G reen g ra ss, The D isc o u n t Market in London (London: S ir Isa a c Pitman and S o n s, L t d ., 193177 PP• 1^ 2- *+3; c f . ¥ . Manning D acey, The B r it is h Banking Mechanism (London: H u tchinson H ouse, 1 9 5 1 )V P* ^ G r e e n g r a s s , on . c i t . , pp. 1^+8-^9. ^ S p a h r , l o c . c i t . 20Benjam in H aggott B eck h a rt, The D isco u n t P o lic y o f th e F ed er a l R eserve System (New York: Henry H o lt and Company, 192*+), p . 33* 7b] 1 9 2 8 , th e Bank was r e q u ir e d t o m a in ta in a r e s e r v e in g o ld b u l l i o n o r c o in e q u iv a le n t to t h i r t y - f i v e p e r c e n t o f i t s n o te s i n c i r c u l a t i o n , and c u r r e n t d e p o s it l i a b i l i t i e s u n d e r th e Law o f 1 9 2 8 , when F ra n c e w en t on th e g o ld s ta n d a r d , I t th e same tim e , th e p re v io u s r e s t r i c t i o n s a s t o th e maximum is s u e w ere a b o l i s h e d .2* * - (T h is a l t e r a t i o n , h o w ev er, d id n o t change th e s u b s ta n c e o f h e r m o n etary sy ste m in p r a c t i c e . ) 22 The o r i g i n a l s t a t u t e s o f 1800 p ro v id e d t h a t : The n o te s s h a l l be is s u e d i n su c h p r o p o r tio n s by means o f th e s p e c ie r e s e r v e in th e c o f f e r s o f th e bank an d th e co m m ercial p ap e r i n i t s p o r t f o l i o , t h a t i t s h o u ld n o t , a t an y tim e , be f o rc e d t o su sp e n d th e paym ent o f i t s o b l ig a t i o n s . ( i t a l i c s a r e w r i t e r ’ s} 23 T h u s, th e r e a l b i l l th e o r y was a d o p te d a t th e v e ry b e g in n in g , th o u g h i t s p r i n c i p l e had b een o f te n e r i n b re a c h th a n in o b se rv a n c e b e c a u se o f u r g e n t n ee d s o f th e G overn m e n t. In 1 9 2 8 , th e b a la n c e s h e e t o f th e Bank showed t h a t a s l a r g e a s s i x t e e n p e r c e n t o f th e B ank’ s t o t a l a s s e t s w ere s h o r t - t e r m an d s e l f - l i q u i d a t i n g b i l l s . The Bank a l s o made a d v a n c e s on s e c u r i t i e s , y e t i t was i n s i g n i f i c a n t in 2^ T h is p a ra g ra p h r e l i e s on K isc h an d E l k in , o p . c i t .. p p . 83 and 26*+-5. 22S p a h r, o p . c i t . . p . 6 5 . O f to b e r t J . L em oine, "The B anking S ystem o f F r a n c e ,” F o re ig n B anking S y ste m s. H. P a r k e t W i l l i s an d B . H . B eck- h a r t , ( e d s • ) (L ondon: "S ir I s a a c P itm an and S o n s, L t d . , 1929)> P . 55 +5. ... _ . . 75 ! i v o lu m e .2^ F u rth e rm o re , th e Bank d id n o t make ad v a n ce s a g a i n s t th e c o l l a t e r a l o f s to c k s a s th e Bank o f E n g lan d d i d . 2 5 In p a s s in g , i t s h o u ld he n o te d t h a t th e Bank h e ld t h i r t y p e r c e n t o f i t s a s s e t s i n f o r e ig n e x c h a n g e s • T h is was a r e s u l t o f th e law s o f A u g u s t, 1 9 2 6 , w h ich p e r m itte d th e Bank t o is s u e n o te s a g a i n s t ex ch an g es in u n lim ite d q u a n t i t i e s .2 6 In sum th e Bank was i n p r i n c i p l e r u n on th e t h e o r i e s o f s p e c ie - f lo w and r e a l b i l l , a t th e end o f th e 1920*s . The- Bank o f J a p a n . The Bank m o n o p o lized n o te i s s u e . I t s n o te s w ere c o n v e r t ib le i n t o g o ld and a l l n o te s is s u e d o v e r a f ix e d f i g u r e , Yen 120 m i l l i o n , i n 1 9 2 8 , w ere t o be c o v e re d one h u n d red p e r c e n t by g o ld an d s i l v e r ( s i l v e r c o u ld n o t ex c ee d a q u a r te r o f th e t o t a l am ount o f s u c h a r e s e r v e ) . H ow ever, th e Bank was a llo w e d to is s u e n o te s i n . e x c e s s o f m e ta l r e s e r v e s and th e f i d u c i a r y is s u e when an in c r e a s e i n th e c i r c u l a t i o n o f money w as deemed n e c e s s a r y , 2^Jo h n T . M adden, e t a l . , The I n t e r n a t i o n a l Money M arket (Hew Y o rk : P r e n t i c e - H a l l , I n c . , 1935)? p . 3 1 0 . 2 5Lem oine, o p . c i t . . p . 5 3 8 . 2 6 E iea n o r L a n sin g D u lle s , The F re n c h F ra n c 191*fr- 1 9 2 8 : The F a c ts and t h e i r I n t e r p r e t a t i o n (Hew Y o rk : The M acm illan Company, 1 9 2 9 )V p 7 2 5 7 . ~~78| s u b j e c t t o th e a p p r o v a l o f th e M in is te r o f F in a n c e , a g a i n s t G overnm ent bonds o r T re a s u ry b i l l s and r e a l b i l l s . On th e s e n o t e s , a t a x o f n o t l e s s th a n f i v e p e r c e n t p e r annum was im p o sed . I t was a l s o p r e s c r ib e d t h a t th e Bank sh o u ld pay one an d o n e - q u a r te r p e r c e n t annum ta x on i t s c o n v e r t ib le n o te s u n d e r th e Law r e l a t i n g t o T a x a tio n on N ote I s s u e s o f 1899 T h e re was no s t i p u l a t i o n o f r e s e r v e s a g a i n s t d e p o s it l i a b i l i t i e s a t th e B ank. The c la u s e t h a t th e Bank s h a l l n o t engage i n b u s in e s s " t o make lo a n s on th e s e c u r i t y o f r e a l e s t a t e o r s h a r e s o f ban k s o r o th e r c o m p a n i e s ," 2 8 seem ed t o i n d i c a t e th e a d o p tio n o f th e r e a l b i l l th e o r y , th o u g h t h i s c la u s e had b een v i o l a t e d s in c e i t s commencement, due to th e l a c k o f enough p r i v a t e c a p i t a l to s u p p o r t th e r a p id d ev e lo p m e n ts o f th e Ja p a n e s e economy. ^9 The F e d e r a l R e se rv e S y ste m . In th e U n ite d S t a t e s , G overnm ent n o te s o f v a r io u s k in d s , n o te s o f a number o f n a t i o n a l ban k s and F e d e r a l R e s e rv e n o te s w ere i n 2 ? T h is p a ra g ra p h r e l i e s on K ise h and E l k in , o p . c i t . , p p . 83 an d 3 0 8 -1 0 . 9 ----- ^ The Bank o f Ja p a n A c t. A r t . 1 2 . 2 9 T o sh ih ik o Y o sh in o , "A H is to r y o f th e Bank o f J a p a i^ 1 S tu d ie s on Our F i n a n c ia l S y stem (T okyo: J its u g y o n o - N ip p o n sh a , 1 9 ^ 2 ), p p . 3 8 -3 9 . 77 i c i r c u l a t i o n , b u t t h e r e 3ms b ee n a s tr o n g te n d e n c y f o r th e F e d e r a l R e se rv e n o te s t o r e p la c e o th e r n o t e s . T h e r e f o r e , a t t e n t i o n i s h e r e e x c lu s iv e ly c e n te r e d aro u n d th e F e d e r a l R e se rv e S y stem and i t s n o t e s . F e d e r a l R e se rv e n o t e s , o b lig a tio n s o f th e U n ite d S t a t e s , w ere is s u e d a t th e d i s c r e t i o n o f th e F e d e r a l R e se rv e B oard f o r a d v a n c e s t o F e d e r a l R e se rv e Banks th ro u g h th e F e d e r a l R e se rv e A g e n ts . They w ere re d e e m a b le in g o ld o r la w f u l money and F e d e r a l R e s e rv e Banks w ere i n t u r n r e q u i r e d t o g iv e t o th e F e d e r a l R e s e rv e A g en ts c o l l a t e r a l f o r n o t e s ,i s s u e d to them . C o l l a t e r a l c o n s is te d o f g o ld o r g o ld c e r t i f i c a t e s , r e a l b i l l s , an d b an k ers* p ro m is s o ry n o te s c o v e re d by e l i g i b l e p a p e r o r G overnm ent bonds o r n o t e s . E v ery F e d e r a l R e se rv e Bank was r e q u ir e d t o h o ld f o r t y p e r c e n t a g a i n s t n o te s i n a c t u a l c i r c u l a t i o n i n g o ld o r la w f u l money a s minimum r e s e r v e s . On th e o th e r h a n d , th e F e d e r a l R e se rv e Banks w ere r e q u i r e d t o m a in ta in t h i r t y - f i v e p e r c e n t r e s e r v e s a g a i n s t d e p o s it l i a b i l i t i e s in g o ld o r la w f u l money, and th e r e s t in o th e r e l i g i b l e p a p e r and c o l l a t e r a l . B i l l s m e re ly c o v e rin g in v e stm e n t; o r draw n f o r p u rp o se o f co n v e y in g on t r a d i n g i n s e c u r i t i e s , e x c e p t G overnm ent bonds and n o t e s , w ere s p e c i f i c a l l y e x c lu d e d from th e e l i g i b i l i t y r e q u ir e m e n ts . B an k ers a c c e p ta n c e s w ere 78 | e l i g i b l e t o a l i m i t e d e x t e n t . A dvances to member banks on t h e i r f i f t e e n d ay p ro m is s o ry n o te s s e c u re d by e l i g i b l e p a p e r o r G overnm ent s e c u r i t i e s w ere a u t h o r iz e d . I n sum, th e F e d e r a l R e se rv e A c t em bodied th e t h e o r i e s o f s p e c ie - f lo w and r e a l b i l l , th o u g h t h e r e w ere a few p r o v is io n s w h ich d id n o t conform to t h e t h e o r i e s . Y e t, th e s e e x c e p tio n a l p r o v is io n s w ere m e re ly c a u tio u s o r n e c e s s a r y m easu res f o r p r a c t i c a l f l e x i b i l i t y . W hile p r a c t i c e s by th e F e d e r a l R e se rv e S y stem an d th e Banks d u r in g th e 1920*s and b e f o r e c a n n o t b e r e g a rd e d a s h a v in g fo llo w e d w hat th e s e d o c t r i n e s d i c t a t e d e x a c t l y , th e y m ust be r e g a rd e d a s d e v i a ti o n s due to th e n e e d s o f th e tim e and n o t a s t h e r e s u l t s o f ch an g es i n p r i n c i p l e . The r e a l b i l l th e o r y was c l e a r l y in d ic a t e d i n a p a ra g ra p h t h a t s t i p u l a t e d t h a t F e d e r a l R e se rv e Banks may, i n th e open m a rk e t: D ea l i n bonds and n o te s o f th e U n ite d S t a t e s an d b i l l s , n o t e s , re v e n u e bonds and w a r r a n ts up t o s i x m onths* m a tu r ity is s u e d i n a n t i c i n a t i o n o f c o l l e c t i o n o f ta x e s o r i n a n t i c i p a t i o n o f r e c e i p t o f a s s u r e d r e v e n u e s ..7 " ( I t a l i c s a r e w r ite r * s) 31 And th e f a c t t h a t th e F e d e r a l R e se rv e Banks b o u g h t o n ly r,o n e -d a y c e r t i f i c a t e s * ’ d i r e c t l y fro m th e T r e a s u r y , th o u g h 30T hese f o u r p a ra g ra p h s r e l y on K isc h an d E lk in , o p . c i t . , p p . 7 5 -8 2 and * k )l-5 . 31 Ibid.. p. *f 0 5. 7 9! th e A c t d id n o t p r o h i b i t d i r e c t p u r c h a s e s ,^2 e l e a r l y p o in te d to th e same p r i n c i p l e . The p r i n c i p l e s , h o w ev er, w ere doomed to be d is c a r d e d u n d e r th e sh o ck o f th e G re a t D e p re s s io n and i t s r e s u l t i n g e f f e c t s on th e A m erican f i n a n c i a l s y s te m . I I I . RESERVE REQUIREMENTS AGAINST NOTES A N D DEPOSIT LIABILITIES AT PRESENT The Bank o f C an ad a. I t was d e c id e d t h a t th e Bank o f Canada s h o u ld e s t a b l i s h th e m onopoly o f n o te is s u e s t e p by s t e p . The a b s o lu te m onopoly o f n o te is s u e by th e Bank was co m p leted by 1 9 5 0 j h a v in g e lim in a te d T re a s u ry n o te ' i s s u e an d th e c h a r t e r e d b a n k s ' n o t e s . N o tes is s u e d by th e Bank a r e l e g a l te n d e r and c o n s t i t u t e th e f i r s t l i e n upon a l l th e a s s e t s o f th e B ank. A lth o u g h Canada i s on th e g o ld b u l l i o n s ta n d a r d w ith th e f l a v o r o f th e g o ld ex ch an g e s ta n d a r d u n d e r th e Bank o f C anada A c t, th e g o ld b u l l i o n s ta n d a r d h a s b een su sp e n d ed s in c e th e B a n k 's com m encem ent. The Bank was r e q u ir e d t o m a in ta in r e s e r v e s a g a i n s t i t s o u ts ta n d in g n o te s an d d e p o s it l i a b i l i t i e s . The r e s e r v e s had to c o n s i s t o f g o ld in th e u n r e s t r i c t e d 32e . A. G o ld e n w e is e r, A m erican M onetary P o lic y (New Y o rk : .M cG raw -H ill Book Company, I n c . , 1 9 5 1 ), p p . 9 0 -9 1 io o tn o te * - - - - - - - 80 r o w n ersh ip o f th e Bank e q u a l to a n am ount n o t l e s s th a n , tw e n ty - f iv e p e r c e n t o f them . In a d d i t i o n , i t was a u t h o r iz e d t o h av e s i l v e r b u l l i o n and c e r t a i n f o r e i g n e x ch an g es to a l i m i t e d e x t e n t . The E xchange Fund O rder o f 19*+0, h o w ev er, p ro v id e d f o r th e te m p o ra ry s u s p e n s io n o f th e B a n k 's minimum g o ld r e s e r v e r e q u ir e m e n ts . A t th e w r i t t e n r e q u e s t o f th e B a n k 's B o a rd , th e G overnor in C o u n c il may su sp e n d th e r e s e r v e re q u ire m e n ts a s r e g a r d s g o ld . Such s u s p e n s io n , h o w ev er, may be f o r a p e r io d n o t e x c e e d in g s i x t y d a y s , b u t on th e f u r t h e r r e q u e s t i n w r i t i n g o f th e B a n k 's B o a rd , i t may be e x te n d e d from tim e t o tim e f o r f u r t h e r p e r io d s n o t e x c e e d in g s i x t y day s e a c h , p ro v id e d t h a t i f a s u s p e n s io n i s t o be lo n g e r th a n one y e a r , i t n e e d s th e san ctio n o f P a r lia m e n t. The r e s t - o f n o te s a n d d e p o s it l i a b i l i t i e s a r e c o v e re d by s e c u r i t i e s : a b o u t s i x t y p e r c e n t o f them a r e C an ad ia n g o v e rn m e n ta l s h o r t- te r m s e c u r i t i e s , and th e r e - * m a in in g f o r t y p e r c e n t c o n s i s t s o f C an ad ian g o v e rn m e n ta l lo n g - te r m s e c u r i t i e s , th e U n ite d S t a t e s d o l l a r an d th e U n ite d Kingdom pound f o r e i g n ex ch an g es and o th e r s e c u r i t i e s an d r e a l b i l l s . In sum , t h e r e i s no e s s e n t i a l d i f f e r e n c e b etw een th e 1920*s and th e 1 9 5 0 's i n so f a r a s l e g a l p r o v is io n s r e g u l a t i n g n o te is s u e s an d r e s e r v e s a r e c o n c e rn e d , e x c e p t th e e s ta b lis h m e n t o f th e Bank o f Canada i n 1935* Y e t, i t m ust n o t be o v e rlo o k e d t h a t th e n e g l e c t o f th e s p e c ie - f lo w and r e a l b i l l t h e o r i e s , d u r in g th e 1 9 2 0 's an d th e s u c c e e d in g p e r io d , was due t o th e d i s t u r b i n g e f f e c t s o f th e F i r s t W orld War an d o th e r c e r t a i n c o n d itio n s ( th e Bank o f Canada was e s t a b l i s h e d i n th e 1 9 3 0 's s o l e l y on th e b a s is o f s h o r t te rm f in a n c in g an d th e Bank a c t u a l l y d e v o te d i t s e f f o r t s t o d e v e lo p a s h o r t- te r m money m a rk e t i n th e f i r s t s e v e r a l y e a r s o f i t s b u s in e s s ) w h e re a s , by th e 1 9 5 0 ’ s , th e l e g i t im acy o f th e t h e o r i e s h as b ee n d i s c a r d e d . The o u ts ta n d in g i n d i c a t i o n i s th e s a l e o f g o ld by th e Bank to th e F o re ig n E xchange B oard and th e s u s p e n s io n o f th e B ank’ s g o ld r e s e r v e r e q u ire m e n ts an d a c t i v e i n t e r v e n t i o n in th e G overnm ent lo n g - te r m s e c u r i t y m a rk e t by th e Bank, 33 a n a e s p e c i a l l y th e B a n k 's p a r t i c i p a t i o n i n th e I n d u s t r i a l D evelopm ent Bank a f t e r 1 9 ^ 6 . The Bank o f E n g la n d . The U n ite d Kingdom w en t o f f th e g o ld b u l l i o n s ta n d a r d i n 1931# I t was done sim p ly by r e l i e v i n g th e Bank o f th e o b l i g a t i o n t o s e l l g o ld a t a f ix e d p r i c e . G old c o u ld move i n t o . an d o u t o f E n g lan d 33por a n i n d i c a t i o n , s e e The 22nd A nnual R e p o rt o f th e Bank f o r I n t e r n a t i o n a l S e ttle m e n ts ( B a s le ; Bank f o r I n t e r n a t i o n a l S e ttl e m e n ts , 1 9 5 2 ), p . 1 8 6 . I t w i l l be r e f e r r e d to a s The 22nd IBS A nnual R e p o rt h e r e a f t e r . 82 an d th e p r ic e o f th e pound i n g o ld f l u c t u a t e d f r e e l y . The e l a s t i c f i d u c i a r y n o te is s u e c la u s e w h ich a u th o r iz e d th e T re a s u ry to p e rm it th e Bank t o in c r e a s e i t s f i d u c i a r y n o te s a b o v e ‘ s * / 260 m i l l i o n h as b een u s e d o f te n s in c e th e f i n a n c i a l c r i s i s i n 1931 and th e f i d u c i a r y is s u e i t s e l f h a s b ee n in c r e a s e d from tim e t o tim e . 3^ The new p r i n c i p l e f o r th e r e g u l a t i o n o f th e n o te i s s u e i n th e A ct o f F e b ru a ry , 1939? was a n a t u r a l r e s u l t o f th e a b o l i t i o n o f th e g o ld b u l l i o n s ta n d a r d . I t p ro v id e d t h a t th e s i z e o f th e n o te i s s u e sh o u ld alw ay s be e q u a l to th e m a rk et v a lu e o f th e g o ld an d o th e r a s s e t s h e ld by th e I s s u e D e p a rtm e n t. The A c t p ro v id e d f o r a w eek ly v a l u a ti o n o f th e a s s e t s o f th e I s s u e D e p a rtm e n t, and f o r s e ttle m e n t b etw een th e Bank and th e E xchange E q u a l i z a t io n A cco u n t o f an y d i f f e r e n c e th u s r e v e a le d b etw een th e s i z e o f th e o u t s ta n d in g n o te is s u e and th e m a rk e t v a lu e o f th e a s s e t s h e ld a s b a c k in g . ^ The p a r t i a l f i d u c i a r y is s u e o f th e Bank was f o rm a lly te r m in a te d i n S e p te m b e r, 1939» by t r a x ls f e r r in g a l l th e g o ld e x c e p t a n o m in a l am ount to th e E xchange E q u a li z a t io n 3 ^ h i s p a ra g ra p h h e a v ily r e l i e s on Ma^or B. F o s te r e t a l . . Money and B anking ( f o u r t h e d i t i o n ; New Y o rk : P r e n t i c e - H a l l , I n c . , 1953)* P* 5 2 6 . 3 5cUr r ency an d Bank N o tes A c t. 1 9 3 9 . S e c . 2 . 83 A ccount in o rd e r t o c o n c e n tr a te th e c o u n t r y 's r e s o u r c e s in one r e s e r v e . S in c e th e n , th e Bank h a s been is s u in g i t s n o te s w ith o u t any re g a rd t o g o ld holdings. 3^ The f i d u c i a r y i s s u e s a s o f Ju n e 1 6 , 195^» i s < < 5 l,675 m il lio n , a l l o f w hich a r e backed by G overnm ent d e b t and s e c u r i t i e s (an d a t r i f l i n g am ount o f o th e r s e c u r i t i e s and g o l d ) . 3? A change h a s a l s o o c c u rre d i n th e n a tu r e o f c o v e rs f o r d e p o s it l i a b i l i t i e s o f th e B ank. The f i r s t Bank R e tu rn u n d e r th e C u rren c y and Bank N o tes A c t, 1 9 2 8 , showed te n p e r c e n t o f th e t o t a l a s s e t s o f th e B anking D ep artm en t was h e ld i n s h o r t- te r m b i l l s (" D is c o u n ts and A d v an ces") w h erea s, th e Bank R e tu rn , d a te d Ju n e 1 6 , 19 5**, shows t h a t o n ly two and o n e - h a lf p e r c e n t i s h e ld i n th e same k in d o f a s s e t s . In sum, a lth o u g h t h e r e h a s been no l e g a l change c o n c e rn in g e l i g i b i l i t y o f p a p e rs a s c o v e rs f o r n o te s and d e p o s it l i a b i l i t i e s , th e p r i n c i p l e w hich p e n e tr a te d th e \ Gold S ta n d a rd 'A c t o f 1925, and th e C u rren cy and Bank N otes i A c t, 1 928, s h o r t- te r m , s e l f - l i q u i d a t i n g , p r o d u c tiv e b i l l , i h a s b een d is c a r d e d and n o t o n ly th e T re a s u ry B i l l s te n d e re d i n a n t i c i p a t i o n o f re v e n u e s b u t a l s o th o s e te n d e re d to f in a n c e d e f i c i t b u d g e ts a r e a c c e p te d a s b a c k in g f o r n o te s 38young, op.* c i t . , p p . 6 6 6 - 6 7 . 37«Bank o f E ngland R e tu r n s ," The E c o n o m ist. CLXXI (J u n e 1 9 , 195*0, p . 1 0 1 1 . 8b ; and d e p o s it l i a b i l i t i e s . F u rth e rm o re , lo n g - te r m G overn m ent bonds a r e a l s o a c c e p te d a s c o n d itio n s r e q u i r e . The Bank o f F r a n c e . C u rre n c y s t a b i l i t y e s t a b l i s h e d i n 1 9 2 6 , ended i n 1936 a f t e r a lm o s t a d ec ad e o f p a i n f u l e f f o r t s . By a law o f O cto b e r 1 , 1 9 3 6 , th e p r o v is io n s o f th e m o n etary law o f Ju n e 2 5 , 1 9 2 8 , f i x i n g th e g o ld c o n te n t o f th e f r a n c an d r e q u i r i n g th e Bank to buy an d s e l l g o ld a t f ix e d p r i c e s , w ere s u s p e n d e d . T h is s t a r t e d th e s u c c e s s iv e d e v a lu a tio n s o f th e f r a n c . A t th e o u tb re a k o f th e Second W orld W ar, when a b o u t o n e - th i r d o f th e g o ld h e ld by th e Bank was t r a n s f e r r e d to th e E xchange S t a b i l i z a t i o n Fund a g a i n s t n e g o t ia b l e b i l l s w h ich m ig h t be s o ld o r r e p u r c h a s e d on th e open m a rk e t, th e bank was r e l e a s e d from th e o b l i g a t i o n to .m a i n ta in a t h i r t y - f i v e p e r c e n t g o ld c o v e ra g e a g a i n s t n o te s and o th e r d e p o s it l i a b i l i t i e s .38 S in c e th e n , t h e r e h a s n o t b ee n an y l e g a l r e s t r i c t i o n on tie am ount o f f i d u c i a r y is s u e an d th e c r e a t i o n o f d e p o s it l i a b i l i t i e s by th e B ank. The f i n a n c i a l b u rd e n s o f th e Second W orld W ar, o c c u p a tio n , and p o stw a r r e c o n s t r u c t i o n have b e e n im posed l a r g e l y on th e Bank i n th e fo rm o f c r e a t i n g new m oney. 38The 1 0 th IBS A n n u al R e p o r t, p p . l^ O - ^ l . 85 ' T h ere h a s b ee n no l e g a l change i n th e e l i g i b i l i t y o f p a p e rs a t th e B ank, y e t th e r e n u n c i a tio n o f th e r e a l b i l l th e o r y i s more th a n c l e a r i n p r a c t i c e . The G overnm ent h as a s k e d th e Bank t o f in a n c e i t s b u d g e t d e f i c i t s a s th e y o c c u r r e d . The G overnm ent h a s made i t a p r a c t i c e t o re p a y i t s d e b ts from p r o f i t s c r e a te d by th e r e v a l u a t i o n o f g o ld h e ld by th e B ank. And th e p r i v a t e s e c t o r a l s o h a s r e l i e d on th e Bank ev en f o r medium an d lo n g - te r m c r e d i t s . A p a s s a g e o f The 2 3 rd IBS A n n u al R e p o rt m e n tio n s t h a t " i n 1952 th e F re n c h banks had to a p p ly to th e Bank o f F ra n c e f o r th e r e f in a n c in g o f t w o - th ir d s o f th e medium an d lo n g te rm c r e d i t s g r a n te d d u rin g th e y e a r . "39 The Bank o f J a p a n . In D ecem ber, 1931? th e J a p a n e s e G overnm ent p u t a n em bargo on g o ld and a t th e same tim e r e l i e v e d th e Bank o f th e o b l i g a t i o n t o s e l l g o ld a t f ix e d p r i c e s . Though i t was su p p o sed t o be a te m p o ra ry m e asu re, th e Bank*s s u b s c r i p t i o n t o G overnm ent bonds t o f in a n c e a b u d g e t d e f i c i t in 1932 m arked th e b e g in n in g o f th e J a p a n e s e ch eap money p o l i c y . The f i d u c i a r y is s u e o f th e Bank was s im u lta n e o u s ly in c r e a s e d fro m Yen 120 m i l l i o n t o a s much a s Yen 1 ,0 0 0 m i l l io n i n o r d e r t o make th e s u b s c r i p t i o n l e g a l l y p o s s i b l e . S u c c e e d in g ly , th e f i d u c i a r y is s u e was 3% h e 2 3 rd IBS A nnual R e p o r t, p . 175* 86~ | in c r e a s e d t o Yen 1 ,7 0 0 m i l l i o n and Yen 2 ,2 0 0 m i l l i o n i n 1938 and in 1939> r e s p e c t i v e l y * F i n a l l y , th e s o - c a l l e d e l a s t i c f i d u c i a r y is s u e sy ste m was a b o lis h e d in 19*+1 in fa v o r o f a maximum l i m i t on is s u e d bank n o t e s , The new sy ste m o f a l e g a l maximum o f n o te s was made perm an en t by th e Bank o f J a p a n Law, 19*4-2. The Law sim p ly p r e s c r ib e s t h a t t h e ttBank o f J a p a n i s a u th o r iz e d to is s u e b a n k - n o te s .1 1 ^ 0 T h ere i s n o t p r o v is io n f o r th e c o n v e rs io n o f th e n o t e s • A maximum l i m i t f o r th e b a n k -n o te is s u e i s d e te rm in e d by th e M in is te r o f F in a n c e upon a p p ro v a l o f t h e C a b in e t, and i t i s made p u b l i c . The Bank o f J a p a n c a n , - 1 w henever i t i s deem ed n e c e s s a r y , is s u e n o te s in e x c e s s o f th e maximum l i m i t f o r f i f t e e n c o n s e c u tiv e d a y s , b u t i t m ust o b ta in p e rm is s io n o f th e M in is te r o f F in a n c e i f i t in te n d s t o c o n tin u e su c h an e x c e s s is s u e beyond f i f t e e n c o n s e c u tiv e d a y s . The Bank i s r e q u ir e d to p ay a n is s u in g t a x on th e am ount o f s u c h n o te s is s u e d i n e x c e s s o f th e maximum l i m i t beyond f i f t e e n c o n s e c u tiv e d ay s a t a r a t e f ix e d by th e M in is te r o f F in a n c e . The Bank i s a l s o r e q u i r e d to m a in ta in r e s e r v e s f o r n o te s e q u iv a le n t t o o r i n e x c e s s o f th e am ount o f n o te s i s s u e d . S in c e 1937> when th e Bank was g r a n te d power t o **Q phe Bank o f Japan Law, A rt. 29. c o n tro -l b u s in e s s f in a n c e , s h o r t- te r m c a p i t a l a s w e ll a s lo n g - te r m c a p i t a l , th e Bank h a s e x te n d e d th e e l i g i b i l i t y o f c o l l a t e r a l t o in c lu d e b i l l s se c u re d by G overnm ent- g u a ra n te e d c o r p o r a tio n bonds and th e l i k e , and i t p e r m its lo a n s h e r e t o f o r e u n q u a l i f i e d . Now i t c o v e rs a lm o st a l l c o n c e iv a b le a s s e t s e x c e p t s to c k s . R e a l b i l l s , lo a n s w ith c o l l a t e r a l , G overnm ent bonds and o b l i g a t i o n s , o th e r bonds o r d e b e n tu r e s , f o r e ig n ex ch an g e and g o ld and s i l v e r a r e eligible a s reserves In sum, th e Bank o f Ja p a n i s r i g h t l y o r w ro n g ly , c o m p le te ly f r e e from th e r e s t r a i n t s o f th e s p e c ie - f lo w and r e a l b i l l t h e o r i e s . The Bank i s s t i l l n o t r e q u ir e d to m a in ta in any l e g a l r e s e r v e a g a in s t d e p o s it l i a b i l i t i e s . The F e d e r a l R e se rv e S y stem . The P ro c la m a tio n o f M arch 6 , 1933> m arked th e p r a c t i c a l s u s p e n s io n o f th e g o ld s ta n d a r d and s u c c e e d in g ly a l l g o ld w ith m inor e x c e p tio n s was n a t i o n a l i z e d . Y e t, th e fo u n d a tio n o f a new m o n etary sy ste m was n o t l a i d down u n t i l 193^ when th e Gold R e se rv e A ct o f J a n u a ry , 1 9 3 ^, was e s t a b l i s h e d . The A ct and s u c c e e d in g s o - c a l le d New D eal e n a c tm e n ts s e t up a '‘h ig h ly r e s t r i c t e d , i n t e r n a t i o n a l , e x e c u tiv e , g o ld ^ T h e s e f o u r p a ra g ra p h s r e l y on The Bank o f Ja p an Law. The Bank o f J a p a n ; H i s t o r i c a l S k e tc h (T okyo; The Bank o f J a p a n , 195277 P • *+; and Y o sh in o , op., c i t . . p p . 5^-73* 88 b u l l i o n s ta n d a r d ” i n F o s te ^ e t a l * s te r m . ^ Though th e g o ld d o l l a r i s th e s ta n d a rd u n i t o f v a lu e , no c u rre n c y i s re d e e m a b le i n g o ld e x c e p t f o r th e p u rp o s e o f m aking paym ents t o f o r e ig n c o u n t r i e s . The pow er o f th e S e c r e ta r y o f th e T re a s u ry ( t h e P r e s i d e n t ) to buy and s e l l g o ld , a t home o r a b r o a d , a t su c h p r i c e s and upon su c h te rm s ” a s he may deem m ost a d v a n ta g e o u s t o th e p u b lic i n t e r e s t ” s t i l l e x i s t s , a lth o u g h t h e r e a r e some p e rs o n s who co n ten d t h a t th e U n ite d S t a t e s com m itted i t s e l f t o a f ix e d g o ld v a lu e o f th e d o l l a r , when t h e U n ite d S t a t e s sig n e d th e A greem ent o f th e I n t e r n a t i o n a l M o n etary F und.. A lth o u g h u rg e d t o do so by th e E co n o m ists* N a tio n a l Com m ittee on M onetary P o lic y , C o n g ress h a s n e v e r ta k e n from th e S e c r e t a r y t h e pow er t o v a ry th e p r i c e o f .g o l d . H ow ever, th e P r e s id e n t c a n n o t v a ry th e w e ig h t o f th e d o l l a r . A lth o u g h t h e r e s t i l l c i r c u l a t e s v a r io u s k in d s o f c u r r e n c y (U n ite d S t a t e s n o t e s , s i l v e r c e r t i f i c a t e s , v a r io u s J i s s u e s o f p a p e r money i n p r o c e s s o f r e t i r e m e n t , s i l v e r c o i n s , n i c k e l s and p e n n ie s ) and a l l o f them a r e l e g a l te n d e r] th e am ount o f th e F e d e r a l H ese rv e n o te s i s u t t e r l y dom inant ^ F o s t e r , e t a l . . o p . c i t . . p p . 66-67* 89! ( e i g h t y - f i v e p e r c e n t a t m id -1 9 5 3 )* 1 *^ T h e r e f o r e , | i a t t e n t i o n i s a g a in c e n te r e d a ro u n d th e F e d e r a l R e s e rv e n o t e s • The F e d e r a l R e se rv e Banks is s u e F i& e ^ a l R e se rv e n o t e s . They m ust be back ed by a one h u n d red p e r c e n t r e s e r v e , a t l e a s t tw e n ty - f iv e p e r c e n t o f whicl^ sh o u ld .be g o ld c e r t i f i c a t e s and th e re m a in in g r e s e r v e s may c o n s i s t o f e l i g i b l e p a p e r , G overnm ent s e c u r i t i e s o b ta in e d a s c o l l a t e r a l f o r a d v a n c e s o r a c q u ir e d in th e open m a rk e t. (The a u t h o r i t y t o p le d g e G overnm ent s e c u r i t i e s a s c o l l a t e r a l a g a i n s t F e d e r a l R e se rv e n o te s was g r a n te d i n 1932 f o r a y e a r , and th e n re n e w e d from tim e t o tim e u n t i l 1 9 ^ 5 , when i t became p e rm a n e n t.)1 4 ^ The F e d e r a l R e se rv e Banks a r e a l s o r e q u ir e d to m a in ta in tw e n ty - f iv e p e r c e n t o f r e s e r v e s i n g o ld c e r t i f i c a t e a g a i n s t d e p o s it l i a b i l i t i e s . The re m a in in g r e s e r v e s may be a l l k in d s o f a s s e t s , u n d e r th e B anking A ct o f 1 9 3 5 » p ro v id e d o n ly t h a t i n th e judgm ent o f th e R e s e rv e Banks th e a s s e t s a r e so u n d . The B oard o f i ^ T h e F e d e r a l R e se rv e S ystem P u rn o se s and F u n c tio n s ; ( f o u r t h e d i t i o n ; W a sh in g to n , D. C: B oard o f G o v ern o rs o f th e F e d e r a l R e se rv e S y stem , 1 9 5 * 0 , p . 9 1 . ^ G o ld e n w e is e r , o £ . c i t . , p p . 12*f-25. ^ F o r a c r i t i c a l v iew c o n c e rn in g e l i g i b i l i t y f o r r e d is c o u n ts and c o l l a t e r a l f o r n o t e s , s e e Jo h n H . W illia m s , "The B anking A ct o f 1 9 3 5 ,” A m erican Econom ic R ev iew . P a p e rs an d P ro c e e d in g s XXVI (M arch, 193&) ? 9f>-10£, e s p . 9 ^ -9 o . G o v e rn o rs, h o w ev er, may su sp e n d th e g o ld r e s e r v e r e q u i r e - • m ents and a g ra d u a te d t a x i s im posed upon s u c h a r e s e r v e d e f i c i e n c y . In sum, th e F e d e r a l R e se rv e Banks m y c r e a t e new money a s th e y w a n t, w ith th e s o le l i m i t a t i o n o f th e tw e n ty ^ f i v e p e r c e n t r e s e r v e re q u ire m e n t i n g o ld c e r t i f i c a t e s a g a i n s t n o te s an d d e p o s i t l i a b i l i t i e s . IV . GENERAL OBSERVATIONS However a u to m a tic a sy ste m may b e , i t c a n n o t w ork e f f e c t i v e l y u n le s s c o n d itio n s a r e th o s e u n d e r w h ic h i t i s su p p o sed to w o rk . The tw o c a r d i n a l p r i n c i p l e s w h ich l a y b e h in d c e n t r a l b a n k in g d u rin g th e 1920*s , t h e s p e c ie - f lo w th e o r y and th e r e a l b i l l th e o r y , c o u ld w ork r e a s o n a b ly w e ll o n ly u n d e r s t a b l e econom ic c o n d itio n s and a n a c t i v e c o o p e r a tio n o f v a r io u s c e n t r a l b a n k s . No w o n d er, a l l th e f i v e c o u n t r ie s d is c u s s e d ab o v e w ith o u t e x c e p tio n d is c a r d e d th e two p r i n c i p l e s so o n e r o r l a t e r u n d e r th e sh o c k s o f th e ram p a n t s to c k m a rk e t s p e c u l a t i o n , i t s c o l l a p s e , th e f i n a n c i a l c r i s i s an d th e s u c c e e d in g l a c k o f i n t e r n a t i o n a l c o o p e r a t i o n . ^ S ee Edw in W a lte r K em m erer, G old an d th e Gold S ta n d a rd ( f i r s t e d i t i o n ; New Y o rk : M cG raw -H ill Book Company, I n c . , 191 * 1 *-), p p . 2 0 9 - 1 1 . The r e n u n c i a t i o n o f th e g o ld s t a n d a r d . The d i r e c t r e a s o n f o r th e a b o lis h m e n t o f th e g o ld s ta n d a r d v a r ie d from c o u n try t o c o u n tr y . The Bank o f E n g lan d was fo rc e d to go o f f th e h i s t o r i c a l s ta n d a r d by th e su d d en w ith d ra w a l o f f o r e i g n s h o r t - t e r m c a p i t a l in L ondon. The Bank o f Ja p a n r e n u n c ia te d i t s o b l i g a t i o n to redeem n o te s i n g o ld due to th e r a p i d e x h a u s tio n o f th e c o u n tr y ’ s g o ld r e s e r v e s r e s u l t i n g fro m c o n s ta n t d e f i c i t b a la n c e s on c u r r e n t i n t e r n a t i o n a l a c c o u n t a n d fo rm id a b le f l i g h t s o f c a p i t a l . The U n ite d S t a t e s d e s e r te d th e g o ld s ta n d a r d o f h e r own a c c o rd i n a n i l l - a d v i s e d e f f o r t to overcom e th e G re a t D e p r e s s io n . The Bank o f F ra n c e c o u ld n o t m a in ta in i t s s ta n d a r d u n d e r th e in c e s s a n t p r e s s u r e o f G overnm ent d e f i c i t f in a n c in g and s p o r a d ic l o s s o f c o n fid e n c e in th e f r a n c . The d is c a r d o f th e r e a l b i l l t h e o r y . The r e n u n c ia t i o n o f th e s p e c ie - f lo w th e o ry n e c e s s a r i l y r e q u ir e d s p e c i a l l e g i s l a t i o n t o su sp e n d o r a b o l i s h th e g o ld s ta n d a r d , w h ereas t h a t o f th e r e a l b i l l th e o r y d id n o t ta k e th e form o f l e g a l m o d if ic a ti o n s , e x c e p t i n th e U n ite d S t a t e s w here th e l i b e r a l i z a t i o n o f c o l l a t e r a l r e q u ire m e n ts an d e l i g i b i l i t y was s e c u re d te m p o r a r ily by th e Thomas I n f l a t i o n A ct and p e rm a n e n tly by th e s u c c e e d in g B anking A c t o f 1935> and Ja p a n w hose c a s e h a s b ee n r e f e r r e d to a b o v e . The p r o v is io n s f o r c o l l a t e r a l b e h in d n o te s in m ost c o u n t r ie s w ere s o l i b e r a l l y p r e s c r ib e d t h a t th e d e p a r t u r e from th e r e a l b i l l th e o r y was p o s s i b le w ith in th e l i m i t s o f the? e x i s t i n g la w s . I n some c o u n tr ie s l i k e th e U n ite d Kingdom , t h e r e was an d i s no l e g a l r e s e r v e a g a i n s t d e p o s it l i a b i l i t i e s and th e d e te r m in a tio n o f e l i g i b i l i t y was and i s l e f t t o th e d i s c r e t i o n o f th e B a n k s. T h e ir p r a c t i c e s w ere l i b e r a l enough t o make i t p o s s i b le to g r a n t Lombard lo a n s an d f in a n c e G overnm oit d e f i c i t s . I n J a p a n , th e ch an g e was l a r g e l y q u a n t i t a t i v e . The Bank o f Ja p a n h ad ta k e n in a lm o s t a l l k in d s o f a s s e t s ev en b e f o r e 1937 a s s e c u r i t i e s . E ven s to c k s w ere a c c e p te d a s su c h an d i t m e re ly expanded a f t e r 1 9 3 2 , and e s p e c i a l l y 1937 th e same p r a c t i c e s , c e n te r in g i t s o p e r a tio n s on th e G overnm ent lo n g te rm and s h o r t- te r m s e c u r i t i e s . T h ere e x i s t e d th e same tr e n d s in b an k in g i n th e p r a c t i c e s in F ra n c e an d C anada. The g e n e r a l a s s e t th e o r y o r th e r e a l b i l l t h e o r y . T h e re h av e b ee n p r e s e n te d many arg u m e n ts f o r o r a g a i n s t th e r e a l b i l l th eo ry * 1 "? an d i t can be s a id w ith o u t much *+7See G o ld e n w e is e r, o p . c i t , . p p . 126-28 $ W. R a n d o lp h B u rg e s s , The R e se rv e Banks an d th e Money M arket ( r e v . e d . ; New Y o rk : H a rp e r an d B r o th e rs P u b l is h e r s , 1 9 3 6 ), p p . 52-57$ and H erb er V . P roehnow , ” Bank L i q u i d i t y an d th e New D o c tr in e o f A n tic ip a t e d In co m e ,” The J o u r n a l o f F in a n c e IV (D ecem ber, 19H-9), 2 9 8 -3 1 ^ , e s p . 2 9 8 -3 Of?. 93 d i s t o r t i o n t h a t th e r e a l b i l l th e o r y , i t s e l f , d o es n o t a u to m a t ic a lly g u a r a n te e sound b an k in g c o n d itio n s and s te a d y , sm ooth econom ic a c t i v i t i e s . I t i s doomed t o c o l la p s e u n d er e x t r a o r d i n a r y c o n d itio n s a s h a s b een se e n s in c e th e end o f th e 1 9 2 0 's . T h ere i s n o d en y in g t h a t th e g e n e r a l a s s e t s th e o r y i s b e t t e r th a n th e r e a l b i l l th e o r y , p ro v id e d t h a t c o r r e c t judgm ent o f b an k in g a u t h o r i t i e s i s alw a y s s e c u r e d . T h is p r o v is o , h o w ev er, i s m ost d i f f i c u l t t o s a t i s f y . The v e ry r e a s o n why th e im p o rta n c e o f l e g a l r e s e r v e r e q u i r e m e n ts i n g o ld and th e m e r its o f r e a l b i l l s w ere a d v o c a te d so s t r o n g ly d u rin g t h e 1 9 2 0 's h in g e s on t h i s p o i n t . The a d m is s io n o f f a t a l d e f e c t s i n th e r e a l b i l l th e o r y d o es n o t j u s t i f y th e g e n e r a l a s s e t th e o r y whose m e r it s r e l y s o l e l y on th e c o r r e c t d i s c r e t i o n o f.b a n k in g a u t h o r i t i e s . T h is i s th e r e a s o n a num ber o f a u to m a tic m o n etary d e v ic e s , su ch a s F i s h e r 's s t a b i l i z e d d o l l a r and com m odity money, h av e been d is c u s s e d among p r o f e s s i o n a l e c o n o m is ts . A g la n c e a t t h e m ovem ents o f th e volum e o f n o te s and d e p o s i t l i a b i l i t i e s o f c e n t r a l b an k s and th e tr e n d s In p r i c e i n d e x e s ^ a r e enough to d o u b t th e r e l i a b i l i t y o f b an k in g a u t h o r i t i e s . O m ittin g c o n s id e r a ti o n o f th e ^ S e e th e T a b le s I I and I I I , f i g u r e s a r e b ased on F e d e r a l R e se rv e B u l l e t i n and Econom ic S t a t i s t i c s o f Ja p a n (T o k y o : The Bank o f J a p a n , 1 9 5 2 ), p p . 1 5 - l 6 . TABLE I I WHOLESALE PRICE M OVEM ENTS IN FIVE COUNTRIES Canada E n g lan d F ra n c e Ja n a n -------- TEe“ U . S . 1926 100 100 100 100 100 1930 87 81 79 76 86 193V 72 71 9+ 75 75 1938 79 81 9*f 106 79 19^2 86 120 189 - 99 19^6 109 l* fl 607 2992 121 1950 158 211 1930 *+6002 120 19 5^ (J a n u a ry ) 173 263 2^78 67320C * 53 N o v .)129 t 95 ^ TABLE I I I NOTES IN CIRCULATION AND DEPOSIT LIABILITIES AT CENTRAL BANKS Canada E n g lan d F ra n c e Ja p a n The U . S . 1 9 2 6 $ / 52*+,0 F r . 5 8 ,8 1 5 Yen - $ *+,l6*+,977 1 9 3 0 5*+*+.0 1 0 0 ,7 5 8 2 ,0 1 5 *+,150,671 193*4- 5*4-0.6 102,*+89 2 ,0 9 1 7,626,*+57 1938 3 9 5 .7 658.*+ . 1*+1,651 3 ,2 9 8 1*+, *+93,179 19*+2 1,02*+.2 1,20*+. 6 *+13, * 4-79 1 0 ,1 1 6 26,972,37*+ 19*4-6 1 ,9 0 6 .0 l,77*4-.7 7 9 3 ,3 1 1 10*+,800 *+3,016,090 1950 . 2 ,1 7 7 .8 1 ,7 7 2 .0 1 ,7 3 7 , *+09 *+9*+,88*+ * + 2 , 8 8 2 ,2 3 8 195*+ 2 ,2 3 1 .9 1 ,9 0 5 .1 2 ,3 8 7 ,5 8 3 7*+7,9 2 7 * + 6 , 6 7 0 ,3 1 6 e x is te n c e o f i n f l a t i o n a r y d a n g e rs i n v a r y in g d e g re e s among j th e v a r io u s c o u n t r i e s , t h e f a c t e x i s t s t h a t d i f f e r e n t | c o u n t r ie s h av e d e v e lo p e d d i f f e r e n t p o l i c i e s . A lth o u g h a d m itte d ly c e n t r a l banks o r m o n e tary a u t h o r i t i e s a r e n o t s o l e l y r e s p o n s i b le f o r i n c o r r e c t ju d g m e n ts, n e v e r t h e l e s s , b a n k in g a u t h o r i t i e s seem to h av e some tim e f a i l e d to p u rs u e th e b e s t p o lic y f o r t h e i r c o u n t r i e s . C e r t a i n l y th e y h av e n o t b een i n f a l l i b l e . 4 ch an g e i n th e n a t u r e o f g o ld r e s e r v e s . A n o th er common ch an g e ca n be fo u n d i n th e n a t u r e o f g o ld r e s e r v e s i n th e v a r io u s c o u n t r i e s . Up to 1 9 3 0 , i t was commonly i h e ld t r u e t h a t g o ld r e s e r v e s w ere th e b u lw ark s o f th e ' c u rre n c y sy ste m o f a c o u n tr y , m aking d o m e stic an d f o r e ig n c u rre n c y h o ld e r s c o n f id e n t i n i t s c u rre n c y by p r o v id in g c o n v e r t i b i l i t y an d r e d e e m a b ility i n g o ld . The b e s t p o lic y o f m a in ta in in g c o n fid e n c e was c o n s id e r e d t o be th e k e e p in g , o f a c e r t a i n r a t i o o f n o te s an d d e p o s it l i a b i l i t i e s i n i g o ld and th e r e g u l a t i o n o f th e volum e o f c u r r e n c y , a c c o r d in g t o th e am ount o f g o ld r e s e r v e . O nly th e am ount o f g o ld ; o v e r and above r e s e r v e r e q u ire m e n ts c o u ld be i n t e r n a t i o n a l ( c u r r e n c y . A f t e r m ost c o u n t r ie s w en t o f f th e g o ld s ta n d a r d , a new th o u g h t g r a d u a lly d e v e lo p e d . In 1 9 3 2 , a m in o r ity o f th e L eague o f N a tio n s G old D e le g a tio n s u g g e s te d a b o l is h in g 97 ! a l l l e g a l s t i p u l a t i o n s w ith re g a rd t o minimum g o ld r e s e r v e s o f th e c e n t r a l banks. **9 S u c c e e d in g ly , G erm any, F ra n c e , th e U n ite d K in g d o n , C anada, and Jap an a b o lis h e d l e g a l r e s e r v e s i n g o ld o r su sp en d ed i t , f r e e in g g o ld fro m c o v e r r e s e r v e s and u s in g i t a s i n t e r n a t i o n a l c u rre n c y and b u f f e r . E f f o r t s t o a s s u r e d o m e stic c o n fid e n c e i n n a t i o n a l c u r r e n c i e s n o t b ased on g o ld was r e a l i z e d o n ly g r a d u a l ly i f a t all. 5 ° Gold f o r s e c u r in g f o r e ig n c o n fid e n c e i n n a t i o n a l c u r r e n c i e s l o s t i t s m eaning due t o v a r io u s ex change c o n t r o l d e v i c e s . T h u s, i n t h e o p in io n o f th e w r i t e r , g o ld h a s changed i t s c h a r a c t e r from a c o v e r f o r n a t i o n a l c u r r e n c i e s t o a b u f f e r f o r o f f s e t t i n g th e d o m e stic e f f e c t s o f s h i f t s i n i n t e r n a t i o n a l i b a la n c e o f p ay m en ts. ^ R e p o rt o f th e G old D e le g a tio n , p . 7 1 . F or a d e t a i l , s e e R agnar N u rk se, I n t e r n a t i o n a l C u rren cy E x p e rie n c e L esso n s o f th e In te r-W a r P e rio d {New Y ork: U n ite d N a tio n s , 19*+7) , P P • 9I+-9 S , o r R ag n ar N u rk se, " C o n d itio n s o f I n t e r n a t i o n a l M onetary E q u ilib r iu m ," E ssa y s i n I n t e r n a t i o n a l F in a n c e ( P r i n c e t o n , New J e r s e y : I n te r n a tio n a l F in a n c e S e c t io n , 19^5 ) > PP» l l - l * f . ^ C e r t a i n l y t h e r e m ust be o b je c ti o n s t o t h i s s t a t e m e n t. T h u s, a c c o rd in g t o th e E co n o m ists* N a tio n a l Commit t e e on M o n etary P o lic y , g o ld i s s t i l l th e o n ly i n t e r n a t i o n a l y a r d s t i c k w hich h a s g e n e r a l and w o rld w ide a c c e p t a b i l i t y . I t i s s t i l l th e a r b i t e r o f i n t e r n a t i o n a l d e s t i n y . C H A P T E R V RELATIONS BETWEEN THE CENTRAL BANK, THE COMMERCIAL BANKS AND M O N EY M ARKET DURING THE 1 9 2 0 'S I . TYPICAL CENTRAL BANKING R e d is c o u n t o p e r a tio n s . As h a s b een n o te d a b o v e ,1 a lth o u g h c e n t r a l banks some tim e s d e p a r te d from th e r u l e s i o f th e game i n o r d e r t o p r e s e r v e s t a b i l i t y i n b u s in e s s co n d i t i o n s an d p r i c e s d u r in g th e 1 9 2 0 's , th e y , i n e s s e n c e , a d o p te d p o l i c i e s w h ich s e c u re d th e c u rre n c y s ta n d a r d and sound c o n d itio n s i n th e money m a rk e t w ith a s p e c i a l r e g a r d t o g o ld h o ld in g s . N am ely, th e y r a i s e th e r e d is c o u n t r a t e ' when t h e i r g o ld r e s e r v e s w ere d e c l in i n g an d lo w e re d i t j when t h e i r g o ld r e s e r v e s w ere i n c r e a s i n g . E f f e c t s o f change in th e r e d i s c o u n t r a t e w ere tw o . T £ i t i s r a i s e d i t s u f f i c i e n t l y in c r e a s e s th e c o s ts o f c r e d i t f o r banks t o f o r c e th e m ‘ to r a i s e t h e i r d is c o u n t r a t e s t o t h e i r c u s to m e rs , th u s j c h e c k in g c r e d i t e x p a n s io n . C o n tr a c tio n o f c r e d i t means j lo w e r p r i c e s . T h is c a u s e s f a v o r a b le b a la n c e s on c u r r e n t j j i n t e r n a t i o n a l a c c o u n t and g o ld in f lo w s . I f i t i s lo w e re d j i t re d u c e s th e c o s ts o f c r e d i t f o r ban k s t o a llo w them to i re d u c e t h e i r d is c o u n t r a t e s to t h e i r c u s to m e rs , th u s , X- C f ante. pp. 21-22 e n c o u ra g in g c r e d i t e x p a n sio n * E x p a n sio n o f c r e d i t d r iv e s ! u p p r ic e s an d makes c u r r e n t i n t e r n a t i o n a l a c c o u n t u n f a v o r - : a b l e . The o th e r e f f e c t i s on c a p i t a l i n t e r n a t i o n a l a c c o u n tJ I f th e r e d is c o u n t r a t e i s r a i s e d , f o r e ig n s h o r t- te r m c a p i t a l flo w s i n , r e l i e v i n g th e s t r in g e n c y on g o ld r e s e r v e s . I f i t P 1 i s lo w e re d , g o ld movements w i l l be r e v e r s e d . ' j i O pen-m arket o p e r a t i o n s . T h u s, th e r e d is c o u n t r a t e p o lic y was th e m ost im p o rta n t in s tru m e n t f o r c r e d i t co n t r o l s u n d e r th e g o ld s t a n d a r d . N e v e r th e le s s , a t v a r io u s ! tim e s when th e money m a rk e t an d co m m ercial ban k s w ere i n a h ig h ly l i q u i d s t a t e , th e c e n t r a l bank e x p e rie n c e d g r e a t d i f f i c u l t y i n makirag i t s r e d is c o u n t r a t e e f f e c t i v e . A m ethod t o m eet t h i s s i t u a t i o n g r a d u a l ly e v o lv e d . T h is was o p e n -m a rk e t o p e r a t i o n s . I f th e c e n t r a l bank s e l l s i t s p a p e r to th e p u b l i c , i t te n d s d i r e c t l y o r i n d i r e c t l y to d e c r e a s e th e l i q u i d i t y o f th e money m a rk e t an d t o f o r c e i t ' * t o r e l y on th e r e d is c o u n tin g f a c i l i t i e s o f th e c e n t r a l | b a n k . T h u s, th e c e n t r a l b an k c a n make i t s r e d is c o u n t r a t e J e f f e c t i v e , nam ely i t a c h ie v e s th e o b je c ti v e o f c r e d i t c o n - j I t r a c t i o n . I f th e c e n t r a l bank buys p a p e r fro m th e p u b l i c , , 2F o r a s im p le e x p la n a tio n o f t h i s m echanism , s e e : P . T . E lls w o r th , The I n t e r n a t i o n a l Econom y: I t s S t r u c t u r e an d O p e ra tio n (New Y o rk : The M acm illan Company, 19 $ 2 ) , pp. 310-17. I 1 0 0 i t te n d s t o in c r e a s e th e l i q u i d i t y o f th e money m a rk e t and j t o r e l a x m o n e tary c o n d i t i o n s . C o o p e ra tio n b etw een th e c e n t r a l bank and b a n k s . On ’ , b o th o c c a s io n s , c r e d i t c o n t r a c ti o n o r e x p a n s io n , i t l a r g e l y 1 i d ep en d s on c o o p e r a tio n o f co m m ercial banks w h e th e r th e c e n -| t r a l bank a c h ie v e s i t s o b j e c t i v e . Due t o t h i s f a c t , i t wasj t • . ' | d e s i r a b l e f o r th e c e n t r a l bank n o t t o com pete w ith commer- t c i a l b a n k s . F u rth e rm o re , th e c a r d i n a l d u ty o f th e c e n t r a l bank t o s a fe g u a rd th e c u rre n c y s ta n d a r d an d t o m a in ta in sound c o n d itio n s i n th e money m a rk e t r e q u i r e d i t t o r e f r a i n fro m th e c l a s s o f b u s in e s s c o n n e c te d in s e p a r a b ly t o o r d i - j n a ry co m m ercial b a n k in g f o r th e r e a s o n t h a t th e b u s in e s s o f 15 th e c e n t r a l bank m ust be c o n d u c te d on th e s a f e s t l i n e s . T h is im p lie d t h a t th e c e n t r a l bank s h o u ld c o n c e n tr a te on j b u s in e s s w ith co m m ercial banks and t o s p e c i a l i z e i n r e d i s - ; ! ! c o u n tin g o r t o m aking ad v a n ce s on s h o r t - t e r m , s e l f - l i q u i d a - \ j i t i n g an d p r o d u c tiv e b i l l s . E ven when th e c e n t r a l b an k i s i i r e q u i r e d to g e t i n to u c h w ith th e p u b lic d i r e c t l y , i t i : s h o u ld t r y t o r e f r a i n from co m p etin g w ith co m m ercial banks 1 on b u s in e s s an d fro m b e in g a s s o c i a t e d w ith i n d i v i d u a l f 1 c l a s s e s o f th e p u b l i c . T h u s, th e a c c e p ta n c e o f d e p o s its 3 c . H . K isc h and W. A . E l k i n , C e n tr a l Banks (L ondon: M acm illan and Company, L t d . , 1 9 3 0 ), p p . 1 1 0 -1 2 . j U i _________ C f . a n t e . , p p . 2 1 -2 2 . j 1 0 1 1 fro m th e p u b lic by th e c e n t r a l b an k was r e g a r d e d a s u n - ' d e s i r a b l e and o p e n -m a rk e t o p e r a tio n s w ere c o n s id e r e d t o be o f se c o n d a ry im p o rta n ce * To o b ta in c o o p e r a tio n o f co m m ercial banks t h e r e w ere o th e r p o s i t i v e w ay s. L e g a l r e s e r v e re q u ire m e n ts w ere one o f th e m . P ro v is io n s f o r g iv in g a d v ic e an d in f o r m a tio n i n c lu d in g v a r io u s s t a t i s t i c a l d a ta w ere a n o t h e r . Thus th e c e n t r a l bank made e f f o r t s t o s a fe g u a r d th e c u rre n c y s ta n d a r d , n a m e ly , c o n v e r t i b i l i t y o f i t s n o t e s , m a in ly th ro u g h r e d is c o u n t o p e r a t i o n s , o p e n -m a rk e t o p e r a t i o n s , an d i t s m o ra l s u a s io n an d s u p e r io r know ledge and e x p e r i e n c e • D e a lin g s i n g o ld an d f o r e i g n e x c h a n g e .., T h is n a t u r a l l y r e q u ir e d th e c e n t r a l b an k t o h av e th e power t o d e a l i n g o ld an d f o r e ig n e x c h a n g e . D e a lin g i n th e fo rm e r a t a f i x e d p r ic e d i r e c t l y o r i n d i r e c t l y was a c t u a l l y th e m ain te n a n c e o f th e c u rre n c y s t a n d a r d . The power t o d e a l i n f o r e i g n ex ch an g e was m e re ly a c o r o l l a r y o f th e g o ld s ta n d a rd * I t was th o u g h t d e s i r a b l e t h a t th e c e n t r a l bank sh o u ld d e a l i n f o r e i g n ex ch an g e i n o r d e r t o d is c h a r g e i t s d u t i e s a s a c e n t r a l b a n k . The pow er made i t p o s s i b le n o t o n ly f o r th e c e n t r a l bank t o prom ote ex ch an g e and b u s in e s s s t a b i l i t y by ir o n in g o u t e v e ry d a y ex ch an g e f l u c t u a t i o n s th ro u g h th e i n t e r v e n t i o n o f th e c e n t r a l bank b u t a l s o t o econom ize g o ld Ortlyarartty of S outhern Caiitorm a u o ra ry 1 0 2 movem ents by l i m i t i n g them t o m a rg in a l n e e d s .^ In sum , th e c e n t r a l b a n k , u p t o 1 9 3 0 , was r e q u ir e d t o m a in ta in th e e x t e r n a l v a lu e o f th e c u rre n c y o f a n a t io n by m a in ta in in g th e c o n v e r t i b i l i t y o f th e c u rre n c y i n t o g o ld and t o p r e s e r v e th e s t a b i l i t y o f th e i n t e r n a l v a lu e o f th e c u rre n c y by m a n ip u la tin g th e r e d i s c o u n t r a t e o f e l i g i b l e p a p e r i n s u c h a way t h a t i t w ould s e c u r e th e c o n v e r t i b i l i t y o f th e c u r r e n c y i n t o g o ld . I I . INDIVIDUAL CENTRAL MNKS The Bank o f E n g la n d . A lth o u g h t h e r e was no l e g a l r e s e r v e r e q u ire m e n t i n E n g la n d , m ost co m m ercial banks h e ld c e r t a i n p e r c e n ta g e o f t h e i r l i a b i l i t i e s t o th e p u b lic a s c a s h b a la n c e s w ith th e B ank. The p e r c e n ta g e was n o t u n ifo rm and f i x e d , y e t i t was i n th e n e ig h b o rh o o d o f t e n to f i f t e e n p e r c e n t o f d e p o s i t l i a b i l i t i e s . The p ro c e s s o f r e d is c o u n tin g w as i n d i r e c t i n th e s e n s e t h a t i t becam e th e cu sto m f o r co m m ercial ban k s to I c a l l u p t h e i r lo a n s to th e d is c o u n t m a rk e t r a t h e r th a n r e - j d is c o u n t w ith th e Bank th e m s e lv e s , th u s f o r c in g d is c o u n t j h o u se s an d b i l l b ro k e rs t o s e e k accom m odations fro m th e Bank in tim e s o f m o n e tary s t r i n g e n c y . L 5kisch and E lk in , op. c i t . , pp. 127-28. 103 The Bank was alw ay s re a d y t o g r a n t n e c e s s a r y accom m o d a tio n t o th e money m a rk e t. I f , h o w ev er, i t c o n s id e r e d t h a t demands f o r accom m odation a r o s e n o t fro m te m p o ra ry s e a s o n a l n ee d s b u t from some d i s e q u i li b r i u m i n th e econom ic s t r u c t u r e , i t w ould r a i s e i t s r a t e much o r l i t t l e o r i n q u ic k s u c c e s s io n . W h ile th e r e l a t i o n s h i p b etw een .the Bank r a t e an d th e m a rk e t r a t e o f d is c o u n t was d e te rm in e d p rim a r i l y by m oney-m arket c o n d i t i o n s , i t w as l a r g e l y d e te rm in e d by c o n v e n tio n s b a se d on th e l e a d e r s h i p o f th e B ank. B u t, a t v a r io u s tim e s , th e Bank was f o r c e d t o r e s o r t t o some form o f o p e n -m a rk e t o p e r a tio n s in o r d e r t o o f f s e t h ig h l i q u i d i t y i n t h e money m a rk e t. The Bank, i n p a s s in g , a l t e r e d i t s r a t e t h i r t y - f o u r tim e s b etw een 1919 an d 1 9 3 2 , t e n o f w h ich o c c u rre d i n 1931 an d 1 9 3 2 .6 The Bank a d o p te d v a r io u s m ethods a s o p e n -m a rk e t o p e r a t i o n s . “S e l l i n g C o n so ls s p o t an d b u y in g f o r th e a c - count** an d “ b o rro w in g i n th e m a rk e t1 1 w ere tw o m ajo r m ethods, y e t th e r e w ere some o th e r ways s u c h a s th e o u t r i g h t s a l e o f G overnm ent s e c u r i t i e s . ? The Bank o p e r a te d i n o n ly th e % o r a s t a t i s t i c a l s tu d y o f f l u c t u a t i o n s i n th e Bank r a t e in E n g lan d b e f o r e 1 9 2 0 , s e e B enjam in H a g g o tt B e e k h a rt, The D is c o u n t P o lic y o f th e F e d e r a l R e se rv e S y stem (New Y o rk ; H enry H o lt an d Company, 192V ), p p . 37-M +. | ?S ee S a y e r s , Bank o f E n g lan d O p e r a tio n s . 1890-191*+ ! (L ondon: P . S . K ing & Son L t d . , 1 9 3 6 7 T p P» 1 9 - * + 8 . _________ j 1 0 b G overnm ent s e c u r i t y m ark et* O p en-m arket o p e r a tio n s w ere e x e c u te d n o t o n ly to make th e Bank r a t e e f f e c t i v e b u t a l s o t o o f f s e t s e a s o n a l ch an g es i n th e d o m e s tic money m a rk e t a s w e ll a s d i s t u r b i n g g o ld m ovem ents* They w ere a l s o u t i l i z e d t o s u p p o r t G overn m ent c r e d i t i n c o n n e c tio n w ith th e is s u e o r c o n v e rs io n o f l o a n s . The B ank’ s o p e n -m a rk e t o p e r a tio n s w ere in d ic a t e d in th e in c r e a s e o f ^ 56*8 m i l l i o n i n th e t o t a l h o ld in g s o f G overnm ent s e c u r i t i e s d u rin g th e p e r io d o f 1930-32* The Bank w as u n d e r o b l i g a t i o n to buy g o ld a t th e p r i c e o f 3*17*9 p e r ounce s ta n d a r d , and t o s e l l i t a t 3 * 1 7 :1 0 1 /2 p e r ounce s ta n d a r d i n q u a n t i t i e s n o t l e s s th a n f o u r h u n d re d s f i n e o u n c e s . A lth o u g h th e p ro c e e d in g s o f th e Bank a s r e g a r d s f o r e i g n ex ch an g e w ere n o t r e v e a le d an d i t was s t a t e d t h a t b e f o r e th e F i r s t W orld War th e Bank d id n o t! i buy f o r e ig n b i l l s an d t h a t i t was n o t i t s cu sto m to d i s c o u n t an y b i l l s p a y a b le i n f o r e i g n c u r r e n c i e s , i t was q u i t e c u sto m a ry f o r th e Bank to h o ld some f o r e i g n e x c h a n g e s . T h ere was n o th in g i n th e law t h a t p re v e n te d i t fro m d o in g 8 s o . i A lth o u g h th e Bank a c c e p te d d e p o s its from th e p u b lic ,; ^ K isc h an d E l k i n , o p . c i t *. p p . 121 and 1 2 7 . 105 i t d id n o t a llo w an y i n t e r e s t on th e d e p o s i t s . T h ere was p r a c t i c a l l y no c o m p e titio n b etw een co m m ercial ban k s and th e b a n k . C om m ercial b a n k in g by th e Bank seem ed to be a m ere Q h i s t o r i c a l r e l i c . The Bank o f F r a n c e . Due t o th e f a c t t h a t th e Bank n o t o n ly p e rfo rm e d th e o r d in a r y f u n c tio n s o f a c e n t r a l bank b u t a l s o was th e l a r g e s t co m m ercia l bank I n F ra n c e , i t was p re d o m in a n t i n th e F re n c h f i n a n c i a l s y s te m . F u rth e rm o re , . th e F re n c h h a b i t o f p r e f e r r in g n o te s in s t e a d o f ch e ck s ad d ed t o i t f o r th e r e a s o n t h a t th e Bank h ad th e s o le m onopoly o f n o te i s s u e . A lth o u g h co m m ercial ban k s w ere n o t r e q u ir e d by law t o c a r r y r e s e r v e s w ith th e B a n k , ^ th e y c u s to m a r ily m a in ta in e d s u b s t a n t i a l b a la n c e s on d e p o s its and made f u l l u s e o f th e c e n t r a l b a n k 's f a c i l i t i e s f o r d is c o u n tin g and c o l l e c t i n g co m m ercial p a p e r s . F o u r b ig co m m ercial banks in ! F ra n c e k e p t e le v e n an d a h a l f p e r c e n t o f t h e i r d e p o s i t j j l i a b i l i t i e s i n t i l l money an d b a la n c e s w ith th e Bank o f F ra n c e i n 1 9 2 5 -2 6 . The r e d i s c o u n t r a t e was a lm o s t a s o le in s tru m e n t 9 i b i d . . p . l l f l . 1 0 I b i d . . p . 1 1 5 . ^ W . R an d o lp h B u rg e s s , The R e se rv e Banks and th e Money M ark et ( r e v . e d . ; New Y o rk : H arp er & B r o th e r s , 1 9 3 6 ), _PP. 3 3 -3 * + .~ __________________ . ______________ | h e ld by th e Bank f o r r e g u l a t i n g c r e d i t . Owing t o th e s t r u c t u r e o f th e F re n c h f i n a n c i a l sy ste m , i t was n o t o n ly th e r a t e a t w hich th e com m ercial banks borrow ed from th e Bank b u t was a l s o th e r a t e a t w hich th e money m arket a n d , to some e x t e n t , b u s in e s s i n g e n e r a l s e c u re d fu n d s . The r e d is c o u n t r a t e was c h a r a c t e r i z e d by low and s t a b l e i n t e r e s t r a t e s due to th e r e l a t i v e l y s t a b l e economy o f F ra n c e and due t o th e l a r g e amount o f i t s g o ld h o ld i n g s . As a r e s u l t o f th e e x te n s iv e u s e i n F re n ch commerce o f th e d o m e stic b i l l o f ex ch an g e, .or t r a d e a c c e p ta n c e , th e r e d is c o u n tin g and d is c o u n tin g o f t h i s ty p e o f p a p e rs was one o f p r i n c i p a l a c t i v i t i e s o f th e Bank. I t d id n e i t h e r d i s t i n g u i s h tr a d e a c c e p ta n c e s from b a n k e r s ’ a c c e p ta n c e s n o r d i s c r i m i n a t e a g a i n s t f o r e i g n b i l l s . The Bank a l s o made * ad v an ces on v a r io u s Government s e c u r i t i e s and g o ld d e p o s its , In c o n t r a s t t o i t s b ro ad powers t o r e d is c o u n t and make a d v a n c e , th e Bank had v e ry l i m i t e d a u t h o r i t y t o engage i n open m ark et o p e r a t i o n s . The s t a t u t e s p e r m itte d th r e e ty p e s o f open m ark et o p e r a t io n s , nam ely: ( 1 ) d e a lin g s in bonds o f th e C a is s e Autonome d 1A rm o rtissem en ; (2 ) th e p u r c h a se o f b i l l s and s h o r t- te r m s e c u r i t i e s f o r th e a c c o u n t o f f o r e i g n c e n t r a l b a n k s; and ( 3 ) d e a lin g s i n f o r e ig n exchange] F u rth e rm o re , th e Bank r e f r a i n e d from u s in g even t h i s lim i t e d power o f o p en -m ark et o p e r a tio n s a c t i v e l y . I t d id n o t i I I 107 d e a l in bonds o f th e C a ise e Autonome d ^ m o r tis s e m e n . The i n i t i a t i v e t o u s e th e second power r e s t e d n o t w ith th e Bank b u t w ith f o r e i g n c e n t r a l b a n k s . The Bank c o u ld n o t i n t e r vene w ith th e f o r e i g n exchange m ark et f o r th e p u rp o se o f o p en -m ark et o p e r a tio n s due t o u n d e s ir a b le e f f e c t s t o ex change r a t e s e^nd g o ld movements, The Bank was a l s o o b lig e d t o buy and s e l l g o ld a t f i x e d p r i c e s . I t had th e o p tio n t o c a sh n o te s i n g o ld c o in or b u l l i o n . The Bank, a s h as been m e n tio n e d , was a u th o r iz e d t o d e a l i n f o r e i g n b i l l s and employ b a la n c e s a b ro a d and i t was u s e d p r im a r il y f o r prom oting exchange s t a b i l i t y . A c tu a l l y th e power t o d e a l i n f o r e ig n exchange was one o f th e re a s o n s f o r th e Bank b e in g a b le t o keep a r e l a t i v e l y s t a b l e r e d is c o u n t r a t e . 1 2 U n lik e o th e r c e n t r a l b a n k s, th e Bank o f F ra n ce was h e a v ily in v o lv e d i n th e com m ercial b anking b u s in e s s . The j number o f d e p o s i t a c c o u n ts o th e r th a n th o s e o f com m ercial j banks was c o n s id e r a b ly l a r g e . N e v e rth e le s s i t was n e a r / t r u t h t o sa y t h a t com m ercial banks c o o p e ra te d w e ll w ith th e Bank and w ere w e ll u n d e r th e c o n t r o l o f th e Bank b ec au se o f th e d i r e c t to u c h o f th e Bank w ith th e p u b lic r a t h e r th a n th a t t th e Bank com peted w ith com m ercial banks f o r p r o f i t s . 12Beckhart, op. cit., p. 75* 108 The Bank o f J a p a n . T here was no l e g a l p r o v is io n f o r th e Bank t o r e q u i r e com m ercial banks to m a in ta in a c e r t a i n amount o f c a s h r e s e r v e s w ith th e B ank. Y e t, m ost o f th e im p o rta n t o r d in a r y banks a s w e ll a s th e s p e c i a l banks su ch a s th e Yokohama S p e c ie Bank had c u r r e n t a c c o u n ts i n th e Bank o f J a p a n , w hich s e rv e d a s t h e i r r e s e r v e s a t th e same tim e a s a c le a r a n c e fund f o r t h e i r b i l l s . In a d d i t i o n com m e rc ia l banks made i t a r u l e t o o v e r d r a f t or s e c u re lo a n from th e c e n t r a l bank on th e s e c u r i t y o f Government bonds a s th e y r e q u ir e d f u n d s • R e d isc o u n t o p e r a tio n s w ere a m ajor in s tru m e n t f o r c r e d i t r e g u l a t i o n . Y e t, th e r e d is c o u n t r a t e had l i t t l e r e l a t i o n w ith m ark et r a t e s •' The change i n th e o f f i c i a l i r a t e s f u n c tio n e d a s a w arn in g s i g n a l . As was t o be e x p e c te d , th e r e d is c o u n t r a t e d id n o t have a l a r g e e f f e c t on i n t e r n a t i o n a l money m ark ets i n d i c a t i n g i t s r a t h e r i n s i g n i f i c a n t p o s i t i o n i n th o s e m a rk e ts . On th e o th e r hand i t had a g r e a t in f lu e n c e on d o m e stic money m a rk e ts , ch an g in g th e c o s t c o n d itio n s o f th e com m ercial bank lo a n b u s in e s s . The r e d is c o u n t r a t e was q u ite h ig h and f l u c t u a t e d m ain ly b e - j c au se o f d o m e stic m onetary c o n d i t i o n s . ^ ■^Tadao Wikawa, "The B anking System o f J a p a n ," F o re ig n B anking S y stem s. H. P a rk e r W i l l i s and B. H. B e e k h a rt ( e d s . ) (London: S i r I s a a c P itm an and S o n s, L t d . , 1 9 2 9 ), L p . . _ 8.63. , _______________________________________________________________________________________________________________: ______________________ j 109 A lth o u g h th e Bank from tim e to tim e r e s o r t e d to o p en -m ark et o p e r a tio n s to re d u c e u n d e s ir a b le l i q u i d i t y in th e money m a rk e t, s e l l i n g o r buying Government s e c u r i t i e s , iL. th e y w ere q u i t e e x c e p t i o n a l . The Bank was r e q u ir e d t o c o n v e rt i t s n o te s i n t o g o ld .1 A lth o u g h i t was a u th o r iz e d t o d e a l in g o ld and s i l v e r b u l l i o n and make lo a n s th e re o n i t d id n o t have th e power to d e a l i n f o r e ig n exchange d i r e c t l y . The l a t t e r b u s in e s s was c a r r i e d on p r im a r il y by th e Yokohama S p e c ie Bank w hich s p e c i a l i z e d i n i n t e r n a t i o n a l f in a n c in g tinder th e c o n t r o l o f th e G overnm ent. The Bank o f Ja p a n co u ld p a r t i c i p a t e i n th e f o r e i g n exchange m arket o n ly th ro u g h r e d is c o u n tin g f o r e ig n 19 b i l l s h e ld by th e Yokohama S p e c ie Bank. The Bank s t a r t e d d i r e c t t r a n s a c t i o n s w ith th e p u b lic i n o rd e r t o e l im in a te p r o f i t s a c c r u in g t o com m ercial banks th ro u g h t h e i r le n d in g money o b ta in e d from th e Bank a t a h ig h e r r a t e th a n th e Bank r a t e . * ^ A lth o u g h th e Bank o f j ll+Y oshino, "A H is to r y o f th e Bank o f J a p a n ," S tu d ie s on Our F i n a n c i a l System (Tokyo: J its u g y o n o -N ip p o n s h a , ! 195^77 P . 58'. 3-5Yoshino, "A T r e a t i s e on th e Yokohama S p e c ie B ank," S tu d ie s on Our F i n a n c i a l System (Tokyo: J its u g y o n o - N ipponsha, 1 9 5 2 ), p . 3 . -J-^ o sh in o , "A H is to r y o f th e Bank o f J a p a n , "cp. c i t.. p. *+1. 110 Ja p an Act d id n o t have any p r o v is io n to r e s t r i c t th e B a n k 's b u s in e s s w ith th e p u b l i c , i t d id n o t seem t o engage i n t h a t f i e l d of a c t i v i t y . The F e d e r a l R eserv e S ystem . The member banks were r e q u ir e d by la w , u n lik e o th e r c e n t r a l b an k s, t o keep minimum r e s e r v e s w ith th e F e d e r a l R eserve Banks w hich were f ix e d a t t h r e e p e r c e n t o f t h e i r tim e d e p o s its and se v e n , te n or t h i r t e e n p e r c e n t o f t h e i r "demand d e p o s its a c c o rd in g to th e p la c e where th e y were l o c a t e d . These p e r c e n ta g e s , i n p a s s in g , had n o t been a l t e r e d s in c e 1 9 1 7 - ^ The l e g a l l y r e q u ir e d r e s e r v e s co u ld be drawn upon te m p o r a r ily by member banks f o r m eeting e x i s t i n g l i a b i l i t i e s u nder c e r t a i n c o n d i t i o n s . 19 A lth o u g h th e fu n d a m e n ta l s i g n i f i c a n c e o f t h e r e d i s co u n t r a t e was w id e ly re c o g n iz e d a t th e v e ry b e g in n in g o f | I th e F e d e r a l R eserv e System by th e 1 9 2 0 's , i t had conceded j , i th e p rim a ry im p o rta n ce i n c r e d i t r e g u l a t i o n t o open-m arket o p e r a tio n s due t o th e t r a d i t i o n a l o p p o s itio n o f A m erican t ■*-?Kisch and E lk in , oj). c i t . . p p . 3 1 0 -1 2 . ■^E. A. G o ld e n w e ise r, A m erican M onetary P o lic y (New Y ork: M cGraw-Hill Book Company, I n c . , 195>1) , P* 9 1 . ^ K i s c h and E lk in , o£. c i t . , p . *f02. h i ! com m ercial banks t o borrow ing and due t o r e l a t i v e l y l i q u i d m o n etary c o n d i t i o n s . 2 0 N e v e rth e le s s , th e p u b lic re g a rd e d i t a s th e symbol o f F e d e r a l R eserve p o l i c y and to o k i t i n t o t h e i r c o n s id e r a ti o n a s su c h . The r e d is c o u n t r a t e s d id n o t * change f r e q u e n t l y , y e t d u rin g th e p e rio d 1 9 2 2- 3 0 , th e F e d e r a l R eserv e Bank o f New York changed i t s r a t e tw e n ty - two t i m e s . 2^ - Each F e d e r a l R eserve Bank was g iv e n th e power to s e t r e g i o n a l r e d is c o u n t r a t e s f o r i t s d i s t r i c t , s u b je c t t o a p p ro v a l by th e F e d e r a l R eserve B o a rd . 22 There were a l s o i n d i c a t i o n s t h a t th e r e d is c o u n t r a t e was m a n ip u la te d t o e a se th e s tr in g e n c y o f f o r e ig n money m a r k e ts .23 A lthough F e d e r a l R eserve Banks w ere a u th o r iz e d , sub j e c t t o r e g u l a t i o n s o f th e F e d e r a l R eserv e B oard, t o buy and s e l l i n th e open m a rk e t, c a b le t r a n s f e r s , bankers* a c c e p ta n c e s and b i l l s o f ex c h an g e s, g o ld , and G overnm ental s e c u r i t i e s , open m arket o p e r a tio n s w ere, i n p r a c t i c e , 20H enry P a rk e r W i l l i s , The T heory and P r a c t i c e o f C e n tr a l Banking w ith S p e c ia l R e fe re n c e t o A m erican Experience 1913-19^? (New York? H arp er and B ro th e rs P u b l i s h e r s , 1 9 3 ^ ), p . Im-2; and C. O ', H ardy. C r e d it P o l i c i e s o f th e F e d e ra l R e serv e System (W ashington, D. Cl B ro o k in g s I n s t i t u t i o n , 1 9 3 2 ) , p p . 2 2 8- 3 2 . 21H ardy, op,, c i t . . p p . 3 5 8- 6 1 . 2 2G. L. Bach, F e d e r a l R eserve P o lic y Making i A S tu d y i n Government Economic P o lic y "Form ation ( New Yorks A lfre d A. Knopf', 1 9 5 0 ), pp.BCMJl. 23The Ik-th A nnual R eport o f th e F e d e r a l R eserve Board (W ashington, D. C: 1?he F e d e ra l R eserv e B oard, 1 9 2 7 ), p . 1 0 . I t w i l l be r e f e r r e d t o a s The l*fth Annual R eport o f - th e System h e r e a f t e r . „ . 112 c o n fin e d p r i n c i p a l l y t o b a n k e rs 1 a c c e p ta n c e s and U n ite d 2k S t a t e s Government s e c u r i t i e s . W hile r e d is c o u n ts w ere u s u a l l y low i n tim es o f low r e d is c o u n t r a t e s and h ig h when r a t e s w ere h ig h , th e r e was a p o s i t i v e c o r r e l a t i o n betw een o p en -m ark et o p e r a tio n s and th e pr? s i z e o f member bank r e s e r v e s , J The volume and e f f e c t s o f o p en -m ark et o p e r a tio n s a r e shown i n th e a t ta c h e d T ab le IV. The F e d e r a l R e se rv e Banks w ere r e q u ir e d t o redeem t h e i r n o te s i n g o ld or la w f u l money and th e T re a s u ry w as! a l s o r e q u ir e d to redeem them in g o ld . B ecause th e T re a s u ry s to o d re a d y t o g iv e a g o ld d o l l a r f o r ea ch 2 3 .2 2 g r a in s o f p u re g o ld o f f e r e d t o i t , th e F e d e r a l R e se rv e Banks u n l i m i t - e d ly d e a l t i n g o ld i n th e o p en -m ark et a t t h a t p r i c e . They w ere a l s o d e f i n i t e l y empowered, s u b j e c t to r e g u l a t i o n s by th e F e d e r a l R e se rv e B oard, t o m a in ta in a c c o u n ts i n f o r e ig n c o u n t r ie s and t o d e a l i n f o r e i g n ex ch an g e. The F e d e r a l R e serv e Banks w ere s p e c i f i c a l l y f o r b id d e n t o a c c e p t d e p o s its from th e o r d in a r y p u b l i c . ‘^ B u r g e s s , o p , c i t . . p p . 2 3 3 -3 ^ . 2 5I b i d . . p p . 2 28-29. TABLE I? OPEN-MARKET OPERATIONS A N D THE (Net change of monthly average d o lla r s ) M O N EY M ARKET26 ; in m illio n s of March 1923 November 1923 May 1927 December 1927 October 1929 Item November 1923 October 192*+ December 1927 Ju ly 1929 December 1930 A ll F ed eral Reserve Banks U .S .S e c u ritie s -233 f 502 » • 315 -M -59 ) ■ H90 R ediscounts 1-171 - 559 * ■ 56 (-567 - 5^9 Member banks r e serv e balances f 2 f 266 » ■ 137 - 65 1 29 26Exerpted from i b i d . , p. 23*+. H H U > CHAPTER V I RELATIONS BETWEEN THE CENTRAL BANK, THE COMMERCIAL BANKS AND THE M ONEY MARKET AT PRESENT I . INDIVIDUAL CENTRAL BANKS’ RELATIONS WITH THEIR M ONEY MARKET The Bank o f C anada* The c o n s id e r a b le r e l i a n c e of C an ad ian banks on Government s o u rc e s f o r an im p o rta n t p o r t i o n o f t h e i r c a sh r e s e r v e s , r e a s o n a b ly d eveloped c a p i t a l m a rk e ts , and th e in d ep en d en ce o f C anadian f i n a n c i a l c o n d itio n s r e s u l t i n g from th e abandonm ent of th e g o ld s ta n d a r d by th e U nited Kingdom, p re p a re d th e way f o r Canada t o e s t a b l i s h a c e n t r a l bank i n 1935» The new i n s t i t u t i o n was in te n d e d to be an in d e p e n d e n t b a n k e r s ’ and Government b an k . I t was e x p e c te d t h a t any in f lu e n c e i t m ight e x e r t on m o n etary c o n d itio n s would be p r i m a r i l y th ro u g h th e s h o r t te rm f i n a n c i a l m arket s . * * • The c h a r te r e d banks were u n d er th e Bank of Canada A ct r e q u ir e d t o m a in ta in a r e s e r v e o f n o t l e s s th a n f i v e p e r c e n t o f t h e i r d e p o s it l i a b i l i t i e s w ith in Canada i n th e 1G. S. D o rra n c e , ’’The Bank o f C an ad a ,” Banking i n th e B r i t i s h Commonwealth. R. S. S ay ers ( e d .) (O x fo rd : At th e C laren d o n P r e s s , 1 9 5 2 ), p p . 132-33. 115 form o f n o te s o f / o r d e p o s i t s a t th e Bank o f Canada. They h av e , how ever, formed a p r a c t i c e i n th e b e s t B r i t i s h t r a d i t i o n up t o d a t e , m a in ta in in g about t e n p e r c e n t r e s e r v e s i n th e form o f bank n o te s or c a sh b a la n c e s w ith th e Bank. A lth o u g h th e Bank d o es n o t have th e power to change r e s e r v e re q u ire m e n ts a t p r e s e n t , i t made e f f o r t s t o o b ta in th e power a t a c e r t a i n tim e . In th e b e s t o rth o d o x t r a d i t i o n s , th e Bank was au t h o r i z e d t o change th e r e d is c o u n t r a t e , y e t t h i s h as n e v e r had su ch an im p o rta n t meaning a s th e Bank r a t e o f th e Bank o f England h a d . T h is h a s been due m a in ly t o th e f a c t t h a t th e r e h as n e v e r been a m arket f o r s h o r t- te r m com m ercial p a p e rs i n Canada2 and Canada h as suspended th e g o ld b u l l i o n s ta n d a r d s in c e th e opening o f th e Bank. The r e d is c o u n t r a t e was e s t a b l i s h e d a t two and one- ! I h a l f p e r c e n t a t i t s v e ry b e g in n in g and rem ained unchanged : u n t i l F e b ru a ry , 1 9 ^ , when i t was red u ced to one and o ne- | I I h a l f p e r c e n t w ith o u t any s i g n i f i c a n t r e s u l t . In O cto b er, 1 9 5 0 , th e r a t e was in c re a s e d t o two p e r c e n t a s a symbol o f th e B ank’s i n t e n t i o n t o c o u n te r an i n f l a t i o n a r y te n d e n c y J 2Dorrance, o p. , cit., p. 1 3 5» j and h as rem ained th e same.3 "Banks had l i t t l e o c c a sio n t o borrow from u s ,,!+ i s a common d e s c r i p t i o n of th e e f f e c t o f th e r e d is c o u n t r a t e i n e v e ry Annual R eport of th e Bank of C anada. In c o n t r a s t to th e r e d is c o u n t r a t e , th e Bank h as e x p l o ite d th e power t o d e a l i n th e open m a rk e t. F o llo w in g th e example o f th e F e d e r a l R eserve System , th e Bank was empowered, f o r th e p u rp o se o f i t s open-m arket o p e r a tio n s , to buy and s e l l i n th e o pen-m arket e i t h e r in or o u ts id e of Canada, s e c u r i t i e s , c a b le t r a n s f e r s , b a n k e r s ' a c c e p ta n c e s , and b i l l s o f exchange of k in d s t h a t a r e d e fin e d a s e l i g i b l e f o r r e d i s c o u n t . ’ X'etj th e Bank o f Canada was a t f i r s t li m i t e d t o h o ld in g s e c u r i t i e s is s u e d and g u a ra n te e d by C anadian c e n t r a l and l o c a l g o v ern m en ts, h av in g a m a tu r ity ex c ee d in g two y e a rs from th e d a te o f a c q u i s i t i o n by th e Bank, o n ly up t o th r e e tim e s th e amount o f i t s p a id -u p c a p i t a l ; 5 tn*t by 193&, i t was a u th o r iz e d t o h o ld such s e c u r i t i e s up t o f i f t y p e r c e n t o f i t s o u ts ta n d in g n o te s and d e p o s it l i a b i l i t i e s , p ro v id e d t h a t i t s h o ld in g s of « s e c u r i t i e s n o t m atu rin g w ith in t e n y e a rs do n o t exceed f i v e 3Based on The Annual R e p o rts o f th e Bank o f Canada (O ttaw a: The Bank o f Canada, 1 9 3 6 -5hT . ^~Loc. c i t . 5Bank o f Canada A c t. A r t. 21 (1 ) ( d ) . 117 / tim e s th e amount of i t s p a id -u p c a p i t a l and r e s e r v e fu n d s . The Bank h as d ev o ted i t s e f f o r t s t o d e v e lo p in g a money m arket based on th e T re a s u ry b i l l a s an in s tru m e n t f o r c r e d i t c o n t r o l . ' 7 As a s te p i n t h i s d i r e c t i o n , th e Bank h a s i n s t i t u t e d p u rc h a se and r e s a l e ag reem en ts w ith bond d e a le r s who ta k e a jo b b in g p o s i t i o n in th e s h o r t- te r m p Government s e c u r i t y m a rk e t. The Bank h as a l s o a s s i s t e d i n d e v e lo p in g a f a i r l y a c t i v e m arket i n lo n g -te rm Government s e c u r i t i e s , by e n t e r in g th e s e c u r i t y m a rk e ts from th e first.9 The Bank h as d e a lt i n open-m arket o p e r a tio n s in Government s e c u r i t i e s n o t o n ly t o i r o n out th e s e a s o n a l v a r i a t i o n s of th e c a sh p o s i t i o n s of th e c h a r te r e d b an k s, b u t a l s o f o r f in a n c in g th e war e f f o r t s o f th e G overnm ent. j A lso , th e Bank h a s e n te r e d from tim e t o tim e i n t o th e I s e c u r i t y m arket t o f a c i l i t a t e th e fu n d in g o f lo n g -te rm Government d e b ts . ^Bank o f Canada Act Amendment A c t. 1988. A r t . 12. 7The Annual R ep o rt of th e Bank o f C anada. 1986. o p . c i t . . p p . 1 6 -1 7 . ^The Annual R ep o rt o f th e Bank o f C anada. 1958. i b i d .. p . 8 . ^See A. F . W. P lu m p tre , C e n tr a l Banking i n th e B r i t i s h Dominion (T o ro n to : The U n iv e r s ity o f T o ro n to P r e s s , 1 9 ^ 0 ) , p p . 2 3 3 - 3 * 4 - . 118 F u rth e rm o re , th e r e a r e c e r t a i n i n d i c a t i o n s t h a t th e Bank e n t e r s th e open m arket w ith an i n t e n t i o n t o in f lu e n c e th e lo n g -te rm money m a rk e t. D uring th e p e r io d o f when c h a r te r e d banks ex ten d ed a s u b s t a n t i a l amount of c a p i t a l a s s i s t a n c e to b u s in e s s th ro u g h th e p u rc h a se of c o r p o r a te s e c u r i t i e s , lo n g - te r m Government bonds y i e l d s went up r a p i d l y and r a i s e d lo n g -te rm i n t e r e s t r a t e s to check th e ex p a n sio n o f p r i v a t e c a p i t a l i n v e s t m e n t s . ^ The Bank a l s o e n te r e d th e f o r e ig n exchange m arket to re d u c e b h o r t- r u n f l u c t u a t i o n s in th e e x t e r n a l v a lu e of th e C anadian d o l l a r u n t i l 1939, when exchange c o n t r o l was in tr o d u c e d . In 1939, th e F o re ig n Exchange C o n tro l Board was e s t a b l i s h e d u nder th e F o re ig n Exchange C o n tro l Order to c o n t r o l t r a n s a c t i o n s in v o lv in g f o r e ig n ex change, and th e l e g a l r e s p o n s i b i l i t y to m a in ta in th e e x t e r n a l v a lu e o f th e C anadian d o l l a r was t r a n s f e r r e d from th e Bank t o th e G overnm ent. Y e t, th e Chairman of th e Board was th e Governor 9 I l o f th e Bank. The Board was r e s p o n s i b le t o t h e M in is te r o f | F in a n c e , b u t i n d a y - to - d a y o p e r a tio n s th e Bank p la y e d a morel a c t i v e r o l e th a n d id th e in d i v i d u a l members o f th e B oard. The Bank was alw ays re a d y t o f in a n c e th e Board t r a n s a c t i o n s l c The Annual R ep o rt of th e Bank of C anada. 19*+8. o p . c i t . , p p . 7 -9 and 11-13*__________________________________________ 119 by p ro v id in g n e c e s s a r y C anadian d o l l a r s . H In 1951) th e exchange c o n t r o l system was a b o lis h e d . The r e s p o n s i b i l i t y t o m a in ta in th e e x t e r n a l v a lu e of th e C anadian d o l l a r i s now on th e s h o u ld e rs of th e Bank, y e t t h e Government e x p re s se d i t s i n t e n t i o n t o m a in ta in a new Exchange Fund and i t was p re se rv e d by An A ct r e s p e c tin g C u rre n c y , R oyal C anadian M int and th e Exchange Fund A ct, 1952. The Exchange Fund, w hich h o ld s th e o f f i c i a l r e s e r v e s o f g o ld and f o r e ig n c u r r e n c i e s , con t i n u e s i n b ein g second i n o p e r a tio n u n d er th e F o re ig n Exchange C o n tro l Act and i s a v a i l a b l e t o c o n t r i b u t e t o o r d e r ly c o n d itio n s and a s a f a c t o r o f s t a b i l i t y i n th e exchange m a r k e t .1 2 A lth o u g h th e Bank does n o t have powers t o r e g u l a t e consum er c r e d i t s and r e a l e s t a t e c r e d i t s , a s w e ll a s m argin re q u ir e m e n ts , th e s e powers a r e h e ld by t h e Government13 and by th e S to ck E x c h a n g e r e s p e c t i v e l y . l l T h i s p a ra g ra p h r e l i e s on A lan 0 . G ib b o n s," F o re ig n Exchange C o n tro l i n Canada, 1 9 3 9 -5 1 *'1 The C anadian J o u rn a l o f Econom ics and P o l i t i c a l S c ie n c e IX X (F eb ru ary ,1953)>35-36• 12A s ta te m e n t made by th e M in is te r of F in an ce i n th e House of Commons q u o ted in The Annual R e p o rt of F o re ig n Exchange C o n tro l B o ard . 1951 (Ottaw a? F o re ig n Exchange C o n tro l B oard, 1951)> P • 1°» l^ S e e The Annual R ep o rt of th e Bank o f C anada. 1951. o p . c i t . . p . 3 . l^ S e e The Annual R eport o f th e Bank of Canada. 19*+6, i b i d . . p . 1 1 . ! 120 The Bank i s s o l e l y th e b a n k e rs ' and g o v ern m e n ts' b an k . I t i s p r o h ib ite d from having d i r e c t c o n ta c t w ith th e p u b l i c , o th e r th a n th e above-m entioned tw o. T here h as n ev e r been a q u a r r e l betw een th e Bank and o th e r c h a r te r e d b an k s. As a m a tte r o f f a c t , "no f i n a n c i a l a c t i o n h as e v e r been ta k e n w ith o u t c o n s u ltin g and, i f n e c e s s a r y , p a c if y in g th e c o u n t r y 's b a n k e r s . The Bank h a s o f te n f r e e l y r e s o r t e d t o n e g o t i a t i o n w ith banks when i t was deemed n e c e s s a r y t o ad o p t c e r t a i n m onetary m eas u r e s .1 6 The Bank of E n g la n d . For y e a rs th e E n g lis h banks had k e p t a r e g u l a r minimum r a t i o o f ab o u t te n p e r c e n t of cash ( c u rre n c y i n th e t i l l s p lu s d e p o s i t s ) w ith th e Bank o f England t o t h e i r d e p o s it l i a b i l i t i e s . The b an k s, how e v e r , a g re e d on th e s u g g e s tio n o f th e Bank o f E n g lan d , to ■ ^D orrance, op,, c i t . . p . 1 2 6 . l 6p*or i n s t a n c e , i n 1 9 5 1 * when t h e r e was need to t i g h t e n th e c h a r te r e d b a n k s ' cash p o s i t i o n i n o rd e r to c o u n te r i n f l a t i o n a r y t e n d e n c i e s , th e Bank met w ith r e p r e s e n t a t i v e s o f th e c h a r te r e d banks tb d is c u s s th e s i t u a t i o n and co n clu d ed an agreem ent t h a t to p re v e n t f u r t h e r ex p a n s io n i n t o t a l bank c r e d i t th e banks had to u n d e rta k e , a more r ig o r o u s s c r u ti n y of a p p l i c a t i o n s f o r c r e d i t w ith a view t o c u r t a i l i n g ad v an ces f o r l e s s e s s e n t i a l p u rp o se s and t o en c o u ra g e b o rro w ers t o go t o s e c u r i t y m arket or e ls e w h e re f o r t h e i r c a p i t a l r e q u ir e m e n ts . See The Annual R ep o rt of th e Bank o f C anada. 1951. o p . c i t . . p . 9* 121 abandon th e p r a c t i c e of w in d o w -d ressin g and m a in ta in th e t r u e and norm al r a t i o o f e i g h t p e r c e n t . 1? S in c e th e n th e ban k s have m a in ta in e d a l i t t l e over e i g h t p e r c e n t of d e p o s it l i a b i l i t i e s in c a sh i n th e Bank o f E n g lan d . S in ce 1932, when th e B r i t i s h Government s t a r t e d i t s cheap money p o l i c y , th e Bank r a t e had been c o m p le te ly i n ab ey an ce and th e m ach in ery o f c r e d i t d i s c i p l i n e th ro u g h th e d is c o u n t m arket l a r g e l y s o . The Bank r a t e f ix e d a t two p e r c e n t, i n 1 9 3 2 ,had rem ained unchanged u n t i l November, 1951, when i t was r a i s e d to two and o n e - h a lf p e r c e n t, e x c e p t f o r a s h o r t w h ile r i g h t a f t e r th e o u tb re a k o f th e Second World War. The Bank r a t e was n o t o n ly c o n s id e r a b ly low b u t a l s o made i n e f f e c t i v e by a new f in a n c in g mechanism i n th e U n ite d Kingdom. S in c e th e w ar, th e Bank ad o p ted *'ever open back d o o r” p o l i c y w hereby th e d is c o u n t f irm s co u ld g e t , a t w i l l , c a sh f o r b i l l s or b i l l s f o r c a sh a t a m arket r a t e th ro u g h th e o f f i c i a l a g e n ts of th e Bank. F u rth e rm o re , even th e b an k s, i f th e y found th e m se lv e s s h o r t o f fu n d s , could s e l l T re a s u ry b i l l s to th e o f f i c i a l a g e n ts of th e Bank i n th e 17 W . Manning D acey, The B r i t i s h Banking Mechanism (Londons H u tch in so n H ouse, 1 9 5 1 ), PP» 96 and 186-8$. m. Kennedy, ”M onetary P o l i c y , ” The B r i t i s h Economy. 1 9 ^5 -1 9 5 0 . G. D. N. Worswick and P . H. Ady, (eds.) (O xfords At th e C laren d o n P r e s s , 1 9 5 2 ), p . 195*______________ 122 m a rk e t. S t i l l m ore, i t became a custom f o r th e o f f i c i a l a g e n ts o f th e Bank to buy f o r th e Bank and p ro b a b ly f o r th e ac co u n t o f " d e p a r tm e n ts ," s h o r t l y m a tu rin g T re a su ry b i l l s d i r e c t l y from th e c l e a r in g b an k s, w ith th e u n d e r s ta n d in g t h a t th e l a t t e r would u se th e p ro c e e d s t o buy from th e m arket e l i g i b l e b i l l s o f th e l a r g e s t m a t u r i t y . ^ The t r a d i t i o n a l b a r r i e r betw een th e Bank and th e com m ercial banks was b ro k en a t a n o th e r p o i n t . In 19^0, t h e Government i n s t i t u t e d a new method o f s h o r t- te r m b orrow ing a s an a l t e r n a t i v e t o in c r e a s in g th e ac co u n t o f T re a s u ry b i l l s . Each week th e T re a s u ry , i n c o n s u l t a t i o n w ith th e Bank, d eterm in ed th e amount i t r e q u ir e d from th e banks and asked them t o le n d money i n th e form of T re a s u ry D e p o s it R e c e ip ts w ith th e c u rre n c y o f s i x m onths a t a r a t e d e te rm in e d by th e T re a su ry i t s e l f th ro u g h th e Bank. The T re a su ry D e p o sit R e c e ip ts w ere n o n - n e g o tia b le but could be used a t p a r t o pay f o r s u b s c r i p t i o n s t o new Government is s u in g s e c u r i t i e s . In th e p o stw a r p e r io d , how ever, th e T re a s u ry sw itc h ed back t o f in a n c in g I t s s h o r t- te r m n eed s w ith T re a s u ry b i l l s and by th e e a r l y p a r t o f 1952 a l l T re a su ry D e p o sit R e c e ip ts had been r e p a i d . 20 ^ Lqc. c i t . 2°D acey, op,, c i t . , p p . 1 8 3 - 8 5 . 123 Due t o t h i s B a n k 's " e v e r open hack d o o r" p o l i c y , open m arket o p e r a tio n s i n th e o r i g i n a l se n se ( th e Bank h as i n i t i a t i v e t o d e a l i n s e c u r i t i e s ) had a p p a r e n tly d is a p p e a r e d . In o th e r w o rd s, th e Bank was m e re ly a t e c h n i c a l a d m i n i s t r a t i v e a g e n t t o s e rv e th e cheap money p o lic y of th e Government d u rin g th e p e rio d o f 1932 t o 195l> l o s i n g t h e two t r a d i t i o n a l in s tr u m e n ts o f m onetary p o l i c y — th e Bank r a t e and open m ark et o p e r a t io n s . However, th e r e s t o r a t i o n o f th e C o n s e rv a tiv e Govern ment and th e growing d e f i c i t i n th e b a la n c e o f paym ents, d u rin g th e l a t t e r h a l f o f 1951j re v iv e d th e t r a d i t i o n a l m onetary p o l i c i e s . The change from n e u t r a l m onetary p o lic y t o p o s i t i v e m onetary p o l i c y r e s t o r e d th e im p o rta n c e o f th e Bank i n th e B r i t i s h economy. The Bank o f England d is c o u n t r a t e ( th e Bank r a t e ) was r a i s e d from two p e r c e n t to two and o n e - h a lf p e r c e n t, and once more became " e f f e c t i v e . " j j I n s te a d o f p u rc h a s in g T re a s u ry b i l l s v i r t u a l l y w ith o u t any l i m i t , and a t r a t e s r i g i d l y m a in ta in e d a t a v e ry low l e v e l (ro u g h ly o n e - h a lf p e r c e n t) th e Bank o f England made i t p u b l i c t h a t th e Bank would h old i t s e l f f r e e t o su p p ly th e m a rk et w ith ca sh e n t i r e l y ,&t i t s own d i s c r e t i o n . To e n su re th e e f f e c t i v e n e s s o f th e Bank r a t e a s u b s t a n t i a l r e d u c tio n was e f f e c t e d in th e f l o a t i n g d e b t by th e is s u e of 1 ,0 0 0 m i l l i o n one and o n e - th ir d p e r c e n t Funding 12*f Stock.21 S in ce th e n , th e Bank r a t e h a s been a c t i v a t e d . I t was a g a in r a i s e d , t h i s tim e from two and o n e - h a lf t o fo u r p e r c e n t i n M arch, 1952— th u s making r e l i a n c e on th e B r i t i s h program f o r r e s t o r a t i o n o f b a la n c e i n th e economy. As th e B r i t i s h payment c o n d itio n s im proved th e Bank low ered i t from fo u r t o th r e e and o n e - h a lf p e r c e n t, i n S eptem ber, 1953> t o make i t com parable w ith m arket r a t e s and f u r t h e r t o t h r e e p e r c e n t i n May, 195*S t o av o id th e in flo w o f h o t money f o r i n t e r e s t a r b i t r a g e from th e U n ite d S ta te s , and t o b r in g th e Bank r a t e i n t o c l o s e r a lig n m e n t w ith th e p a t t e r n o f i n t e r e s t r a t e s i n th e m a r k e t.22 At t h a t tim e , i t was em phasized t h a t a f l e x i b l e c r e d i t p o l i c y would c o n tin u e t o be pursued and t h a t th e downward tr e n d m ight be r e v e r s e d sh o u ld a. change i n c o n d itio n s c a l l f o r a s t i f f e n i n g o f r a t e s . 23 i To know th e e f f e c t i v e n e s s o f th e re v iv e d Bank r a t e , j some p a s s a g e s o f th e E conom ist a r e c i t e d a s s u f f i c i e n t . The Econom ist o f J u ly 3 , 195^» r e p o r te d th a ts ; 2lT he 22nd IBS Annual R eport o f th e Bank, p p . 2 7 -2 8 . 22The 2 ^ 4 -t h IBS A nnual R e p o rt, p p . 1 7 5 -7 6 . 23«Three P e r c e n t P arad o x ?” The E conom ist CLXXI (May 22, 195*+), 599-600. 125 A few h o u ses w ere f o rc e d t o borrow a t th e Bank o f England a t th e p e n a l r a t e £ th e Bank r a t e ) and o f te n p a id up t o two and t h r e e - q u a r te r s p e r c e n t and even th r e e p e r c e n t to th e banks f o r n ig h t money. A n o th er i s s u e o f The Econom ist a l s o n o te d t h a t : Bank r a t e was red u ce d from 3 1 / 2 t o 3 p e r c e n t on T hursday and th e c l e a r i n g banks sub s e q u e n tly announced c o rre sp o n d in g r e d u c tio n s i n t h e i r d e p o s it a llo w a n c e s and s h o r t lo a n r a t e s ; 2? The Bank r a t e in f lu e n c e s n o t o n ly d o m e stic money r a t e s b u t a l s o i n t e r n a t i o n a l m onetary c o n d itio n s d e s p i t e th e f a c t t h a t th e r e e x i s t exchange c o n t r o l s among c o u n t r ie s i in c lu d in g th e U nited Kingdom. The in c r e a s e in th e Bank r a t e i n 1952 made a c c e p ta n c e s i n London no lo n g e r l e s s e x p e n siv e th a n i n New Y ork. I t seems t o have been a l s o r e s p o n s i b le f o r check in g th e d e c lin e i n c a p i t a l e x p o r ts from th e U nited K i n g d o m . 26 T h e r e d u c t io n in th e Bank r a t e i n 195*+ w as, a s h a s been n o te d e a r l i e r , m a in ly d e s ig n e d .to c o u n te r th e in f lo w o f f o r e i g n h o t m oney.27 | ! A lthough th e Bank, i n c o o p e ra tio n w ith "departm ents,*^ 2*H»Money M a rk e t." The E co n o m ist. CLXXII ( J u l y 3 . 195*0, P . 68. 2? I b i d . . CLXXI (May 15, 195*0, p . 571. 26 see The 22nd IBS Annual R e p o rt, p . 189. 27The E co n o m ist. (May 22, 195*0-, l o c . c i t . 126 d e a l t i n th e Government lo n g - te r m s e c u r i t i e s i n th e open m arket i n o rd e r t o m eet th e Labor G overnm ent's u l t r a cheap money p o l i c y , i t h as n o t , a f t e r th e D a lt o n 's u n s u c c e s s fu l a t te m p t, b een c a lle d i n e x c e p t on c e r t a i n o c c a s io n s 2® — th e tim e o f th e g r e a t n a t i o n a l i z a t i o n i s s u e , i n November, 19**9, a f t e r th e d e v a lu a tio n o f th e pound, and o th e r la r g e s c a le c o n v e rs io n p e r i o d s . 2^ N e v e r th e le s s , th e Bank h as a c t i v e l y e x e c u te d open m arket o p e r a tio n s ' i n th e s h o r t- te r m Govern ment s e c u r i t y m arket a s m arket c o n d itio n s r e q u i r e . Y et, th e a u t h o r i t i e s have c o n tin u e d t o rem ind th e money m arket o f t h e i r c o n t r o l over th e b a n k s ' c a sh r e s e r v e s by oc c a s i o n a l l y le a v in g a few d is c o u n t h o u ses u n d er th e n e c e s s i t y o f o b ta in in g m a rg in a l am ounts o f c r e d i t from th e Bank o f E ngland a t th e p e n a l r a t e s : T hroughout th e p e r io d A p r il 1953-M arch 195*+ th e y { th e Bank of England} have more or l e s s c o n tin u o u s ly in te r v e n e d i n th e m arket t o o f f s e t th e d i s t u r b i n g in f lu e n c e o f t r a n s f e r s t o and from th e Government a c c o u n t s . ..3 ^ The Bank o f E ngland does n o t , l i k e th e Bank o f 2^T h is does n o t mean t h a t th e Bank o f E ngland h as n e v e r succeeded i n in f lu e n c in g lo n g -te r m i n t e r e s t r a t e s . See Joan R obinson, "The R ate o f I n t e r e s t ,* ' The R ate o f I n t e r e s t and O ther E ssa v s (London: M acm illan and Company, L t d . , 1952T7 P . 30. 29 se e Kennedy, op. c i t . . p p . 1 9 5 -2 0 5 . 30tijjonetary S urvey 1953“ * } V M idland Bank Review (May, 195*0, 6 . 127 Canada, have any l e g a l power over th e s to c k m a rk e t. Y et, 't h e T re a s u ry h a s a., fo rm id a b le c o n t r o l n o t o n ly over th e s to c k m a rk e t, b u t a l s o over in v e stm e n t i n g e n e r a l. The Borrowing (C o n tr o l and G u a ra n te e s) Act o f 19^6 gave th e i Government power t o e o n t r o l and d i r e c t th e flo w of new in v e s tm e n t, and i f n e c e s s a r y , t o s ti m u la te t h a t flo w . The T re a s u ry i s empowered t o r e g u l a t e borrow ing and r a i s i n g o f money by th e i s s u e o f s h a re s and d e b e n tu r e s . B ecause th e c o v e ra g e o f th e A ct was n o t d e sig n e d t o in c lu d e a l l b o rro w in g s, e x c e p t th o s e -through th e s to c k m a rk e t, th e T re a s u ry h a s th ro u g h th e Bank of E ngland asked banks t o o b se rv e th e s e l e c t i v e r e s t r a i n t s over bank c r e d i t s , is s u in g memoranda. The memoranda have drawn th e b a n k s1 ' a t t e n t i o n t o e n s u re t h a t a d v a n ce s a r e n o t made f o r th e in c re a s e d f in a n c e o f h i r e p u r c h a s e , p a r t i c u l a r l y o f consumer goo d s, f o r any s p e c u l a t i v e p u rp o s e , or £ or u n n e c e s s a ry c a p i t a l i e x p e n d itu re o r in v e s tm e n t. I t was supplem ented by a Board i o f T rade o rd e r f i x i n g minimum d e p o s its and maximum r e paym ent p e r io d s on a w ide v a r i e t y o f g o o d s . ^ A lthough th e r e s p o n s i b i l i t y t o r e g u l a t e in v e stm e n t i s on th e T re a s u ry , th e Bank a l s o s h a re s a p a r t by p a r t i c i p a t i n g i n th e N a tio n a l 3 ! l . G. P a t e l , "M onetary P o lic y i n P o stw ar Y ears,*1 S t a f f P a p e r s . I l l ( A p r il, 1953) 98. 128 In v estm en t C o u n cil a s a member, an d , from tim e t o tim e , c a l l th e b a n k s ' a t t e n t i o n t o n e c e s s a r y m onetary m easures on th e b a s i s o f m oral s u a s io n and o f l a t e n t p r e s s u r e o f l e g a l d i r e c t i n g power t o be r e f e r r e d l a t e r . 32 In c o u n t r ie s l i k e th e U n ited Kingdom, where more th a n tw o - t h i r d s o f th e t o t a l in v e stm e n ts o f th e c o u n try a r e sub j e c t t o G o v e rn m e n t,c o n tro l and w here, b e s id e s v a r io u s Govern m e n ta l c o n t r o l s , d i r e c t c o n t r o l o ver p r i c e s o f a l l r a tio n e d g o o d s, i n d i r e c t p r i c e c o n t r o l s o ver u n r a tio n e d goods th ro u g h l a r g e s c a l e s u b s i d i e s , b u lk p u rc h a s in g program , i n t e r n a l re v e n u e c o n t r o l , im port d u t i e s , and wage c o n t r o l s , and th e d i s t r i b u t i n g system o f m a t e r i a l s , a c c o rd in g t o p r i o r i t i e s a r e i n p r a c t i c e , th e sp h e re th e c e n t r a l bank can a u to n o m ously e x e r c is e i t s pow ers i n i s n o t so w id e .33 N e v e rth e le s s , t h i s overw helm ing governm ent c o n t r o l of; th e economy does n o t do away w ith th e im p o rta n ce o f th e J B ank. I t , th o u g h on a t e c h n i c a l a d m i n i s t r a t i v e l e v e l , plays! a v e ry im p o rta n t— in d e e d , an a b s o l u t e l y s t r a t e g i c — r o l e i n 32see R obert A. B rady, C r i s i s i n B r i t a i n (B e rk e le y , C a l i f o r n i a : U n iv e r s ity o f C a l i f o r n i a P r e s s , 1 9 5 0 ), p p . 60- 70; C. N. W a rd -P e rk in so n , "Banking D evelopm ent," W orswick and Ady ( e d s . ) , o n . c i t . . p . 218; D acey, ojd. c i t . . p p . 1 9 5 -7 . i ^ B r a d y , o p . c i t . . p p . 72-75* However, some o f t h e s e f a c t o r s do n o t now e x i s t as o f August 195*+. 129 i t s im p le m e n ta tio n . A gain, i n f o r e i g n exchange and g o ld d e a lin g s , th e Bank ta k e s th e c a r d i n a l p a r t tho u g h on a t e c h n i c a l l e v e l . The Bank, a s th e a g e n t o f th e Exchange E q u a liz a tio n A ccount, h as managed th e A ccount u n d er th e c o n t r o l and f o r th e ac co u n t o f th e T re a s u ry s in c e 1932. The A ccount was managed t o n e u t r a l i z e d a y - to - d a y f l u c t u a t i o n s i n s t e r l i n g r a t e s o f ex ch an g e. A f te r Septem ber 1939, when exchange c o n t r o l was in tr o d u c e d , th e Bank assumed th e new re s p o n s i b i l i t y t o a d m in is te r exchange c o n t r o l i n th e U n ite d Kingdom on b e h a lf of th e T r e a s u r y .3** D uring th e p e r io d 1939 t o 1951, o n ly th e Bank, a c tin g f o r th e Exchange Account, had bought and s o ld f o r e i g n exchanges a s a p r i n c i p a l a t f ix e d r a t e s . Exchange c o n t r o l h a s been r e c e n t l y r e la x e d t o a c o n s id e r a b le extent.3-> T here h as been no s t a t u t o r y l i m i t on th e s iz e o f th e A ccount s in c e Septem ber 1939, and i t c o n tin u e s t o h o ld th e g o ld and d o l l a r s o f th e s t e r l i n g a r e a . These r e s e r v e s amounted t o 2 .5 b i l l i o n d o l l a r s i n J a n u a ry , 195*+• The Bank, 3^116 5 th Annual R ep o rt on Exchange R e s t r i c t i o n s . 195^ (W ashington, D. Cs I n t e r n a t i o n a l M onetary Fund, 1 9 W , PP. 307. 3^See l o c . c i t . The 22nd IBS Annual R e p o rt, p . 1 3 6 ; The 2*+th IBS Annual R e p o rt, p . 127 and The E c o n o m ist. 130 tho u g h n o m in a lly , can buy g o ld a t th e p r i c e o f 2^8 s h i l l i n g s p e r o u n c e . 36 I F i n a l l y , th e Bank s t i l l a c c e p ts d e p o s its from th e o r d in a r y p u b l i c , b u t t h i s i s n o t s i g n i f i c a n t . The d i r e c t r e l a t i o n s form ed d u rin g th e l a s t war betw een th e Bank and com m ercial banks have rem ained though ,th e T re a s u ry D e p o sit R e c e ip ts sy stem disappeared*. The Bank h as from tim e to tim e bought b i l l s d i r e c t l y from b a n k s. A lth o u g h th e B a n k 's l e a d e r s h i p among banks h as been w e ll known, i n th e p a s t th e m o ral power o f th e Bank, a s opposed t o i t s p r e s s u r e e x e r c is e d th ro u g h th e money m a rk e t, had been used v e ry s p a r i n g l y . N e v e rth e le s s , i t makes s ta te m e n ts on m onetary c o n d itio n s from tim e to tim e , a sk in g th e banks t o ta k e n e c e s s a r y s t e p s . 37 Under th e Bank o f E ngland A c t, 19^6, i The. Bank, i f th e y t h i n k i t n e c e s s a r y i n th e [ p u b lic i n t e r e s t , may r e q u e s t in fo rm a tio n from 1 and make recom m endations t o b a n k e rs , and may, i f so a u th o riz e d by th e T re a s u ry , i s s u e d i r e c t i o n s t o any b an k er f o r th e p u rp o se of s e c u rin g t h a t j e f f e c t a s g iv e n to any such r e q u e s t or recoin- j m e n d a tio n .3 o I 36*»Central B an k s," F e d e r a l R e serv e B u l l e t i n XL (M arch, 195*0, 3 2 b . 3 7see M idland Bank R eview , o p . c i t . , p . 5» 3®The Bank of England A ct. 19^-6. A rt. b. (2). 131 No doubt t h i s c la u s e g iv e s th e Bank a s tro n g pow er, y e t no i n s t a n c e o f i t s u se h as been publicized.39 The Bank o f F ra n c e . Though th e r e had n e v e r been i n s t i t u t e d l e g a l c a sh r e s e r v e re q u ire m e n ts p r i o r to 19^8, th e banks m a in ta in e d s u b s t a n t i a l amounts of b a la n c e s w ith t t h e Bank o f F r a n c e . In a d d i t i o n , a form of su p p le m en tary r e s e r v e r e q u ire m e n ts was e s t a b l i s h e d i n S ep tem b er, 19^8, i n o rd e r t o c o u n te r i n f l a t i o n a r y f o r c e s th e n p r e v a i l i n g . Each bank was r e q u ir e d to c o n tin u e t o h o ld th e volume of Government s e c u r i t i e s i t h e ld on O ctober 1 , 19*+8, and to m a in ta in a s p e c i a l r e s e r v e in c a sh and i n s h o r t- te r m Government s e c u r i t i e s am ounting t o tw e n ty p e r c e n t of a l l new d e p o s its r e c e iv e d a f t e r O ctober 1 , 1 9 ^ 8 .^ The Bank, u n lik e o th e r c e n t r a l b an k s, made S p e c if ic u se o f changes i n th e r e d is c o u n t r a t e u n t i l th e o u tb re a k o f th e Second World War. T h is was p a r t l y e x p la in e d by th e f a c t t h a t F ra n ce m a in ta in e d th e g o ld s ta n d a rd u n t i l Septem ber 1936, w e ll a f t e r many c o u n t r ie s went o f f th e g o ld s ta n d a r d and p a r t l y by th e f a c t t h a t t h e Bank d id n o t have an e x te n s iv e power to d e a l i n open m arket up t o 1938. The f a i l u r e t o e n fo rc e d i r e c t c o n t r o l s d u rin g th e 39w & ra-P erkinson, o p . c i t . , p . 218. ^ T h e 1 9 th IBS Annual R e p o rt, p . 170. 132 war and th e p o stw a r p e r io d s fo rc e d F ra n c e t o r e s o r t to m o n etary p o l i c y i n an e f f o r t t o re c o v e r a sound economy and t o eheck i n f l a t i o n . B ecause q u a l i t a t i v e m onetary m easures and li m i t e d s c a le h ig h e r i n t e r e s t p o lic y ta k e n d u rin g th e e a r l y p o stw ar p e rio d w ere in a d e q u a te , th e Bank s t a r t e d , i n c o o p e ra tio n w ith f i s c a l a u t h o r i t i e s , th e s y s te m a tic a p p l i c a t i o n o f q u a n t i t a t i v e c r e d i t c o n t r o l s . B e sid e s th e r e s e r v e re q u ire m e n ts d e s c r ib e d abo v e, th e Bank e s t a b l i s h e d a r e d is c o u n t c e i l i n g f o r each com m e rc ia l bank a t a l e v e l s l i g h t l y h ig h e r th a n t h a t p r e v a i lin g a s o f O ctober 1 , 19*+8. The e f f e c t o f th e s e c e i l i n g r e s t r i c t i o n s was to l i m i t a c c e s s by th e com m ercial banks i n o r d e r to o b ta in r e s e r v e s w ith w hich t o expand le n d in g t o th e p u b l i c . The maximum f o r a l l banks to g e th e r amounted t o F r . 188 b i l l i o n , tho u g h i t h as been in c r e a s e d s in c e th e n . I f a bank had r e c o u r s e t o r e d is c o u n ts beyond th e c e i l i n g a p p l ic a b le t o i t ( th e maximum r a t e o f e x c e ss allow ed b ein g l i m i t e d t o t e n p e r c e n t ) , i t would have t o p ay an e x t r a one and o n e - h a lf p e r c e n t in te r e s t.* 4 ^ I t i s , how ever, n o te w o rth y t h a t th e c e i l i n g was n o t a p p l i c a b l e t o medium- te rm in v e stm e n t c r e d i t s and o th e r s p e c i a l c r e d i t s . ^J-L oc. c i t . The 22nd IBS A nnual R e p o rt, p . 193} and The 2 1 s t IBS Annual R e p o r t. p . 199• 1 3 3 S in c e 19*+7, when th e Bank ad o p ted a f l e x i b l e m onetary p o l i c y , th e r e d is c o u n t r a t e h a s been changed from tim e to tim e i n o rd e r t o c o u n te r i n f l a t i o n a r y te n d e n c ie s a t one tim e , t o p r e s e rv e t h e i r i n t e r n a t i o n a l r e s e r v e s a t a n o th e r . I t h a s b een cu stom ary f o r th e banks to change t h e i r r a t e s a c c o rd in g t o th e r e d is c o u n t r a t e . I t sh o u ld be n o te d t h a t th e r e d is c o u n t r a t e i s , a c c o rd in g t o F o s t e r , j3t j £ l ., n o t o n ly th e r a t e a t w hich th e com m ercial banks borrow from th e Bank, b u t a l s o th e r a t e a t w hich th e money m arket an d , t o some e x t e n t , b u s in e s s i n g e n e r a l borrow . T h e r e f o re , th e r e d is c o u n t r a t e p o lic y i s much more e f f e c t i v e th a n th o s e o f o th e r c e n t r a l b a n k s .1+2 In 1938, th e sp h e re o f th e B ank1s open-m arket o p e r a tio n s was g r e a t l y e x te n d e d . The Bank was s p e c i f i c a l l y empowered, by d e c re e o f th e P r e s i d e n t , t o u n d e rta k e open- m ark et o p e r a t io n s i n r e s p e c t t o n e g o t ia b l e s h o r t- te r m b i l l s and c r e d i t in s tr u m e n ts , such a s : T re a su ry b i l l s , n a t i o n a l d e fe n s e n o te s , p ro m isso ry n o te s , b a n k e rs 1 a c c e p t a n c e s , and s h o r t- te r m h i l l s of l o c a l a u t h o r i t i e s . Though i t i s n o t c l e a r t o what e x te n t and i n what manner th e Bank h as used i t s open-m arket o p e r a tio n power ^ 2M ajor B. F o s t e r , et. a l . , Money and Banking ( f o u r t h e d i t i o n ; New Yorks P r e n t i c e - H a l l , I n c . , 1 9 5 3 ), PP» 55^-5* 13*+ d u rin g th e Second World War and th e p o stw a r p e r i o d s , i t i s no doubt t r u e t h a t th e pow ers have been e x t e n s i v e l y used i n c o o p e ra tio n w ith th e r e d is c o u n t r a t e p o l i c y . N ever t h e l e s s , th e f a c t s t h a t th e r e d is c o u n t f a c i l i t i e s have been more e x t e n s iv e ly u t i l i z e d i n F ra n ce th a n o th e r c o u n t r i e s , and t h a t th e Government h a s made i t a r u l e t o borrow n e c e s s a r y money n o t i n d i r e c t l y th ro u g h th e money m arket b u t d i r e c t l y from th e Bank o f F ra n c e , te n d t o i n d i c a t e th e l e s s s i g n i f i c a n c e o f th e o p en -ja ark et o p e r a tio n power o f th e Bank th a n o th e r c e n t r a l b a n k s . The Bank c a r r i e d on open-m arket o p e r a tio n s a l s o i n th e f o r e i g n exchange m a rk e t, y e t a f t e r 1936 when th e Exchange S t a b i l i z a t i o n Fund was e s t a b l i s h e d , a c o n s id e r a b le p o r t i o n o f th e f o r e ig n exchange t r a n s a c t i o n s p r e v io u s ly c a r r i e d out by th e Bank were ex e cu te d by th e Fund. In 1939, exchange c o n t r o l was in tro d u c e d and th e M in is te r o f F in a n c e was g ra n te d e x te n s iv e a u t h o r i t y i n th e f i e l d of exchange c o n t r o l , y e t th e Bank h as p a r t i c i p a t e d i n th e c o n t r o l th ro u g h th e G overnor who i s th e p r e s i d e n t o f th e A d m in is tra tio n Committee o f th e E x c h a n g e O f f i c e . ^ The Bank i s alw ays re a d y to f in a n c e o p e r a tio n s by th e Fund, b u y in g o r s e l l i n g i t s g o ld and f o r e i g n exchanges from and ^ The 9 th Annual R ep o rt on Exchange R e s t r i c t i o n s , 195**. o p . c i t . . p . 139. 135 t o t h e F u n d . ^ The d e s i r e o f th e N a tio n a l C r e d it C o u n cil to r e c o n c ile th e n ee d s f o r r a p id r e c o n s t r u c t i o n w ith th e a v o id ance of i n f l a t i o n a r y c r e d i t e x p a n sio n , r e a l i z i n g th e d o u b le f a c u l t y o f c r e d i t ( i t h e lp s p r o d u c tiv e a c t i v i t y b u t i t a l s o fe e d s i n f l a t i o n ) , fo rc e d m onetary a u t h o r i t i e s to a d o p t e x te n s iv e q u a l i t a t i v e c o n t r o l s in s t e a d of s tro n g t r a d i t i o n a l q u a n t i t a t i v e c o n t r o l s . 1 ^ The banks were d i r e c t e d , i n 19^7, t o g r a n t b u s in e s s c r e d i t o n ly f o r e s s e n t i a l p u rp o se s and o n ly to f irm s w hich co u ld n o t o b ta in th e fu n d s o th e r w is e . A dvances above F r . 30 m i l l i o n — l a t e r 50 m i l l i o n , 100 m i l l i o n — had t o be approved by th e Bank o f F ra n c e , and s in c e th e autumn of t 1951, th o s e above F r . 500 m i l l i o n have been s u b je c t to th e j I p r e lim in a r y a u t h o r i z a t i o n o f th e Bank. A lth o u g h d is c o u n ts were n o t in c lu d e d i n th e f i g u r e o f th e p re c e e d in g r e s t r i c - ! i t i o n s , th e y w ere in c lu d e d i n th e f i g u r e by th e same amend ment i n 1951• ^*F or a d e t a i l , see The F re n ch Exchange S t a b i l i z a t i o n Fund (W ashington, D. C: The Board o f G overnors of th e F e d e r a l R eserv e System , 1 9 5 0 ), p p . 1-5* **5See E x c e rp ts from The 2nd A nnual R ep o rt o f th e N a tio n a l C r e d it C o u n cil o f F ra n ce q u o ted i n "Second Annual R eport o f th e N a tio n a l C r e d it C o u n cil o f F r a n c e ," F e d e r a l R eserve B u l l e t i n XXXIV (A u g u s t,1 1 9 ^ 8 ), 9 5 0 -6 0 . The q u a l i t a t i v e c o n t r o l s m entioned above and th e f a c t t h a t th e Government h as been a c o n t r o l l i n g f a c t o r i n in v e s tm e n t an d , to some e x t e n t , th e f a c t s t h a t s to c k m arket s p e c u la tio n i s n o t s tro n g and t h a t th e consum er c r e d i t s a r e n o t so im p o rta n t i n F ra n c e th a n i n th e U n ited S t a t e s , have made i t u n n e c e s s a ry f o r th e Bank to have pow ers such a s m argin r e q u ire m e n ts or consum er c r e d i t r e g u l a t i o n s . R e la tio n s betw een th e Bank o f F ra n c e and o th e r banks have b een rem ark ab ly s tr e n g th e n e d . E s p e c i a l l y two i n c i d e n t s a r e n o te w o rth y . The Bank came t o e x e r t in f lu e n c e over i b an k s th ro u g h th e N a tio n a l C r e d it C o u n cil w here th e G overnor o f th e Bank o f F ran ce a c t s a s v i c e - p r e s i d e n t and where p u b lic and p r i v a t e f i n a n c i a l i n s t i t u t i o n s a r e r e p r e s e n te d w ith o t h e r s . ^ F u rth e rm o re , th e l a r g e and v a r ie d m em bership o f th e C o u n cil n e c e s s a r i l y p la c e s much power i n th e hands o f i t s s e c r e t a r i a t , w hich i s s u p p lie d by th e Bank. The Bank h a s a l s o s tre n g th e n e d i t s c o n t r o l o v er d e p o s it banking by se n d in g t h e i r member a s a d i r e c t o r t o each one o f th e n a t i o n a l i z e d d e p o s it b a n k s .**7 ^ F o s te r , et ^ 1 ., op,. c i t . ? pp. 563- 6*+ . **7Ib id . . p. 560. 137 The Bank o f J a p a n . A f e a t u r e o f th e Ja p an ese hank in g sy stem o f no l e g a l r e s e r v e re q u ire m e n ts n o r th e e x i s t ence o f a custom f o r hanks t o keep a c e r t a i n p e rc e n ta g e o f t h e i r d e p o s it l i a b i l i t i e s a s r e s e r v e s i n th e c e n t r a l hank h a s su rv iv e d th e war and th e p o stw a r r e o r g a n i z a t i o n p e r io d s . H owever, th e Amendment Law o f th e Bank o f Jap an Law, w hich e s t a b l i s h e d th e P o lic y Board i n 19*+9» paved th e way f o r l e g a l r e s e r v e r e q u ir e m e n ts , by p ro v id in g t h a t th e P o lic y Board s h a l l he i n c h a rg e o f M making changes in th e p e r c e n t age o f d e p o s i t s t o he m a in ta in e d w ith th e Bank o f Jap an by f i n a n c i a l i n s t i t u t i o n s hav in g c o n t r a c t u a l r e l a t i o n s h i p w ith th e Bank o f J a p a n .t|lf8 (The Board h a s n o t y e t r e q u ir e d t h e banks t o keep l e g a l r e s e r v e s . ) In t h i s c o n n e c tio n , th e r a t i o o f th e d e p o s it l i a b i l i t i e s o f a l l banks t o ca sh h o ld in g s and d e p o s its w ith o th e r f i n a n c i a l i n s t i t u t i o n s ( in c lu d in g th e Bank o f Ja p a n ) f l u c t u a t e s r a t h e r v i o l e n t l y . For i n s t a n c e , i t was n in e te e n p e r c e n t i n 19^8, n in e te e n p e r c e n t i n 19^9, s e v e n te e n p e r c e n t i n 1950, f o u r te e n p e r c e n t i n 1951 > s i x t e e n p e r c e n t i n 1 9 52.^9 The Bank of Ja p an was one o f th e c e n t r a l banks w hich ^ The Bank o f Jap an Law. A r t . 13-3> 6 . m w ® ^ 9Bl s ^d on g - ^ l s t i c p . o f JajD&n ( Tokyot The Bank o f Ja p a n , 1 9 5 2 ), p p . iy - 2 0 ; ancT th e A nnual R e p o rt. 1952 o f th e P o lic y Board o f th e Bank o f Jap an (Tokyo; The P o lic y Board of th e Bank o f Ja p a n , 1 9 5 3 p p . 28 and 3 9 . 138 d e p a rte d from a cheap money p o l i c y i n th e e a r l y p o stw ar p e r i o d . The r e d is c o u n t r a t e and r a t e s on ad vances from th e Bank t o th e banks were r a i s e d . ^ The fo rm er r a t e was in c r e a s e d from 3 .2 9 p e r c e n t, w hich had rem ained unchanged s in c e 1936, t o 3*65 p e r c e n t, and s u c c e e d in g ly r a i s e d to M -.3 8 , 5*11, and 5.8*+ p e r c e n t, i n A p r i l , 19^8, J u ly , 19^8 and O cto b e r, 1951, r e s p e c t i v e l y . N e v e r th e le s s , b ec au se o f th e f a c t t h a t th e d is c o u n t r a t e h as been much h ig h e r th a n th e r e d is c o u n t r a t e , one of th e f e a t u r e s o f th e Ja p an ese money m a rk e t, th e Bank h a s f a i l e d t o make i t e f f e c t i v e as a means o f check in g i n f l a t i o n a r y te n d e n c i e s . The banks have r e s o r t e d t o th e Bank o f Ja p a n , a sk in g f o r new advances w ith th e i n t e n t i o n t o g a in th e i n t e r e s t d i f f e r e n c e betw een th e r e d is c o u n t r a t e o f th e Bank o f Jap an and th e d is c o u n t r a t e i n th e money m a r k e t.51 ^ A lth o u g h th e r e d is c o u n t r a t e i s th e o f f i c i a l Bank I r a t e , th e i n t e r e s t r a t e s on ad v an ces w ith th e c o l l a t e r a l o f Government bonds or o th e r s a r e more im p o rta n t b ec au se th e banks p r e f e r o b ta in in g ad v an ces t o r e d is c o u n tin g p a p e rs th e y h o ld and h e r e a f t e r th e r e d is c o u n t r a t e in c lu d e s th e ; r a t e s on advances w ith th e c o l l a t e r a l of Government j s e c u r i t i e s and o th e r s e x c e p t c a s e s o th e rw is e d e f in e d . i I 5^-For th e s t a t e o f c o n tin u o u s and r a p id e x p a n sio n o f j th e Bank'fs b i l l s d is c o u n te d and a d v a n c e s, se e th e a tta c h e d ! T a b le V. 139 TABLE V THE IMPORTANCE OF REDISCOUNT OPERATIONS AT THE BANK OF JAPAN B i l l s D isc o u n te d and A dvances N a tio n a l G overn ment S e c u r i t i e s H olding ( i n m il lio n s o f y e n s ) 1930 (December 31) 751 * 175 1931 * 8k2 61*7 1938 508 1,81*1 19**2 1 ,8 2 7 5,81*1 19**6 50,*f30 3 ^ ,7 6 1 1950 111*,507 136,578 1952(Septem ber 30) 295,917 105,75** a ibO To overcome t h i s sh o rtco m in g th e Bank re v iv e d th e o ld , tho u g h u n iq u e , " h ig h e r r a t e s a p p l i c a t i o n system " ( K o h r its u te k iy o - s e id o ) w hich was o r i g i n a l l y d e sig n e d t o o b t a i n th e s e c u r i t y o f th e Bank ad v an ces t o b a n k s . The sy stem was re v iv e d i n 19*+6 t o c o u n te r th e n p r e v a i l i n g i n f l a t i o n a r y te n d e n c i e s , re d u c in g th e amount o f ad v an ces to banks and i t was g r a d u a lly i n t e n s i f i e d . In M arch, 195l> i t was f u r t h e r s tr e n g th e n e d . To make th e s t o r y s h o r t th e e s s e n c e of th e system i s t h a t th e Bank r e d is c o u n ts or ad v an ces t o banks up t o : t h e amount o f one p e r c e n t o f t h e i r d e p o s its l i a b i l i t i e s a t th e b a s ic r e d is c o u n t or advance r a t e ( lo w e s t, th e form er . i s known as th e Bank r a t e ) and t o f u r t h e r r e d is c o u n ts o r ad vances up t o e i g h t p e r c e n t th e Bank a p p l i e s th e f i r s t h ig h e r i n t e r e s t r a t e s , and to o v er and above th e amount th e second h ig h e r i n t e r e s t r a t e s a re a p p lie d so t h a t banks may n o t be a b le t o expand t h e i r lo a n s and advances i n f i n i t e l y , r e l y i n g on th e B a n k 's r e s o u r c e s . The h ig h e r r a t e s v a ry a c c o rd in g t o th e ty p e s o f b i l l s and t h e i r c o l l a t e r a l i n o rd e r t o se c u re c e r t a i n q u a l i t a t i v e c o n t r o l s o ver b a n k s ' lo a n s and in v e s tm e n ts . C r e d it f o r com m ercial t r a n s a c t i o n s , t r a d e , e s s e n t i a l i n d u s t r i e s , some m a n u fa c tu rin g , a g r i c u l t u r e and f i s h e r y , I b l and governm ents a re g iv e n p r e f e r r e d t r e a t m e n t s . 5^ Though th e m o n etary a u t h o r i t i e s a r e hoping t h a t th e banks w i l l become in d e p e n d e n t o f th e c e n t r a l b a n k 's r e s o u r c e s , i t i s e x p e c te d t h a t th e s t a t e o f m a tte r s w i l l l a s t f o r a c o n s id e r a b le l e n g t h o f tim e . And th e n , a s lo n g a s th e banks r e l y on th e c e n t r a l b a n k 's r e s o u r c e s f o r t h e i r b u s in e s s and th e T re a s u ry i n s i s t s on a cheap money p o lic y Cat l e a s t f o r Government s e c u r i t i e s ) , th e " h ig h e r r a t e s a p p l i c a t i o n system " w i l l rem ain i n p r a c t i c e . 53 The Bank i s sim p ly a u th o riz e d t o buy and s e l l "co m m ercial p a p e r, b a n k e r s ' a c c e p ta n c e s and o th e r b i l l s or n o t e s , Government bonds arid o b l i g a t i o n s and o th e r bonds or d e b e n t u r e s ."5^ Y et, open -m ark et o p e r a tio n s have been l i m i t e d t o Government s e c u r i t i e s . ' D uring th e l a s t war and some y e a rs p r i o r t h e r e t o , i t was custom ary f o r th e Bank t o ta k e up Government bonds d i r e c t l y from th e T re a su ry and s e l l them t o th e p u b lic g r a d u a l ly a s new ly c r e a te d money 52Por a d e t a i l o f th e " h ig h e r r a t e s a p p l i c a t i o n s y s te m ," se e Y oshino "The H ig h er R a te s A p p lic a tio n S y stem ," S tu d ie s on Our F in a n c ia l System (Tokyo: J its u g y o n o -N ip - p o n sh a , 1 9 5 2 ), pp. 2 0 3- 2 6 . 53The M in is te r o f F in a n c e 's a p p ro v a l i s r e q u ir e d t o change th e b a s ic r e d is c o u n t r a t e , b u t th e a p p l i c a t i o n o f i th e " h ig h e r r a t e s a p p l i c a t i o n system " d e v o lv e s on th e j B a n k 's d i s c r e t i o n . j 5^The Bank of Japan Law. Art. 20, 6. ! l*+2 b egan t o c i r c u l a t e . A f t e r th e e a r l y p o stw a r p e r io d .when th e l a r g e volume o f th e G overnm ent's lo n g - te r m bonds were redeem ed w ith th e U n ite d S t a t e s Aid C ounter Fund and w ith th e b u d g e ta ry s u r p lu s , th e Bank li m i t e d i t s open-m arket o p e r a tio n s o n ly t o p r o v id in g n e c e s s a r y fu n d s f o r banks t o s u b s c r ib e t o f i n a n c i a l d e b e n tu re s f l o a t e d by lo n g -te rm f in a n c in g i n s t i t u t i o n s . 55 The Bank now seems t o r e l y m a in ly on advance f a c i l i t i e s w ith th e " h ig h e r r a t e s a p p l i c a t i o n system " i n o rd e r t o m a in ta in sound m onetary c o n d i t i o n s . The r e s p o n s i b i l i t y of m a in ta in in g th e e x t e r n a l v a lu e o f th e yen was g r a d u a l ly ta k e n from th e Bank o f Jap an t o th e Government a f t e r 1932. A lthough th e M in is te r of F in a n c e h as a l a r g e power t o c o n t r o l f o r e i g n exchange a t j p r e s e n t , th e Bank o f Ja p an p la y s a s i g n i f i c a n t p a r t on a ! t e c h n i c a l a d m i n i s t r a t i v e l e v e l by d e a lin g i n f o r e ig n I exchange from and t o th e F o re ig n Exchange Fund, le n d in g { f o r e i g n exchange t o banks and f in a n c in g th e Funds t r a n s a c t i o n s . A lth o u g h th e Bank of Jap an Law, A r t . 1 3 -3 , 7 , g r a n t s th e P o lic y Board pow ers t o c o n t r o l lo a n s and in v e s tm e n ts t o ^ T h e A nnual R e p o r t. 1951 o f th e P o lic y Board o f th e Bank o f J a p a n , o p . c i t .« p p . 2 and 5~o• 1^3 s e c u r i t y d e a l e r s by banks and o th e r f i n a n c i a l i n s t i t u t i o n s in c lu d in g m arg in r e q u ir e m e n ts , th e r e i s no i n d i c a t i o n t h a t th e Board h as e v e r e x e r c is e d th e po w ers. The f a i l u r e t o u s e th e pow ers seems l a r g e l y due t o two r e a s o n s . The f i r s t i s t h a t th e pow ers, a s w e ll a s th e power t o change r e s e r v e r e q u ir e m e n ts , were g iv e n th e Board r a t h e r c o m p u ls o rily by t h e o c c u p a tio n a u t h o r i t i e s and th e Ja p a n e se m onetary a u t h o r i t i e s d id n o t and' could n o t a p p r e c ia t e them b ec au se of th e la c k o f t h e i r f a m i l i a r i t y . The second re a s o n i s more fu n d a m e n ta l. Due t o th e la c k o f t h e i r own fu n d s f o r b u s in e s s , th e Ja p an ese banks have h e a v ily r e l i e d on th e c e n t r a l b a n k 's r e s o u r c e s and th e y have b een more th a n w i l l i n g t o f o llo w what th e Bank of Japan s u g g e s ts i n o rd e r n o t t o l o s e ch an ces t o o b ta in fu n d s by o ffe n d in g th e Bank. T h is s i t u a t i o n h as made i t p o s s i b l e f o r th e Bank n o t t o u s e i t h e s e o u t r i g h t po w ers. I n s te a d o f them , th e Bank h as from tim e t o tim e r e s o r t e d t o s o - c a l l e d s u g g e s tio n s . As a m a tte r of f a c t , th e Bank h as succeeded i n o b ta in in g q u a l i t a t i v e , a s w e ll a s q u a n t i t a t i v e c o n t r o l s over l o a n s , s in c e 1951 w ith a view t o r e s t r i c t i n g u n n e c e ss a ry and n o n -u rg e n t f in a n c e a s w e ll a s e x c e s s iv e lo n g -te r m lo a n s f o r equ ip m en ts and s e c u rin g fu n d s f o r im p o rta n t s e c t o r s of th e economy.^* No d o u b t, th e re m a rk a b le r e s u l t s o f th e s e m oral s u a s io n s a r e t o some e x te n t due t o th e pow ers g ra n te d to t h e Bank o f Japan by th e Bank o f Jap an Law i n o rd e r to s e c u r e maximum c o o p e ra tio n of th e banks f o r c r e d i t c o n t r o l s . \ The Bank o f Jap an i s empowered t o u n d e rta k e such b u s in e s s a s i s n e c e s s a r y f o r th e m a in te n an ce and f o s t e r i n g o f th e c r e d i t sy stem , s u b je c t t o th e p e rm is s io n o f th e com petent M i n i s t e r . F u rth e rm o re , th e Bank can o rd e r banks and o th e r f i n a n c i a l i n s t i t u t i o n s t o c o o p e ra te th ro u g h th e M in is te r o f F in a n c e .57 The F e d e r a l R eserv e S y stem . In 1933, banking l e g i s l a t i o n empowered th e change of member bank r e s e r v e re q u ire m e n ts when an em ergency e x i s te d and th e Banking A ct > o f 1935 made t h i s a u t h o r i t y p erm a n e n tly a v a i l a b l e t o th e j B oard o f G overnors o f th e F e d e r a l R eserv e System . The j i g e n e r a l fram ew ork o f th e power h as rem ain ed unchanged i s in c e th e Banking A ct o f 1935 w ith th e e x c e p tio n o f a b r i e f j i p e rio d o f 19I+8-19l< -9 when th e Board was a u th o riz e d on a j 56;rhe Annual R e p o r t. 1992. o f th e P o lic y Board o f t h e Bank o f J a p a n , o p . c i t . . p . 2; and a l s o The Annual R e p o r t. 1951. o f th e P o lic y Board of th e Bank o f J a p a n . o p . c i t . , p . 2 . 5?The Bank of Japan Law. Art. 25 and 28. ih $ te m p o ra ry b a s i s t o r a i s e r e s e r v e re q u ire m e n ts above th e maximum p r e v io u s l y p e r m i s s i b l e . A lth o u g h t h e r e a r e some sh o rtc o m in g s in h e r e n t i n th e u se o f th e p o w e r , t h e Board h as made f r e q u e n t u se o f i t s a u t h o r i t y t o a l t e r r e s e r v e r e q u ire m e n ts e s p e c i a l l y i n th e p o stw a r p e r io d i n o rd e r t o a d j u s t th e b a n k s ’ l i q u i d i t y p o s i t i o n t o an a p p r o p r ia te l e v e l . As th e law s ta n d s to d a y , th e Board has a u t h o r i t y t o i n c r e a s e r e s e r v e re q u ire m e n ts t o tw ic e th e minimum r a t i o s s t a t e d i n th e law and to re d u c e r e q u ire m e n ts t h a t a r e above th e s t a t u t o r y r a t i o s t o any l e v e l t h a t i s n o t below them .^9 Changes i n r e s e r v e re q u ir e m e n ts may be made a p p l ic a b le t o any or a l l th e g ro u p s o f banks b u t must be u n ifo rm f o r a l l banks w ith in a g ro u p . A lth o u g h r e d is c o u n t o p e r a tio n s had been an im p o rta n t method o f e x p r e s s in g F e d e r a l R e serv e p o l i c y s in c e i t s commencement, r e s u l t s o f th e h i g h l y - l i q u i d m onetary c o n d i t i o n s caused by an alm o st c o n tin u o u s in f lo w o f g o ld and th e d e l i b e r a t e cheap money p o lic y th ro u g h open-m arket o p e r a tio n s d u rin g th e 1 9 3 0 ’s and o f w artim e d ev elo p m en ts made 5&E. a . G o ld e n w e ise r, A m erican M onetary P o lic y (New Yorks M cGraw-Hill Book Company, I n c . , 1 95l)» p p .176-7* 59For th e b ase r e s e r v e r a t i o s , s t a t u t o r y l i m i t s and r a t i o s i n e f f e c t , see th e a tta c h e d T ab le V I. l*f6 TABLE ¥1 RESERVE REQUIREMENTS CHANGING RANGES AND RATIOS IN EFFECT ( I n p e r c e n t) Ranee .F n'E T f'ecF'” Septem ber 195*f Demand d e p o s its C e n tr a l r e s e r v e c i t y banks 13 to 26 22 R e serv e c i t y banks 10 t o 20 19 C o u n try banks 7 t o I 1 * 13 Time d e p o s i t s , a l l member banks 3 to 6 5 i i i i i t I ! 1 i 1^7 r e d is c o u n t o p e r a tio n s i n s i g n i f i c a n t . The F e d e r a l R eserve Bank o f New Y ork, f o r i n s t a n c e , low ered i t s r e d is c o u n t r a t e from two and o n e - h a lf p e r c e n t i n 1 9 3 3 t o one p e r c e n t i n 1937 by s e v e r a i s t e p s , and i t rem ained unchanged u n t i l 1 9^ 8 . The w artim e p o lic y o f m a in ta in in g a f ix e d p a t t e r n o f i n t e r e s t r a t e s on Government s e c u r i t i e s f u r t h e r underm ined th e u se o f th e r e d is c o u n t o p e r a t i o n s . In A p r il 19b2f th e F e d e ra l Open-M arket Com mittee is s u e d a d i r e c t i o n t h a t th e F e d e r a l R e serv e Banks should p u rc h a s e f o r th e S y ste m 's open-m arket I a c c o u n t " a l l U n ited S t a t e s T re a s u ry b i l l s t h a t m ight be o f f e r e d t o such Banks on a d is c o u n t b a s is a t a rat?e o f th re e -^ e ig h th p e r c e n t p e r a n n u m ." ^ Thus, th e r e d is c o u n t o p e r a tio n s d is a p p e a re d due to th e u n lim ite d p u rc h a s e o f th e T re a s u ry b i l l s a t t h r e e - e i g h th p e r c e n t w hich was much lo w er th a n th e r e d is c o u n t r a t e and t r a d i t i o n a l open-m arket o p e r a tio n s ( th e i n i t i a t i v e o f o p e r a tio n s i n Government s h o r t- te r m s e c u r i t i e s r e s t s w ith th e System ) w ere e l im in a te d . F u rth e rm o re , th e a d o p tio n o f th e p o l i c y by th e F e d e r a l Open-M arket Committee o f m a in ta in in g th e g e n e r a l l e v e l o f p r i c e s and y i e l d s o f Government s e c u r i t i e s to o k away even th e rem ain in g freedom o f open-m arket o p e r a t io n s — o p e r a tio n s i n Government lo n g te rm s e c u r i t i e s . I | ________ 60The_2 9 th Annual R ep o rt o f th e S vstem T u . 10*+. , ! 1^8 In 19^7) how ever, th e F e d e r a l R eserv e Banks p a r t i a l l y re c o v e re d th e r e d is c o u n t o p e r a tio n power by- d is c o n tin u in g t h e i r s ta n d in g t h r e e - e i g h t h s p e r c e n t buying o f f e r on T re a s u ry b i l l s . Thus, th e r e d is c o u n t r a t e was made a f a c t o r a g a in . N e v e r th e le s s , th e a d h e re n c e o f th e System t o m a in ta in in g th e Government bond m arket s t i l l k e p t th e volume o f r e d is c o u n ts and ad v an ces i n s i g n i f i c a n t u n t i l 1951j when th e T re a su ry -B o a rd a c c o r d ^ was made, d is c o n tin u i n g th e p r a c t i c e o f k eep in g Government bond p r i c e s a t or above p a r . The r e d is c o u n t r a t e , how ever, had b een in c re a s e d t o two p e r c e n t by 1 9 5 3 * a s a t i g h t m onetary p o l i c y was r e q u ir e d and th e volume o f b a n k s ' borrow ing from th e F e d e r a l R e serv e Banks r a p i d l y I n c r e a s e d . A lth o u g h r e d is c o u n t o p e r a tio n s do n o t amount t o a l a r g e f i g u r e , th e y seem t o have r e g a in e d somewhat t h e i r j 1 t r a d i t i o n a l im p o rta n c e i n th e F e d e r a l R eserv e p o l i c y , a t j I l e a s t a s a p s y c h o lo g ic a l fo rc e * The ^O th A nnual R ep o rt o f i th e Board o f G overnors o f th e F e d e r a l R eserv e System r e p o r te d : In th e p re se n c e o f booming econom ic c o n d i tio n s , and re c o g n iz in g th e i n f l a t i o n a r y p o t e n t i a l o f s tro n g c r e d i t dem ands, th e F e d e r a l R eserv e System c o n tin u e d t o p u rs u e a p o l i c y d i r e c t e d tow ard ^ F o r an o f f i c i a l r e c o r d , see The 1 8t h A nnual R ep o rt o f th e S ystem , p p . 9 8 -1 0 1 . l*+9 slo w in g th e p ace o f hank c r e d i t e x p a n sio n w ith a view t o re d u c in g i n f l a t i o n a r y d a n g e rs . Opera t i o n u nder t h i s p o l i c y made i t n e c e s s a r y f o r member banks a s a group t o o b ta in p a r t o f t h e i r needed r e s e r v e fu n d s th ro u g h b o rro w in g . To make th e p o lic y more e f f e c t i v e , th e F e d e r a l R eserv e d is c o u n t r a t e was r a i s e d i n Ja n u a ry 1953 from 1 3/*+ p e r ,c e n t t o 2 p e r c e n t . \ I t a l i c s a r e th e w r i t e r ' In c o n t r a s t to r e d is c o u n t o p e r a t io n s , open-m arket o p e r a t io n s of th e F e d e r a l R eserv e System have had t h e i r m ost c o l o r f u l age s in c e 1930* Though th e form of o p e r a tio n s h a s n o t changed, e x c e p t ( a ) t h a t th e im p o rta n c e of o p e ra t i o n s i n th e b a n k e r s ' accelptance was r a p i d l y l o s t a f t e r | 1930, and (b ) d u rin g th e Second World War th e System c o n c u rre d w ith th e T r e a s u r y 's p o l i c y o f m a in ta in in g a p a t t e r n o f i n t e r e s t r a t e s i n o rd e r t o su p p o rt th e Govern ment s e c u r i t y m a rk e ts , b o th s h o r t and lo n g - te r m , new p u rp o se s o f th e o p e r a tio n s have g r a d u a l ly e v o lv e d . I The p rim a ry f u n c tio n of open-m arket o p e r a tio n s j I d u rin g th e 1 9 2 0 's was to make th e r e d is c o u n t r a t e e f f e c t i v e ■ by re d u c in g th e h ig h l i q u i d i t y o f th e money m a rk e t. D uring th e s p e c u l a t i v e e x p a n sio n i n 1928 and 1929> th e System s o ld th e g r e a t e r p a r t o f i t s h o ld ih g s o f Government s e c u r i t i e s , th e re b y c a u sin g member banks t o i n c r e a s e t h e i r r e l i a n c e on r e d is c o u n t f a c i l i t i e s w ith th e F e d e r a l R eserv e ^ The i+Oth A nnual R e p o rt o f th e S ystem , p . 3 . 150 B anks. D uring th e p e r io d 1930-193^> th e System r e v e r s e d i t s o p e r a tio n s in o rd e r to o b ta in a h ig h l i q u i d i t y i n th e money m ark et c o m p a tib le w ith low r e d is c o u n t r a t e s . 63 Though up t o 1936 ( a t l e a s t a s lo n g a s o f f i c i a l r e c o r d s a r e c o n c ern ed ) th e F e d e r a l R eserv e Banks c a r r i e d out open-m arket o p e r a tio n s t o re d u c e s h o r t- te r m i n t e r e s t r a t e s d i r e c t l y , c r e a tin g l a r g e am ounts o f e x c e s s r e s e r v e s , th e y l e t lo n g -te rm i n t e r e s t r a t e s be d e te rm in e d i n d i r e c t l y th ro u g h th e m arket m e c h a n i s m . I t was n o t u n t i l 1937 t h a t th e F e d e r a l Open M arket Committee s t a r t e d engaging i n a s e r i e s o f open-m arket o p e r a tio n s i n lo n g - te rm Govern ment s e c u r i t i e s i n o rd e r t o m a in ta in " o r d e r l y c o n d itio n s i n th e money m a rk e t"— nam ely, low i n t e r e s t r a t e s w hich p r e v a i le d d u rin g th e p e r io d o f 1933-1936» and w hich were an im p o rta n t f a c t o r i n th e r e v i v a l o f th e c a p i t a l m arket and i n th e p r e s e r v a t i o n o f a s te a d y m arket f o r Government s e c u r i t i e s . T hus, th e F e d e ra l R eserv e System came t o r e a l i z e t h a t open-m arket o p e r a tio n s i n lo n g - te r m Govern ment s e c u r i t i e s w ere n o t o n ly in d is p e n s a b le t o f a c i l i t a t e Government f in a n c in g a s i n th e p a s t , b u t such o p e r a tio n s 63See The 2 0 th A nnual R eport o f th e System , p p . 1 7- 21. 6 U - The 23rd A nnual R e p o rt o f th e System , p . 30. 151 w ere a l s o a v a i l a b l e t o in f lu e n c e th e c a p i t a l m arket th ro u g h f o rm a tio n o f an i n t e r e s t r a t e s t r u c t u r e on Government s e c u r i t i e s w ith v a r io u s m a t u r i t i e s . The Board s t a t e d i n i t s A nnual R ep o rt f o r 1939* A d o p tio n by th e System i n 1939 o f a f l e x i b l e p o r t f o l i o i n p la c e o f th e f ix e d p o r t f o l i o h e ld f o r th e p re c e d in g s i x y e a r s was i n re s p o n s e t o m onetary c o n d itio n s t h a t had d ev e lo p ed o ver th e p a s t few y e a r s . In e a r l i e r y e a rs changes i n th e System p o r t f o l i o had been made w ith r e f e r e n c e t o t h e i r e f f e c t on member bank in d e b te d n e s s or th e volume o f e x c e s s r e s e r v e s . W ith bank r e s e r v e s a t an u n p re c e d e n te d and c o n s ta n tl y m ounting l e v e l , and w ith a y a s t amount o f fu n d s i n th e hands o f i n d i v i d u a l and i n s t i t u t i o n a l i n v e s t o r s se e k in g o u t l e t s , su ch changes i n member bank r e s e r v e s a s a r e caused by System open -m ark et o p e r a tio n s a r e no lo n g e r a m ajor f a c t o r i n e a s in g or t i g h t e n i n g c r e d i t c o n d i tio n s ; On th e o th e r h an d , su ch o p e r a tio n s e x e r t an i n f lu e n c e on c o n d itio n s i n th e c a p i t a l m a rk e t. The e n t r y or w ith d ra w a l o f th e System a s an a c t i v e buyer or s e l l e r h as an in f lu e n c e n o t o n ly on p r i c e s o f th e p a r t i c u l a r i s s u e s t h a t th e System buys or s e l l s , b u t a l s o on th e m arket f o r Government o b l i g a t i o n s as a whole and t o some e x te n t on th e c a p i t a l m arket in g e n e r a l . In view o f th e f a c t t h a t member banks h o ld a l a r g e volume o f Govern ment and c o rp o ra te b o n d s, th e e n d e av o rs o f th e System t o c o n t r i b u t e t o th e m a in te n an ce o f an o r d e r ly bond m arket te n d t o s t a b i l i z e banking c o n d itio n s and, th ro u g h t h e i r e f f e c t on th e c a p i t a l m a rk e ts , th e y c o n t r i b u t e t o g e n e r a l econom ic re c o v e ry . The change i n th e im m ediate o b je c ti v e o f open- m ark et o p e r a tio n s h as had th e i n c i d e n t a l e f f e c t o f making i t l e s s im p o rta n t f o r th e F e d e r a l Re s e rv e System t o have i t s p o r t f o l i o o f U n ited S t a t e s Government s e c u r i t i e s c o n s i s t i n l a r g e p a r t o f 152 s h o r t- te r m o b l i g a t i o n s . ^ Though th e fo llo w in g p u rp o se o f o p e r a tio n s i s m erely a c o r o l l a r y of th e t r a d i t i o n a l o b je c ti v e o f o p e r a t io n s , i t h a s become an e s t a b l i s h e d and e x te n s iv e u se o f o p e r a tio n s t o c o u n te r s e a s o n a l or te m p o ra ry m o n etary d is t u r b a n c e s ca u sed by movements o f Government fu n d s , s e a s o n a l demands f o r money o f th e p u b lic and i n t e r n a t i o n a l g o ld movements. F o r th e s e p u rp o s e s i t i s n o t an e x a g g e r a tio n t o say t h a t o pen -m ark et o p e r a tio n s c o m p le te ly r e p la c e d r e d is c o u n t o p e r a t io n s a t l e a s t i n so f a r a s th e volume o f t r a n s a c t i o n i s c o n c e rn e d . The v e ry r e a s o n s , w hich r e s t o r e d th e u se o f th e r e d is c o u n t r a t e , b ro u g h t back open-m arket o p e r a tio n s * to th e c e n te r o f m o n etary o p e r a tio n s o f th e System . The F e d e ra l R e se rv e B an k s’ d i s c o n t i n u a t i o n of th e s ta n d in g t h r e e - e i g h t h s p e r c e n t buying o f f e r on T re a su ry b i l l s gave pow er, th o u g h l i m i t e d , f o r th e Banks t o engage i n open-m arket o p e r a t io n s i n th e s h o r t- te r m Government s e c u r i t y m a rk e t. Ye$, i t was n o t u n t i l th e Tre& spry-B oard ac co rd t h a t th e Banks r e g a in e d s u b s t a n t i a l power t o c a r r y o u t open-m arket o p e r a t io n s i n th e Government s e c u r i t y m a rk e ts , b o th s h o r t and lo n g - te r m , a c t i v e l y and o f t h e i r own a c c o rd . 6 5 ih e 2 6 th A nnual R e p o rt o f th e S ystem , p . 9 . I t i s t r u e a s an o f f i c i a l book on th e F e d e r a l R e se rv e System s t a t e s t h a t t r a d i t i o n a l r e s e r v e banking p r a c t i c e h a s been t o l i m i t open-m arket o p e r a tio n s t o s h o r t - t e r m Government s e c u r i t i e s ^ a n d t h a t th e System h as 67 r e c e n t l y engaged o n ly i n s h o r t- te r m Government s e c u r i t i e s . Y e t, i t must be remembered t h a t o p e r a tio n s have d e v ia te d from tim e t o tim e from t h a t p r i n c i p l e a s h a s been m entioned above and i t i s l e g a l l y p o s s i b l e f o r th e System t o engage i n o p en -m ark et o p e r a tio n s i n s h o r t - a s w e ll a s lo n g -te rm Government s e c u r i t i e s and some o th e r l i s t e d s e c u r i t i e s . In a d d i t i o n t o t h e pow ers d e s c r ib e d above, th e System h a s or som etim es i n th e p a s t had s e l e c t i v e c r e d i t c o n t r o l powers* m arg in re q u ire m e n ts on s to c k m arket c r e d i t , c o n t r o l s over consumer c r e d i t and r e a l e s t a t e c r e d i t , and some o th e r c r e d i t c o n t r o l p o w e r s . 68 S in c e 193*+, th e Board h a s been u n d er th e S e c u r i t i e s Exchange Act o f 193*+, a u th o riz e d t o p r e s c r i b e th e maximum amount o f c r e d i t t h a t can be g ra n te d by banks o r s e c u r i t i e s ^^The F e d e r a l R eserv e S ystem ; P u rp o se s and F u n ctio n s, ( f o u r t h e d i t i o n ; W ashington, D. C: Board o f G overnors o f th e F e d e r a l R eserv e System , 19*+5)> P* *+0. ^ S e e The *+Oth A nnual R ep o rt o f th e S ystem , p p . 86- 105. 68The fo llo w in g f o u r p a ra g ra p h s m a in ly r e l y on The F e d e r a l R eserv e S ystem : P u rp o se s and F u n c tio n s , o p . c i t . , p p . 5 6 -6 7 . 15*+ b ro k e rs and d e a l e r s f o r th e p u rp o se o f p u rc h a s in g or c a r r y in g s e c u r i t i e s r e g i s t e r e d on n a t i o n a l s to c k exchanges i n o rd e r t o p r e v e n t e x c e s s iv e s to c k m arket s p e c u la tio n . E x te n s iv e u se h as been made of t h i s te c h n iq u e . For s e v e r a l y e a r s b e f o re th e w ar, th e m arg in r e q u ire m e n ts were f o r t y p e r c e n t , b u t th e y were r a i s e d by s u c c e s s iv e s te p s t o one hundred p e r c e n t i n 19^6, and rem ained unchanged u n t i l 19^7 when th e y w ere red u ce d t o s e v e n ty - f i v e p e r c e n t. In 1 9 ^ 0 , th e y w ere f u r t h e r re d u c e d t o f i f t y p e r c e n t o n ly to be in c r e a s e d t o s e v e n ty - f iv e p e r c e n t i n 1951* They have b e e n f i f t y p e r c e n t s in c e 1953 when r e q u ire m e n ts were r e duced t o th e p r e s e n t l e v e l . C o n tro l over consumer c r e d i t was In tro d u c e d f o r th e | f i r s t tim e i n 19*+1 by an E x e c u tiv e O rder of th e P r e s id e n t | b ased on h i s w ar em ergency p o w ers. The p u rp o se was t o | I c u rb th e u se of c r e d i t f o r th e p u rc h a s e o f d u ra b le con- i i s u m e r's g o o d s. At th e o u ts e t i t a p p lie d o n ly t o in s ta lm e n t c r e d i t b u t l a t e r i n th e war th e scope o f th e r e g u l a t i o n was i b ro ad en ed t o in c lu d e a l a r g e r number o f a r t i c l e s whose i i p u rc h a s e s In v o lv e d down paym ents and t o co v er ch arg e I i a c c o u n ts and sin g le -p a y m e n t l o a n s . R e g u la tio n s were made | ■ , I a s t o down paym ents and m a t u r i t i e s on in s ta lm e n t c r e d i t ; ! c h a rg e a c c o u n ts were c lo s e d u n d er c e r t a i n c o n d i tio n s ; and s in g le -p a y m e n t lo a n s o f d e f in e d c a t e g o r i e s were l i m i t e d t o 155 n in e ty d a y s . The c o n t r o l s w ith some r e l a x a t i o n s i n t h e i r term s and scope a f t e r th e war ended i n 19^7• They w ere r e i n s t a t e d te m p o r a r ily f o r th e p e r io d o f a s a s p e c i a l a n t i - i n f l a t i o n a r y m e asu re. A f te r th e o u tb re a k o f war i n K o rea, th e y were re v iv e d u nder th e te m p o ra ry au t h o r i t y o f th e D efense P ro d u c tio n A c t. But t h i s tim e , o n ly in s ta lm e n t c r e d i t was c o n t r o l l e d . A f te r v a r io u s r e v i s i o n s , th e Board suspended r e g u l a t i o n o f consumer c r e d i t i n 1952 and two m onths a f t e r th e s u s p e n s io n th e a u t h o r i t y e x p ir e d . Under th e same A c t, th e Board a l s o o b ta in e d th e power t o r e g u l a t e r e a l e s t a t e c r e d i t (e x c lu d in g such c r e d i t u n d e r th e a d m i n i s t r a t i o n o f th e Housing and Home F in an c e A d m in is tr a tio n ) . R e g u la tio n s were a p p lie d t o th e te rm s on w hich i n d i v i d u a l lo a n s c o u ld be made. The r e g u l a t i o n s , a l s o , s p e c i f i e d down paym ents and m a t u r i t i e s on c r e d i t s , A lth o u g h th e Board s t i l l h o ld s th e power u n d er th e A c t, i t h a s been su sp e n d ed . At p r e s e n t th e B o ard , u n d er th e same A( c t , h as a n o th e r s e l e c t i v e c o n t r o l power whose c h a r a c te r i s e n t i r e l y o f an em ergency n a t u r e . T hat i s , th e power t o g o v ern th e g e n e r a l o p e r a tio n o f th e program Of g u a ra n te e d lo a n s 156 a u th o riz e d by th e same A c t . ^ 9 A n o th er ty p e o f c r e d i t r e s t r a i n t , c l o s e l y r e l a t e d t o s e l e c t i v e c o n t r o l s , was a v o lu n ta r y c r e d i t r e s t r a i n t pro g ram . Upon th e d e l e g a t io n o f th e P r e s i d e n t i a l power g r a n te d by th e D efense P ro d u c tio n A c t, th e Board fo rm u la te d a program o f c o o p e r a tio n w ith th e N a tio n a l V o lu n ta ry C r e d it R e s t r a i n t Com mittee i n w hich com m ercial b an k s, in s u ra n c e com panies, in v e stm e n t b a n k e rs and o th e r s a v in g s i n s t i t u t i o n s w ere r e p r e s e n t e d . The program r e q u e s te d le n d e r s t o s c re e n lo a n a p p l i c a t i o n s on th e b a s i s o f n a t i o n a l d e fe n s e r e q u ir e m e n ts . A lth o u g h " f o r more th a n a y e a r th e V o lu n ta ry C re d it R e s t r a i n t Program was an e s s e n t i a l p a r t o f th e n a t i o n a l e f f o r t t o r e s t r a i n th e i n f l a t i o n a r y p r e s s u r e s g e n e ra te d by th e K orean w a r ," ? 0 i t was te r m in a te d i n 1952. T hus, th ro u g h s e l e c t i v e c o n t r o l s th e F e d e r a l R eserv e I System h as come t o have a c l o s e r to u c h w ith th e p u b l i c . In f a c t , i t h a s been made l e g a l f o r th e B anks t o have I d i r e c t b u s in e s s r e l a t i o n s w ith th e l a t t e r . An A ct e s t a b - | l i s h e d i n 193^ a u th o riz e d th e F e d e r a l R eserv e Banks t o make ^ S e e The ^ 7 th Annual R ep o rt o f th e System and i t s su c c e e d in g R e p o rts . ?°The F e d e r a l R eserv e Systems P u rp o se s and F u n ctio n s, ojo. c i £ . , p . ZS~. j L _ _________ ___ : ___ I 157 " i n d u s t r i a l ad v an ces" d i r e c t l y t o b u s in e s s u n d er c e r t a i n c o n d i t i o n s . Though i t b ro k e th e p r i n c i p l e o f th e bankers* and governm ent bank o f th e c e n t r a l bank in l e t t e r , in d u s tr ia l ad v an ces have n e v e r become s i g n i f i c a n t i n volume and th e Banks have succeeded i n p r e s e r v in g th e p r i n c i p l e i n s p i r i t . A nother developm ent i n th e B anks’ r e l a t i o n w ith th e money m arket was r e g u l a t i o n s on th e p u rc h a s e o f Government S e c u r i t i e s d i r e c t l y from th e T re a s u ry . P r i o r t o th e B anking Act of 1935> th e d i r e c t p u rc h a s e was n o t r e s t r i c t e d , b u t s in c e 1935 i t had been p r o h i b i t e d i n o rd e r t o p re v e n t i n f l a t i o n by open-m arket o p e r a t i o n s . In 19*+2, th e Banks w ere a u th o riz e d t o p u rc h a s e Government s e c u r i t i e s up t o # 5 ,0 0 0 m i l l i o n d i r e c t l y from th e T re a s u ry i n o rd e r t o f a c i l i t a t e Government f in a n c in g . A lth o u g h due t o e x p ir e i n th e n e a r f u t u r e , t h i s a u t h o r i z a t i o n s t i l l re m a in s e f - 9 i f e c t i v e • The Gold R eserv e A ct o f 193^ r e l i e v e d th e F e d e r a l R e se rv e Banks and th e T re a s u ry o f t h e i r o b l i g a t i o n t o redeem t h e i r n o te s i n g o ld . The same A ct made th e T re a s u ry r e s p o n s i b le f o r th e i n t e r n a t i o n a l m onetary p o lic y o f th e U n ite d S t a t e s . S in c e th e n , th e F e d e r a l R eserv e Banks have b een s e p a r a te d from th e g o ld m arket i n th e se n se t h a t o n ly th e T re a s u ry can buy, s e l l , and above a l l , h o ld g o ld and t h e Banks m e re ly r e c e iv e g o ld c e r t i f i c a t e s p a s s i v e l y from j 158 th e T re a s u ry i n exchange f o r c r e a tin g c r e d i t s i n f a v o r o f th e l a t t e r .71 The s t r e n g t h o f th e d o l l a r and th e l a r g e amount o f th e U n ite d S t a t e s g o ld h o ld in g s have made i t u n n e c e s s a ry f o r th e Banks t o in te r v e n e d i r e c t l y i n th e f o r e i g n exchange m a r k e t,'72 T h is te n d e n c y h a s been s tr e n g th e n e d by th e Exchange S t a b i l i z a t i o n Fund w hich h a s p a r t i c i p a t e d i n m a in ta in in g th e a p p r o p r ia te l e v e l o f th e e x t e r n a l v a lu e of th e d o l l a r . The F e d e r a l R e serv e B anks, ( e s p e c i a l l y th e F e d e r a l R e serv e Bank of New York a s th e a g e n t f o r th e w hole F e d e r a l R eserve System i n i n t e r n a t i o n a l banking t r a n s a c t i o n s and f o r th e Exchange S t a b i l i z a t i o n F u n d ), though on a t e c h n i c a l a d m i n i s t r a t i v e l e v e l , have o p e ra te d i n th e f o r e i g n exchange m a rk e ts . N e e d le ss t o sa y , th e F e d e r a l R e serv e Banks a r e empowered t o m a in ta in a c c o u n ts ab road and t o e s t a b l i s h a g e n c ie s i n such c o u n tr ie s f o r th e p u rp o se o f co n d u c tin g c e r t a i n t r a n s a c t i o n s . They a r e a l s o a c t i v e l y engaged i n 7 lF o r an e x p la n a tio n o f th e m echanism , se e Bank R e s e r v e s * Some M ajor F a c to r s A f f e c tin g Them (New Yorks F e d e r a l R e serv e Bank o f New York, 1 9 5 D , PP« 1 5 -2 0 . ^2See P o lic y o f th e Chairm an o f th e Board o f G overnors o f th e F e d e ra l R e serv e System (W ashington, D. C: The Board o f G overnors o f th e F e d e r a l R e serv e System , 1 9 ^ 9 ), p p . ^ l - ^ . 159 s e rv in g f o r e i g n a c c o u n ts . V ario u s f o r e i g n governm ents and c e n t r a l banks have a c c o u n ts w ith F e d e ra l R eserv e B anks, e s p e c i a l l y w ith th e F e d e r a l R eserv e Bank ,of New Y ork. The F e d e r a l R eserv e Bank o f New York i s a l s o p e rfo rm in g v a r io u s s e r v i c e s f o r th e I n t e r n a t i o n a l Bank f o r R e c o n s tru c tio n and Developm ent and th e I n t e r n a t i o n a l M onetary F u n d . 73 I I . general observations The d e c lin in g ir& portance i n r e d is c o u n t o p e r a t i o n s . The im p o rta n ce of r e d is c o u n t o p e r a tio n s h as d e c lin e d a b s o l u t e l y a s w e ll a s r e l a t i v e l y . ^ E s p e c i a l l y s in c e th e w o rld -w id e s u s p e n s io n o f th e g o ld s ta n d a rd and th e o u t b re a k o f th e Second World War, th e y have b een c o m p le te ly r e l e g a t e d t o th e background by o th e r f a c t o r s . Even th o u g h o p e r a tio n s were re v iv e d a f t e r th e w ar, i t seems u n l i k e l y t h a t r e d is c o u n t o p e r a tio n s w i l l r e g a i n th e im p o r ta n c e th e y used t o have d u rin g the 1920*s. B e sid e s r a d i c a l changes i n t e c h n i c a l money m arket 7 3 se e B r e tto n Woods A greem ents A c t. S e c . 6 . 7*tFor i n s t a n c e , th e a v e ra g e volume o f b i l l s d i s co u n ted by th e F e d e r a l R e serv e Banks w hich amounted t o $951 m i l l i o n i n 1929 d e c lin e d t o as l i t t l e a s $27 m i l l i o n a t th e end o f 1953> w hereas b i l l s and U n ited S t a t e s Govern ment s e c u r i t i e s h o ld in g , ro u g h ly c o rre sp o n d in g t o th e r e s u l t of open-m arket o p e r a tio n s changed from $¥*9 m i l l i o n t o a s much a s $25}915 m i l l i o n a t th e end o f 1953. 160 c o n d i tio n s , th e d e c lin e i s a t t r i b u t a b l e t o th e developm ent o f o th e r m ethods o f c r e d i t c o n t r o l (su c h a s open-m arket o p e r a t i o n s , changing r e s e r v e r e q u ir e m e n ts , m oral s u a s io n and v a r io u s d i r e c t c o n t r o l s ) and t o a cheap money minded p u b l i c . I t i s t r u e t h a t th e Banks o f P ra n c e , a s w e ll a s of Ja p an , have h e a v ily r e l i e d on r e d is c o u n t o p e r a tio n s i n o r d e r t o c o n t r o l c r e d i t s . Y e t, th e r e d is c o u n t o p e r a tio n s h av e b een c a r r i e d o u t o n ly i n c lo s e co m b in a tio n w ith q u a l i t a t i v e c o n t r o l s , such a s r e g u l a t i o n s o f th e u s e s of b a n k s ' fu n d s and th e " h ig h e r r a t e s a p p l i c a t i o n sy ste m ." F u rth e rm o re , i t i s l a r g e l y due t o p a r t i c u l a r c h a r a c t e r i s t i c s o f t h e i r money m a rk e ts . In r e l a t i o n t o r e d is c o u n t o p e r a t io n s , i t i s w orthy of n o tin g r e p e a t e d l y t h a t a l l th e f i v e c e n t r a l banks w ith o u t any e x c e p tio n d is c a r d e d th e t r a d i t i o n a l p r i n c i p l e — r e d is c o u n tin g o n ly r e a l b i l l s and adv an cin g o n ly on th e c o l l a t e r a l o f th e same b i l l s . The e x te n s iv e and c o n tin u o u s u se o f open-m arket o p e r a t i o n s . O pen-m arket o p e r a tio n s w hich had b een c a l l e d f o r i n t e r m i t t e n t l y i n o rd e r t o make r e d is c o u n t r a t e s e f f e c t i v e , by a d j u s t i n g e x t r a o r d in a r y l i q u i d i t y o f th e money m a rk e t, became th e p rim a ry in s tru m e n t o f c r e d i t c o n t r o l i n th e 1 9 3 0 's , ta k in g o ver th e p o s i t i o n o f r e d is c o u n t o p e r a t io n s . T h is change i s m a in ly due t o a d v a n ta g e s o f open- m arket o p e r a tio n s w hich a r e u n d e rta k e n on th e i n i t i a t i v e o f th e c e n t r a l bank (w h ereas r e d is c o u n t o p e r a tio n s a r e p a s s iv e i n n a t u r e and a r e c a r r i e d o u t on th e i n i t i a t i v e o f b a n k s ). The c e n t r a l bank can t e l l th e volume o f fu n d s n e c e s s a r y f o r open-m arket o p e r a tio n s i n advance (w h ereas i t o n ly knows th e p r i c e o f new fu n d s p ro v id e d th ro u g h r e d i s co u n t f a c i l i t i e s ) . S in c e th e 1 9 3 0 's , c e n t r a l banks have been engaged i n open-m arket o p e r a tio n s n o t o n ly i n t e r m i t t e n t l y t o o f f s e t s e a s o n a l d is tu r b a n c e s i n th e money m arket b u t a l s o c o n tin u o u s ly t o i n s u l a t e t h e i r economy from i n t e r n a t i o n a l m onetary c o n d itio n s i n c o o p e ra tio n w ith T r e a s u r ie s and t o o f f s e t o th e r u n d e s ir a b le d o m e stic m o n etary d ev e lo p m e n ts. B e sid e s f a c i l i t a t i n g th e f l o a t i n g and r e fu n d in g o f p u b lic d e b ts by th e governm ent from tim e to tim e , open-m arket o p e r a tio n s came t o be u n d e rta k e n c o n tin u o u s ly t o m a in ta in th e g o v e rn m e n t's c r e d i t s ta n d in g . I t i s t r u e t h a t d u r in g , and r i g h t b e f o re and a f t e r th e w ar, open-m arket o p e r a tio n s i n th e t r u e se n se ( t h a t th e y a r e u n d e rta k e n on th e i n i t i a t i v e o f th e c e n t r a l bank a c c o rd in g t o l e g i t i m a t e n ee d s o f money m a rk e t) d is a p p e a re d due to th e f a c t t h a t c e n t r a l banks w ere r e q u ir e d to meet 162 th e e x t r a o r d i n a r y governm ent r e q u e s ts d i r e c t l y or t o m a in ta in a p a t t e r n o f i n t e r e s t r a t e s . N e v e r th e le s s , open- m ark et f a c i l i t i e s have been e x t e n s i v e l y , a s w e ll a s con t i n u o u s l y , u t i l i z e d a s th e most e x p e d ie n t way t o p ro v id e n e c e s s a r y fu n d s i n th e money m a rk e t. The a c t i v e u se o f r e s e r v e r e q u ir e m e n ts . R e g u la tin g bank r e s e r v e s d i r e c t l y th ro u g h changing r e s e r v e r e q u i r e m ents i s m e re ly a l o g i c a l r e s u l t of th e r e c o g n i t i o n t h a t th e p rim a ry f u n c tio n o f r e d is c o u n t o p e r a tio n s and open- m a rk e t o p e r a tio n s i s t o r e g u l a t e bank r e s e r v e s i n o rd e r t o in f lu e n c e m o n etary c o n d itio n s i n th e m a rk e t. A lth o u g h th e F e d e r a l R eserv e System i s th e o n ly c e n t r a l bank among th e f i v e c e n t r a l b a n k s, w hich h a s th e power and e x p e rie n c e t o change r e s e r v e re q u ir e m e n ts , th e Bank o f Canada i s r e p o r t e d l y se e k in g f o r th e same k in d o f power, and th e Bank o f Jap an h a s been g ra n te d th e power th o u g h i t h a s n e v e r Used th e pow er. In F ra n c e , banks a r e a l s o r e q u ir e d t o m a in ta in c e r t a i n l e g a l r e s e r v e s i n c a sh or Government s e c u r i t i e s th o u g h th e m ain o b je c ti v e o f t h i s re q u ire m e n t i s t o s e c u re fu n d s f o r th e Governm ent. T h e r e f o re , i t would be no e x a g g e r a tio n t o say t h a t changing r e s e r v e r e q u ire m e n ts a r e becom ing a b a s ic i n s t r u ment f o r th e c e n t r a l bank t o c o n t r o l c r e d i t , p r e p a r in g a b a s e f o r open-m arket o p e r a t io n s , a s w e ll a s r e d is c o u n t 163 o p e r a t i o n s . v The i n t e g r a t i o n o f th e th r e e in s t r u m e n t s . A lthough i t has b een cu stom ary and c o n v e n ie n t t o e x p la in r e d is c o u n t o p e r a t i o n s , open-m arket o p e r a tio n s and changing r e s e r v e re q u ire m e n ts s e p a r a t e l y , th e t r a d i t i o n a l way o f e x p la n a tio n te n d s t o m isle a d th e u n in fo rm e d , f a i l i n g t o show th e e s s e n t i a l u n i t y o f th e t h r e e . I t i s no u se t o deny th e f a c t t h a t each one o f th e t h r e e h a s i t s own s p e c i a l c h a r a c te r and u se ( f o r i n s t a n c e , o pen-m arket o p e r a tio n s g iv e i n i t i a t i v e t o th e c e n t r a l bank* w h e re a s, r e d is c o u n t o p e r a tio n s g iv e i t t o b a n k s, and r e s e rv e r e q u ire m e n ts a f f e c t a l l banks im m e d ia te ly w ith o u t le a v in g any c h o ic e t o i n d i v i d u a l b an k s, w hereas banks have a c h o ic e t o o b ta in or l o s e fu n d s under open-m arket o p e ra t i o n s o r u n d er r e d is c o u n t o p e r a t i o n s ) . Y e t, th e p rim a ry f u n c t i o n o f each one o f : t h e t h r e e i s th e same. They a r e d e sig n e d t o change bank r e s e r v e s and c o s t s t o o b ta in r e s e r v e s from th e c e n t r a l bank i n o rd e r t o c o n t r o l c r e d i t i n g e n e r a l. An in c r e a s e i n r e s e r v e re q u ire m e n ts w hich e l im in a te s e x c e s s r e s e r v e s f o r c e s banks t o r e s o r t t o r e d i s c o u n t s , c e t e r i s p a r i b u s , i n o rd e r t o o b ta in a d e q u a te l i q u i d i t y . I f th e c e n t r a l bank w ants c r e d i t c o n t r a c t i o n , I t can r a i s e 16M - i t s r e d is c o u n t r a t e h ig h enough t o p re v e n t th e u se o f r e d is c o u n t f a c i l i t i e s . Under th e s e c o n d i tio n s , th e t i g h t m o n etary c o n d itio n s can be m itig a te d by open-m arket o p e ra t i o n s , nam ely, by buying o p e r a t i o n s . I t i s p o s s i b le f o r th e c e n t r a l bank t o e lim in a te e x c e ss r e s e r v e s by o p en -m ark et o p e r a tio n s in s t e a d o f changing r e s e r v e re q u ire m e n ts i f e x d e ss r e s e r v e s a r e not s u b s t a n t i a l l y l a r g e . The e l i m i n a t i o n o f e x c e s s r e s e r v e s by open-m arket o p e r a tio n s te n d s t o r a i s e money r a t e s i n th e m a rk e t. I f th e c e n t r a l bank w ants c r e d i t c o n t r a c t i o n i t must m a in ta in th e r e d is c o u n t r a t e h ig h enough t o p r e v e n t th e u se o f r e d is c o u n t f a c i l i t i e s . I f th e r e d is c o u n t r a t e i s lo w ered i n r e l a t i o n t o money r a t e s i n th e m a rk e t, i t i n c r e a s e s , c e t e r i s p a r i b u s , l i q u i d i t y o f banks and te n d s t o low er money r a t e s i n th e m a rk e t. I f th e r e d is c o u n t r a t e i s in c r e a s e d r e l a t i v e l y t o money m arket r a t e s , i t r e d u c e s , c e t e r i s P a r i b u s , l i q u i d i t y o f banks a s lo n g a s th e r e i s no e x c e s s r e s e r v e s a t a l l . Thus, th e t h r e e a r e used c o o p e r a tiv e ly and i n t e r ch a n g ea b ly t o d e te rm in e bank r e s e r v e s and t h e i r p r i c e . T h e r e f o r e , th o u g h th e re p la c e m e n t o f open -m ark et o p e r a tio n s f o r r e d is c o u n t o p e r a tio n s and th e e s ta b lis h m e n t o f changing r e s e r v e r e q u ire m e n ts a r e im p o rta n t d ev elo p m en ts i n c e n t r a l 165 b an k in g , a more im p o rta n t and e s s e n t i a l change can he found i n a n o th e r a s p e c t . T hat i s , t h a t c e n t r a l hanks have come t o re g a rd ch an g in g hank r e s e r v e p o s i t i o n s w ith o u t any re g a rd t o th e way t o change i t a s t h e ’ e s se n c e o f c e n t r a l b a n k in g , a d o p tin g th e g e n e r a l a s s e t th e o r y f o r r e d is c o u n ts and e x te n d in g open-m arket o p e r a tio n s from s h o r t- te r m g o v ern ment s e c u r i t i e s t o lo n g -te rm governm ent s e c u r i t i e s . I t m ust he remembered t h a t th ro u g h t h i s change th e c e n t r a l hank h as come t o ex ten d f i e l d s o f c o n t r o l from s h o r t- te r m money m a rk e ts' t o lo n g -te rm money m a rk e ts . The c l o s e r to u c h w ith th e g e n e r a l p u b l i c . I t was th o u g h t more o r l e s s d e s ira b le ^ d u rin g th e 1 9 2 0 's , f o r th e c e n t r a l bank t o r e s t r i c t i t s b u s in e s s o n ly t o banks and g o v ern m en ts, y e t h i s t o r i c a l develo p m en ts have s in c e th e n p ro c e e d e d i n a d i f f e r e n t d i r e c t i o n . I n s te a d o f lo o s e n in g th e t i e w ith th e g e n e r a l p u b l i c , c e n t r a l banks have come i n t o c l o s e r to u c h w ith th e g e n e r a l p u b l i c . The e x te n s iv e and c o n tin u o u s u se o f open-m arket o p e r a tio n s was th e f i r s t i n d i c a t i o n tow ard c l o s e r r e l a t i o n s betw een th e tw o. On th e c o n t r a r y , t o r e d is c o u n t o p e ra t i o n s , open -m ark et o p e r a tio n s a re n o t l i m i t e d t o b an k s. The c e n t r a l bank can d e a l i n s e c u r itie s ; h o t o n ly w ith banks 166 b u t a l s o w ith th e g e n e r a l p u b l i c , h o ld e r s o f s e c u r i t i e s , (su c h as in s u r a n c e com panies, sa v in g s i n s t i t u t i o n s , co rp o r a t i o n s and even i n d i v i d u a l s ) . T h e re fo re , an in c r e a s e i n o p en -m ark et o p e r a tio n s a s such meant an in c r e a s in g i n f l u en ce o f th e c e n t r a l bank d i r e c t l y over th e g e n e r a l p u b l i c . In a d d i t i o n to open-m arket o p e r a tio n s i n s h o r t- te r m governm ent s e c u r i t i e s , th e c e n t r a l bank began engaging i n open-m arket o p e r a tio n s i n lo n g - te r m governm ent s e c u r i t i e s . T h is n e c e s s a r i l y meant th e e x p a n sio n o f th e sp h e re w ith in w hich th e c e n t r a l bank can e x e r t i t s p r e s s u r e . M argin re q u ire m e n ts have a l s o added t o d e v e lo p in g c l o s e r r e l a t i o n s among th e c e n t r a l bank, s to c k m a rk e ts , and r e l a t e d f i n a n c i a l i n s t i t u t i o n s . I t i s more th a n a p p a re n t t h a t f o r m e r 's c o n t r o l s over consumer c r e d i t , a s w e ll a s r e a l e s t a t e c r e d i t , formed an in ti m a t e c o n n e c tio n betw een th e c e n t r a l bank and f i n a n c i a l i n s t i t u t i o n s en g ag in g i n th e s e f i e l d s a s w e ll as th e p u b l i c . A d e c i s i v e m easu re, how ever, w hich h a s b ro u g h t t h i s te n d e n c y t o th e extrem e h a s . been v a r io u s t i g h t q u a l i t a t i v e c o n t r o l s i n s t i t u t e d d u rin g and a f t e r th e war on an emer gency b a s i s . They o f te n g r a n t th e c e n t r a l bank even th e power t o s c r e e n i n d i v i d u a l a p p l i c a t i o n s f o r c r e d i t s . I n t h i s c o n n e c tio n , th e c e n t r a l bank h as n o t f a i l e d t o d ev e lo p a c l o s e r r e l a t i o n w ith th e banking s o c i e t y . 167 The developm ent o f d i r e c t c o n n e c tio n s betw een th e Bank of E ngland and com m ercial banks i s an o u ts ta n d in g exam ple. S ta n d in g buying o f f e r o f T re a s u ry b i l l s and th e m a in te n an ce o f a p a t t e r n of i n t e r e s t r a t e s prom oted th e common i n t e r e s t s betw een th e F e d e r a l R eserv e System and b a n k s . V a rio u s law s have p r e s c r ib e d th e c e n t r a l b a n k ’ s a u t h o r i t y t o is s u e d i r e c t i o n s and e x e r t s a n c tio n s over b a n k s . F re q u e n t ex ch an g es o f o p in io n betw een th e c e n t r a l bank and banking s o c i e t y , no d o u b t, have prom oted th e developm ent o f t i g h t e r c o n n e c tio n s betw een th e tw o. D evelopm ents o f c l o s e r o p e r a t io n a l r e l a t i o n s h i p s w ith th e g o v ern m en t. D evelopm ents o f s t r u c t u r a l r e l a t i o n s b etw een th e c e n t r a l bank and th e governm ent w ere d e s c r ib e d and d is c u s s e d i n C h ap ter I I I . As i s e x p e c te d , th e r e l a t i o n s of th e two on th e o p e r a t i o n a l l e v e l have become so c l o s e and in ti m a t e t h a t o p e r a tio n s o f e i t h e r one a r e i n o t a d e q u a te ly s tu d ie d w ith o u t r e f e r r i n g t o a n o t h e r ’s more o r l e s s in d e t a i l . Even th e f i s c a l p o l i c y , w hich h a s been s t r o n g l y a d v o c ate d a s , t h e s t a b i l i z e r o f an economy, th e s u b s t i t u t i o n f o r m onetary p o l i c y s in c e th e 1 9 3 0 ’s , can n o t be p u t i n t o p r a c t i c e w ith o u t c o o p e r a tio n o f m onetary a u t h o r i t i e s a s w i l l be se e n i n a l a t e r c h a p te r . E s p e c i a l l y , d e f i c i t f in a n c in g and p u b lic d e b t managements a r e alm o st 168 u n th in k a b le w ith o u t r e f e r r i n g to m onetary c o n s id e r a ti o n s o f th e c e n t r a l bank. The th o u g h t w hich p r e v a i le d d u rin g th e 1 9 2 0 's , t h a t t h e c e n t r a l bank sh o u ld be a s in d e p e n d e n t o f th e governm ent a s p o s s i b l e , n a t u r a l l y had i t s c o u n t e r p a r ts on th e o p e r a - * t i o n a l l e v e l a s r e s t r i c t i v e p r a c t i c e s . The Bank o f Canada A c t, based on th e t r a d i t i o n a l c e n t r a l banking th e o r y , had a p r o v is io n t h a t th e Bank sh o u ld n o t h o ld Government s e c u r i t i e s w ith a m a tu r i ty ex ceed in g two y e a rs i n e x c e s s o f t h r e e tim e s th e amount o f th e p a id -u p c a p i t a l o f th e B an k .75 The Bank o f E ngland was p r o h ib ite d from making ad v an ces to t h e Government w ith o u t e x p re s s a u t h o r i t y o f P a r lia m e n t.76 In J a p a n , am ounts and te rm s o f Government o b l i g a t i o n s t o be ta k e n up by th e Bank o f Jap an w ere d e te rm in e d by th e Bank on each o c c a s io n , s u b je c t t o a p p ro v a l o f th e M in is te r o f F in a n c e .77 The F e d e r a l R e serv e Banks w ere s p e c i f i c a l l y p r o h i b i t e d from d e a lin g i n Government o b l i g a t i o n s d i r e c t l y w ith th e T r e a s u r y .78 ? ^The Bank o f Canada A c t. A r t. 20, (1 ) Cd). 76K iseh and E lk in , o p . c i t . . p . 2^5* 77i b i d . T p p . 3 1 0- 1 1 . 7$See Banking Act of 1 9 3 ?. S e c . 206. 169 D uring th e fo llo w in g two d e c a d e s , th e whole p i c t u r e changed. The Bank o f Canada i s p r a c t i c a l l y f r e e from r e s t r i c t i o n s i n h o ld in g Government s e c u r i t i e s , 79 w hereas th e Bank o f Japan i s empowered t o make ad v an ces t o th e Government even w ith o u t ta k in g any c o l l a t e r a l . ® ^ i n 19**2, t h e F e d e r a l R eserv e Banks w ere a u th o r iz e d t o p u rc h a s e Government o b l i g a t i o n s d i r e c t l y from th e T re a s u ry , p r o v id e d t h a t th e a g g re g a te h o ld in g s o f s e c u r i t i e s t h u s a c q u ir e d by th e Banks do not exceed $5?000 m illio n .® ^ On th e c o n tr a r y t o th e s e c h a n g e s, i n F ra n c e th e l e g a l c e i l i n g was new ly imposed on c u r r e n t Government borrow ing r e c e n tly ,® 2 y e t t h i s i s m e re ly an i n d i c a t i o n o f th e l a s t e f f o r t t o c o u n te r e x c e s s iv e ly c lo s e r e l a t i o n s o f th e two w ith Government dom inance. W ith th e s e in c r e a s e d pow ers, b e s id e s o t h e r s , c e n t r a l banks have re n d e re d e v e ry s e r v ic e p o s s i b l e t o g o v ern m e n ts. A c tu a lly i t i s Im p o s s ib le t o t h i n k r e l a t i o n s o th e r th a n t h a t d u rin g em ergency when th e governm ent e x te n d s i t s 79The Bank o f Canada Act Amendment A c t. 1 9 3 8 . S e c . 1 2 . QQfhe Bank o f Ja p an Law. A rt. 22. ®^An Act t o E x p e d ite th e P r o s e c u tio n o f th e War, Se c . ^ 0 1 . ®2See The 2 0 th IBS Annual R e p o rt. p . 193. 170 c o n t r o l o v er a l l s e c t o r s o f th e c o u n try . A ll c e n t r a l N bank p o l i c i e s have been l a r g e l y d i r e c t e d tow ard ach iev em en t o f n a t i o n a l a im s .^3 (Under em ergency c o n d itio n s th e g o v e rn ment i s s o l e l y r e s p o n s i b le f o r d e te rm in in g what n a t i o n a l aim s a r e . ) To en d o rse t h i s s ta te m e n t, i t would n o t be n e c e s s a r y t o m en tio n v a r io u s p o l i c i e s ad o p ted by c e n t r a l banks in d e t a i l . P r e f e r r e d tr e a tm e n t o f governm ent s e c u r i t i e s as c o l l a t e r a l f o r a d v a n c e s, th e m a in te n an ce of low i n t e r e s t r a t e s on s h o r t- te r m governm ent s e c u r i t i e s th ro u g h s ta n d in g buy in g o f f e r s a t low d is c o u n t r a t e s , th e m ain ten an ce o f a p a t t e r n o f i n t e r e s t r a t e s on v a r io u s governm ent s e c u r i t i e s a r e a l l alo n g t h i s l i n e . C e n tr a l banks have a l s o ex ten d ed h e lp t o governm ents by k ee p in g banking r e s e r v e s i n g o v ern ment s e c u r i t i e s so a s t o p r e s e r v e governm ent c r e d i t s ta n d in g . Above a l l , p r a c t i c a l l y u n lim ite d ad v an ces o f c e n t r a l b an k s t o governm ents i n some c o u n t r ie s a r e th e extrem e c a s e s . C lo se r r e l a t i o n s betw een th e two have d ev elo p ed n o t o n ly i n d o m e stic m onetary m a tte r s b u t a l s o i n i n t e r n a t i o n a l ^3The Bank o f Canada Act s t a t e s t h a t th e Bank o f Canada i s " t o r e g u l a t e c r e d i t and c u rre n c y i n th e b e s t in t e r e s t . . o f th e econom ic l i f e o f th e n a t i o n . . . ” and th e Bank of Ja p an Law a l s o d e c la r e s t h a t " th e Bank of Japan s h a l l be managed s o l e l y f o r achievem ent o f n a t i o n a l a im s ." 171 m onetary p h a s e s . One o f th e m ain re a s o n s why s t a b i l i z a t i o n fu n d s w ere e s t a b l i s h e d was t o r e l i e v e c e n t r a l banks o f l o s s i n f o r e i g n exchange d e a lin g s i n o rd e r t o m a in ta in a p ro p e r e x t e r n a l v a lu e o f th e n a t i o n a l c u r re n c y . N a tu r a l ly , th e y have c o o p e ra te d w ith s t a b i l i z a t i o n fu n d s to m a in ta in th e e x t e r n a l v a lu e o f th e n a t i o n a l c u rre n c y . Under an exchange c o n t r o l system th e y have a l s o exten d ed t h e i r t e c h n i c a l know ledge and e x p e rie n c e t o g o v ern m en ts. G e n e r a lly , c e n t r a l banks have been l e s s r e l u c t a n t t o f in a n c e g o v e rn m e n ts’ n ee d s f o r f o r e i g n exchange t r a n s a c t i o n s th a n t o p ro v id e governm ents w ith c r e d i t f o r g e n e r a l u s e , due t o t h e f a c t t h a t th e l a t t e r i s more o r l e s s c l o s e r t o th e p r i n c i p l e s o f t r a d i t i o n a l c e n t r a l b a n k in g . Summary. The r e a l b i l l th e o ry and i t s a p p l i c a t i o n , | I and th e em phasis on r e d is c o u n t o p e r a tio n s have g e n e r a l l y j b een r e p la c e d by a new th o u g h t t h a t th e fu n d am e n tal p u rp o se J o f c e n t r a l banking i s t o r e g u l a t e bank r e s e r v e s , r e g a r d l e s s j I o f th e m ethods u se d , i n o r d e r , p r i n c i p a l l y , t o in f lu e n c e j th e s h o r t- te r m money m a rk e t. R e d isc o u n t and open-m arket ! o p e r a t io n s have been im proved to ad a p t th e m se lv e s t o t h i s o b j e c t i v e . Changing r e s e r v e r e q u ire m e n ts have been i n c o r p o r a te d i n t o th e t r a d i t i o n a l c e n t r a l banking in s tr u m e n ts . I n th e p ro c e s s o f r e g u l a t i n g bank r e s e r v e s , th e 172 im p o rta n c e of open-m arket o p e r a tio n s on lo n g -te rm i n t e r e s t r a t e s was f o u n d . A n d some c o u n t r ie s s t a r t e d e x p l o i t i n g t h i s new in s tru m e n t s u c c e s s f u l l y or u n s u c c e s s f u l ly . B e sid e s t h e s e , some c e n t r a l banks came t o a c q u ir e v a r io u s s p e c i f i c c o n t r o l in s tr u m e n ts — such a s m argin re q u ir e m e n ts , consumer c r e d i t c o n t r o l s , r e a l e s t a t e c o n t r o l s . These sh a re th e same f e a t u r e s t o some e x t e n t . U n lik e d i r e c t c o n t r o l s , th e y do n o t r e g u l a t e i n d iv i d u a l economic a c t i v i t i e s d i r e c t l y , b u t th e y a r e ; a l s o d i s t i n c t from th e t r a d i t i o n a l t h r e e in s tr u m e n ts r e f e r r e d t o ab o v e. The l a t t e r a f f e c t s th e flo w o f c r e d i t and money g e n e r a l l y , w hereas th e fo rm er in f lu e n c e s th e one in p a r t i c u l a r s e c t o r s . In t h i s s e n s e , th e y ra n k betw een s o - c a l l e d m onetary c o n t r o l s and d i r e c t c o n t r o l s i n i n t e n s i t y o f c o n t r o l . A nother common f e a t u r e o f th e t h r e e i s t h a t th e y f i t i n t o th e s a v in g -in v e s tm e n t ap p ro ach by a c c id e n t or on p u rp o s e . The i n t e n s i t y o f c o n t r o l i s extrem e i n t i g h t q u a l i t a t i v e c o n t r o l s ad o p ted by some c e n t r a l b a n k s. They a r e n o t d i f f e r e n t from d i r e c t c o n t r o l s w hich have b een en fo rc e d by g o v ern m e n ts. The o n ly d i f f e r e n c e , i f one e x i s t s , John M. Keynes saw a t h e o r e t i c a l p o s s i b i l i t y t o r e g u l a t e lo n g - te r m i n t e r e s t r a t e s th ro u g h open-m arket o p e r a t i o n s , se e John Maynard K eynes, The G e n e ra l T heory o f Employment I n t e r e s t and Money (New Yorks H a r c o u rt, B race and Company, 1 9 3 6 ), p p . 2 0 5-266. 173 i s t h a t th e y a r e imposed on th e m onetary a s p e c t s o f economic a c t i v i t i e s , w hereas o th e r d i r e c t c o n t r o l s a r e imposed on o th e r a s p e c ts o f econom ic a c t i v i t i e s . T h is trem endous e x p a n sio n o f c r e d i t c o n t r o l power o f th e c e n t r a l bank and i t s i n t e n s i t y o f c o n t r o l i s , a s a m a tte r o f c o u r s e , r e l a t e d t o th e d ev elo p m en ts o f g o v ern ment c o n t r o l s s in c e 1930. I t depends on th e c h a r a c t e r i s t i c s o f an economy and governm ent a s t o what k in d s o f power a c e n t r a l bank can or should h av e , and i t a ls o depends on a p e o p l e s ’ c h o ic e betw een freedom w ith i n s t a b i l i t y and s t a b i l i t y w ith c o n t r o l . ^5 T h e r e f o r e , t h e f u n c t i o n s o f th e c e n t r a l bank and i t s p ro p e r pow ers a r e d e te rm in e d o n ly w ith r e f e r e n c e t o th e governm ent and g o v e rn m e n ta l c o n t r o l i n g e n e r a l . T h is a s p e c t w i l l be • t d is c u s s e d i n th e fo llo w in g c h a p te r . 1 ®5sorae e c o n o m ists thinjc t h a t s t a b i l i t y w ith c o n t r o l j may p ro v e t o be im p o s s ib le i n p r a c t i c e . ; C H A P T E R VII CONCLUSION As had heen t r u e i n th e p a s t b e fo r e th e 1 9 2 0 ’s , d evelopm ents o f c e n t r a l b anking s in c e 1930 have a ls o l a r g e l y been d e te rm in e d by h i s t o r i c a l e v e n ts such a s th e G re a t D e p re s s io n and th e Second World War, T h e re fo re , i t m ight n o t be a p p r o p r ia te t o e v a lu e th e p a s t tw e n ty - f i v e y e a r s ’ d ev elo p m en ts i n c e n t r a l b anking from a view p o in t d i f f e r e n t from th o s e w hich have made th o s e d e v e lo p m ents i n e v i t a b l e . Y et, i t seems im p o rta n t t o d i s t i n g u i s h d e s i r a b l e d ev elo p m en ts from u n d e s ir a b le develo p m en ts f o r th e sake o f t h e f u t u r e , I . THE DECLINING SIGNIFICANCE IN REDISCOUNT OPERATIONS I The d is c a r d o f e l i g i b i l i t y r e q u ir e m e n ts . As was j d e s c rib e d i n C h a p te r IV, th e d is c a r d o f e l i g i b i l i t y r e - ( I q u ire m e n ts i s an o u ts ta n d in g developm ent i n c e n t r a l b ank- j i n g . Due t o t h e f a c t s t h a t t h e r e i s no c o n n e c tio n betw een j i th e c h a r a c te r o f p a p e rs o f f e r e d f o r d is c o u n t and th e u se | t o w hich th e p ro c e e d s a r e p u t , t h a t banks can expand a t a m u l t i p l e r a t e on th e b a s i s o f c e n t r a l b a n k ’s c r e d i t , t h a t e l i g i b l e p a p e r i n th e a g g re g a te te n d s t o be alw ays j 175 i n l a r g e r q u a n t i t y th a n c e n t r a l h a n k ’s c r e d i t , and t h a t lo a n s hacked hy e l i g i b l e p ap e r a r e itsso f a c t o non- i n f l a t i o n a r y i s n o t t e n a h le a t tim e s , ”i t i s d e c id e d ly wrong t o e x p e c t from th e p r a c t i c e o f d is c o u n tin g o r r e d is c o u n tin g com m ercial p a p e r th e happy r e s u l t o f an i d e a l money s u p p ly .”-^ But i t must be m entioned t h a t th e d is c a r d o f th e r e a l b i l l th e o r y was l a r g e l y due t o i n c i p i e n t re q u ire m e n ts o f th e tim e s in s t e a d o f l o g i c a l sh o rtco m in g s m entioned ab o v e. In th e U nited S t a t e s , f o r i n s t a n c e , develo p m en ts em bodied i n th e Banking A ct o f 1935> and o th e r l e g i s l a t i o n w ere l a r g e l y due to th e l a c k o f e l i g i b l e p a p e r t o be o f f e r e d by banks f o r r e d is c o u n t and th e u r g e n t need to f in a n c e Government d e f i c i t f i s c a l p o l i c y . In Ja p a n , on th e o th e r h a n d , d ev elo p m en ts a r e t o a l a r g e e x t e n t due to f in a n c in g Government d e f i c i t f i s c a l p o l i c y and en c o u ra g in g n a t i o n a l l y d e s ir e d i n d u s t r i e s th ro u g h p r e f e r e n t i a l t r e a t ment o f t h e i r f i n a n c i a l d e b e n tu r e s . At any r a t e , a c t u a l d evelopm ents a r e g e n e r a lly w elcom e. E s p e c ia l ly d u rin g d e p r e s s io n s when low r e d is c o u n t r a t e s f a i l t o in d u c e p r i v a t e sp e n d in g , t h e r e i s no o th e r " ■ ■ ■ — — H I . iG eorge N. Halm, I n t e r n a t i o n a l M onetary C o o p e ra tio n ,. [Chapel H i l l , N o rth C a ro lin a : The U n iv e r s it y of N orth C a ro lin a iP re s s , 19*+5^> P« 53 • 176 way t o overcome d e p r e s s io n s th a n th ro u g h governm ent d e f i c i t sp e n d in g w hich o r d i n a r i l y r e q u i r e s c e n t r a l bankte c r e d i t and w hich th e a d h e re n c e t o th e r e a l b i l l th e o r y can n o t p e r m i t . However, i t should be k e p t i n mind t h a t the r e p l a c e ment o f th e r e a l b i l l th e o r y by th e g e n e r a l a s s e t th e o ry c e r t a i n l y im p a ire d a b u lw ark , th o u g h n o t so s tro n g a s had b een c o n s id e r e d . Now th e power t o c r e a t e and c o n t r a c t c r e d i t s i s l a r g e l y i n th e hands o f m onetary a u t h o r i t i e s . T h is b r in g s up th e problem of how t o o b ta in a r i g h t c r e d i t p o l i c y w hich w i l l be d is c u s s e d l a t e r . The i n t e g r a t i o n o f r e d is c o u n t o p e r a t i o n s , open- m a rk et o p e r a tio n s and r e s e r v e re q u ir e m e n ts . The d is c a r d o f th e r e a l b i l l th e o ry meant th e r e c o g n i t i o n t h a t r e d is c o u n t o p e r a tio n i s m erely a te c h n iq u e o f c r e d i t c o n t r o l th ro u g h r e g u l a t i n g bank r e s e r v e s and t h e r e a r e some o th e r ways th a n r e d is c o u n t o p e r a tio n to r e g u l a t e bank r e s e r v e s . A c c o rd in g ly , o pen-m arket o p e r a tio n and changing r e s e r v e re q u ir e m e n ts were adopted and w e ll in c o r p o r a te d i n t o th e t r a d i t i o n a l c e n t r a l banking in s tr u m e n t, r e d is c o u n t o p e r a tio n . A c tu a lly , th e a d o p tio n o f th e l a t t e r two in s tru m e n ts was a s te p fo rw a rd . W hile u n d er r e d is c o u n t o p e r a tio n a c e n t r a l bank can in f lu e n c e bank r e s e r v e s o n ly p a s s i v e l y . j 177 I t can r e g u l a t e bank r e s e r v e s p o s i t i v e l y u n d er open- m ark et o p e r a tio n and changing r e s e r v e r e q u ir e m e n ts . Where th e r e i s a s tro n g te n d e n c y o f banks n o t t o borrow from a c e n t r a l bank, open-m arket o p e r a tio n or changing r e s e r v e re q u ir e m e n ts a r e p o s s i b ly th e o n ly a v a i l a b l e in s tru m e n ts ' to change bank r e s e r v e s . E s p e c ia l ly d u rin g d e p r e s s io n s when banks te n d t o av o id borrow ing a t a c e n t r a l bank, th e o th e r two a r e th e o n ly ways t o in c r e a s e bank r e s e r v e s . A lthough open-m arket o p e r a tio n s a r e v e ry e f f e c t i v e to change bank r e s e r v e s by a r e l a t i v e l y sm a ll am ount, th e y I a r e in c a p a b le o f changing them s u b s t a n t i a l l y b ec au se a c e n t r a l bank d e e s n o t h o ld s e c u r i t i e s enough to ,a b s o r b e x c e s s r e s e r v e s o r su ch s e l l i n g o p e r a tio n s may r e s u l t i n d i s o r d e r l y c o n d itio n s i n th e s e c u r i t y m a rk e t. In t h i s case,I an in c r e a s e i n r e s e r v e re q u ire m e n ts i s a p p r o p r i a t e . T here ! i s no q u e s tio n ab o u t p o s s i b l e i n d i r e c t e f f e c t s on th e i i s e c u r i t y m arket o f in c r e a s e d r e s e r v e r e q u ir e m e n ts , b u t such j e f f e c t s a r e l i k e l y to be l e s s se v e re th a n d i r e c t e f f e c t s o f j o p en -m ark et o p e r a t io n s . ' i At any r a t e , th e i n t e g r a t i o n o f th e t h r e e m ethods i s i a d e s i r a b l e developm ent i n c e n t r a l banking f o r th e p a s t two d ec ad e s and a h a l f , making i t p o s s i b l e f o r th e c e n t r a l bank t o a c t i v e l y in f lu e n c e s h o r t- te r m money m arket th ro u g h ch an g in g bank r e s e r v e s . j i _________________________________________________________________________________________________________________________________________________________________________________________ i 178 I I . THE CLOSER RELATIONS WITH THE GOVERNMENT A d o u b t on th e e f f e c t i v e n e s s o f th e i n t e r e s t r a t e d u rin g d e p r e s s i o n s . Deep t r u s t o f e c o n o m ists on th e 1 e f f e c t i v e n e s s o f th e i n t e r e s t r a t e a s th e economic s t a b i l i z e r h e ld d u rin g th e 1 9 2 0 's and th e e a r l y p a r t o f th e 1 9 3 0 's , was c o m p le te ly sh a k e n . R e g a rd le s s o f th e way in w hich th e i n t e r e s t r a t e a f f e c t s econom ic a c t i v i t i e s , 2 a change i n th e i n t e r e s t r a t e was c o n s id e re d t o be so e f f e c t i v e t h a t th e r e may h a r d ly be any need t o r e s o r t t o o th e r methods.3 However, th e s t a t e o f m a tte r s d u rin g th e d e p r e s s io n s te n d e d t o c o n f l i c t w ith t h i s b e l i e f . Even th e lo w e st i n t e r e s t r a t e w hich had been e v e r known f a i l e d to in d u c e a d e q u a te in v e stm e n t an d , t h e r e f o r e , consum ption. I t was made c l e a r t h a t n o t o n ly th e i n t e r e s t r a t e , b u t a l s o th e r a t e o f p r o s p e c tiv e p r o f i t had a l o t t o do w ith i n v estm en t . 2For i n s t a n c e , H aw trey th o u g h t t h a t a change in th e i n t e r e s t r a t e a f f e c t s in v e s tm e n t, changing c o s t of w orking I c a p i t a l , w hereas Keynes th o u g h t t h a t a change i n th e | I n t e r e s t r a t e a f f e c t s in v e s tm e n t, changing c o s t o f f ix e d \ c a p i t a l . See R. G. H aw trey, "The A rt o f C e n tr a l B a n k in g ," . The A rt o f Ce n t r a l Banking (Londons Longmans, Green and I Company, 1933)* p p .'1 5 5 - o o ; and John M. K eynes, A T r e a t i s e ! on Money(New York: H a rc o u rt, B race and Company, 1930)> V ol. I , p p . 1 8 5 -2 2 0 . 3For instance, see Keynes, ibid.. pp. 53-91 *. 179 T h e re fo re , i f th e i n t e r e s t r a t e i s z e ro 1 * and s t i l l h ig h e r th a n r a t e s o f p r o s p e c tiv e p r o f i t , th e r e i s no way to in d u c e in v e s tm e n t, sp e n d in g , o th e r th a n by a g o v ern m en tal spending program w hich does n o t have to c o n s id e r p r o f i t a b i l i t y so s e r i o u s l y a s p r i v a t e e n t e r p r i s e . D e f i c i t sp en d - ing i s " th e l o g i c a l s e q u e l t o c e n t r a l bank p o l i c y . " ' From t h i s v ie w p o in t, i t was i n e v i t a b l e and more or l e s s d e s i r a b l e t h a t c e n t r a l banks made r e l a t i o n s w ith th e governm ent much c lo s e r th a n b e f o r e . And i t i s a g a in n o te d t h a t t h i s g o v e rn m e n ta l d e f i c i t sp en d in g could n o t have been r e a l i z e d i f c e n t r a l banks had ad h e re d t o th e r e a l b i l l th e o r y p e r s i s t e n t l y . D i f f e r e n t i a t i o n o f i n t e r e s t r a t e s . I t had been ta k e n f o r g r a n te d t h a t a change i n an i n t e r e s t r a t e i n a c e r t a i n s e c to r i s a u t o m a t ic a lly t r a n s m i t t e d t o o th e r s e c to r s ,| changing i n t e r e s t r a t e s i n th e l a t t e r s e c t o r s and i t h ad , ! \ t h e r e f o r e , been cu sto m ary i n th e o ry to d is c u s s th e i n t e r e s t j t r a t e in s t e a d o f a s t r u c t u r e o f i n t e r e s t r a t e s . ^ I t means t h e o r e t i c a l z e r o . A c tu a lly i t i s im pos s i b l e t o make i n t e r e s t r a t e z e ro to b o rro w e rs b ec au se o f a d m i n i s t r a t i v e c o s t s . 5John H. W illia m s, " D e f i c i t S p e n d in g ," P ostw ar M onetary P la n s and O ther E ssa y s ( t h i r d e d i t i o n ; Hew York; A lfre d A. K nopf, 19^7)> p . 68. 180 However, t h i s k in d o f s i m p l i f f e a t i o n was a ls o b e tra y e d by f a c t u a l h ap p e n in g s d u rin g th e 1 9 3 0 's.® I t was w id e ly re c o g n iz e d t h a t lo n g - te r m i n t e r e s t r a t e s rem ained r e l a t i v e l y h ig h , w h ile s h o r t- te r m i n t e r e s t r a t e s were a r t i f i c i a l l y low ered by c e n t r a l b a n k 's e a s y money p o lic y and d e f i c i t f i s c a l p o l i c y . I t was made c l e a r by s t u d i e s ? t h a t "a change i n th e s h o r t r a t e w i l l b rin g a b o u t a change i n th e long r a t e o n ly i f a g e n e r a l c o n v ic tio n i s c r e a te d t h a t th e s h o r t r a t e w i l l rem ain low f o r a c o n s id e r a b le t i m e . ”® T h is r e a l i z a t i o n t h a t lo n g -te rm i n t e r e s t r a t e s a r e l e s s d ep en d en t on s h o r t- te r m i n t e r e s t r a t e s th a n used to be presum ed, and th e dependence of lo n g -te rm i n t e r e s t r a t e s on c o n v i c ti o n , a p s y c h o lo g ic a l f a c t o r , had an im p o rta n t p o lic y i m p l i c a t i o n . A ccording t o most e c o n o m is ts , th e volume o f in v e s tm e n ts d s i more l i k e l y d e te rm in e d by ® R ie fle r d i s t i n g u i s h e d s h o r t- te r m i n t e r e s t r a t e movements from th o s e of lo n g -te rm i n t e r e s t r a t e b e f o re 1 9 3 0 . See W. W. R i e f l e r , Money R a te s and Money M arkets i n th e U n ited S t a t e s (New Yorks H arper and B r o th e r s , 19307* pp* 116- 23. ?F or i n s t a n c e , F . A. L u tz , "The S t r u c t u r e o f I n t e r e s t R a t e s , ” The Q u a r te r ly J o u r n a l o f Econom ics LV(November, 1 9 ^ 0 ), 3 6- 6 3 ; and Joan R obinson, "The R ate o f I n t e r e s t , " The R ate o f I n t e r e s t and O ther E ssav s (Londons M acm illan and Company, L t d ., 1 9 5 2 ), p p . 1-30* 8 Lutz, op. cit.. p. 60. 181 lo n g -te rm i n t e r e s t r a t e s th a n by s h o r t- te r m i n t e r e s t r a t e s . As long a s p e r f e c t m o b ility of c a p i t a l betw een s h o r t- te r m and lo n g -te rm c a p i t a l m a rk e ts e x i s t s , t h e r e i s no need f o r th e c e n t r a l bank t o e n t e r th e lo n g -te rm c a p i t a l m ark et t o a f f e c t in v e s tm e n t. But i f n o t so , th e t r a d i t i o n a l c e n t r a l b a n k in g , in f lu e n c in g in v e stm e n t th ro u g h changing s h o r t- te r m i n t e r e s t r a t e s by r e g u la tin g bank r e s e r v e s , i s l i k e l y t o be s h o r t of a c h ie v in g i t s e s s e n t i a l o b j e c t i v e , s t a b i l i z i n g th e economy. F u rth e rm o re , i t i s d i f f i c u l t t o o b ta in th e p u b l i c f s c o n v ic tio n i n th e c o n tin u a n c e of low s h o r t- te r m r a t e s f o r a c o n s id e r a b le tim e . Even i f th e c e n t f a l bank su cceed s i n o b ta in in g i t , th e r e i s no a s s u ra n c e t h a t th e c e n t r a l bank can keep i t f o r a lo n g tim e . B ecause c o n v ic tio n i s a p s y c h o lo g ic a l f a c t o r , i t i s alw ays exposed t o a d an g er of b ein g shaken by v a r io u s f a c t o r s . j I I t seems more ex p ed ien t, t h e r e f o r e , f o r th e c e n t r a l bank t o e n t e r lo n g -te rm c a p i t a l m arket d i r e c t l y i n o rd e r t o m a in ta in low lo n g -te rm i n t e r e s t r a t e s . I t i s t r u e t h a t i i th e c e n t r a l bank does n o t have t o l i m i t i t s open-m arket j o p e r a tio n s t o lo n g -te rm governm ent s e c u r i t i e s f o r t h i s I i p u rp o s e . I f th e c e n t r a l bank engages i n open-m arket o p e ra t i o n s i n p r i v a t e lo n g -te rm s e c u r i t i e s i t w i l l be more e f f e c t i v e in in d u c in g p r i v a t e in v e s tm e n ts , b u t such p r a c t i c e s l a r e n o t e s s e n t i a l l y d i f f e r e n t from o u t r i g h t s u b s i d i z a t i o n I 182 o f p r i v a t e e n t e r p r i s e s and i t h as in h e r e n t sh o rtco m in g s i n s u b s i d i z a t i o n .^ T h e r e f o r e , i t i s a w ise p o l i c y f o r th e c e n t r a l bank t o l i m i t i t s o p e r a tio n s t o governm ent s e c u r i t i e s , l e t t i n g p r i v a t e lo n g -te rm c a p i t a l m arket be in f lu e n c e d by c o n d itio n s o f th e lo n g -te rm governm ent s e c u r i t y m arket th ro u g h th e m arket m echanism . From t h i s v ie w p o in t, r e c e n t p r a c t i c e s o f c e n t r a l b an k s a r e d e s i r a b l e d ev elo p m en ts i n c e n t r a l b a n k in g . I t i s a l s o t r u e t h a t such p r a c t i c e s were o f te n s t a r t e d to f a c i l i t a t e governm ent lo n g - te rm f in a n c in g and to m a in ta in i j governm ent c r e d i t s ta n d in g i n lo n g -te rm c a p i t a l m a rk e t, j b u t i t does n o t l e s s e n th e im p o rta n ce o f a p o s i t i v e u se of o p en -m ark et o p e r a tio n s i n lo n g -te rm governm ent s e c u r i t i e s . Of c o u rs e , i t must be n o te d t h a t t h i s k in d o f o p e r a tio n ' i i s e a s i l y c a r r i e d on to low er i n t e r e s t r a t e s b u t r e v e r s e j I o p e r a tio n s a r e o f te n d i f f i c u l t to o b ta in b e c a u se o f c o n s ta n t a p p re h e n s io n o f governm ent a g a in s t h ig h e r i n t e r e s t b u rd en s I and p o s s i b le Im pairm ent o f governm ent c r e d i t s t a n d i n g . } 9 See W illiam F e l l n e r , M onetary P o l i c i e s and F u l l \ Employment (B e rk e le y , C a l i f o r n i a : U n iv e r s it y o f C a l i f o r n i a j P r e s s , 1 9 ^ 6 ), p p . 1 8 6 -8 9 . I 1 0 ; x I t i s t o be r e c a l l e d how s tr o n g ly th e T re a s u ry of th e U n ited S t a t e s was opposed t o th e F e d e r a l R eserve p o l i c y j . o f unpegging th e p r i c e s o f th e Government lo n g -te rm j s e c u r i t i e s . .i 183 T h is p o s s i b le c o n f l i c t betw een f i s c a l a u t h o r i t i e s and m o n etary a u t h o r i t i e s w i l l be d is c u s s e d a t th e end o f th e c h a p te r . At any r a t e , th e r e i s no doubt t h a t t h e develop-* ment o f c l o s e r r e l a t i o n s h i p s betw een th e c e n t r a l bank and th e governm ent have made i t p o s s i b le f o r th e form er t o e n s u re th e e f f e c t i v e n e s s of c o n t r o l over c r e d i t c o n d itio n s f u f t h e r . F i s c a l p o lic y and d o u b ts on m o n etary p o lic y d u rin g p r o s p e r i t y . F i s c a l p o l i c y , a su p p le m e n ta ry t o o l t o mone t a r y p o lic y a t i t s b e g in n in g and a s u p p la n tin g p o lic y l a t e r , was s t a r t e d d u rin g th e G re at D e p re s s io n . I t was* how ever, f u r t h e r d ev elo p ed d u rin g th e war and h as been so r e f in e d t h a t th e two p o l i c i e s become a b le t o c o u n te r d e f l a t i o n a r y f o r c e s a s w e ll a s i n f l a t i o n a r y te n d e n c ie s t o some e x te n t* And a t one tim e , some ec o n o m ists te n d e d t o b e lie v e t h a t f i s c a l p o l i c y a lo n e was e f f e c t i v e enough t o r e g u l a t e an economy and sh o u ld s u p p la n t m onetary p o l i c y . On th e o th e r h an d , a doubt on th e e f f e c t i v e n e s s o f i n t e r e s t r a t e s i n c o n t r o l l i n g an economy g e n e ra te d d u rin g d e p r e s s io n s was o f te n ex ten d ed t o th e e n t i r e p h ase of a ^ S e e John H. W illia m , "The I m p lic a tio n o f F i s c a l P o lic y f o r M onetary P o lic y and Banking S y ste m ,1 * op. c i t . , P. 87. 18U- 1 O b u s in e s s c y c le . ^ Some s t u d i e s made d u rin g th e l a t t e r h a l f o f th e 1 9 3 0 's p o in te d outs That t h e r e i s a s tro n g p re su m p tio n fa v o r in g th e t h e s i s t h a t th e i n t e r e s t r a t e i s seldom c o n s id e re d a s a f a c t o r i n e n t r e p r e n e u r i a l de c i s i o n t o expand or c o n t r a c t and th e i n t e r e s t r a t e i s a c o n t r o l l i n g f a c t o r i n a n e g l i g i b l e number o f i n s t a n c e s .13 T here a r e , ro u g h ly sp e a k in g , t h r e e m ajor p a r t s o f f i s c a l p o l i c y : s u r p lu s or d e f i c i t spending p o l i c y , ta x * p o l i c y , and d e b t p o l i c y . S u rp lu s or d e f i c i t p o lic y i s c o n t r o l l e d th ro u g h th e n e t b a la n c e o f e x p e n d itu r e s and re v e n u e s — th e c a sh s u r p lu s o r d e f i c i t — w hich i s supposed t o e x e r c is e a d i r e c t in f lu e n c e over th e volume of sp e n d in g . Tax p o l i c y i s c o n t r o ll e d th ro u g h th e changing th e form and in c id e n c e o f ta x a t i o n , w ith a view t o in f lu e n c in g th e volume o f p r i v a t e sp e n d in g . Debt p o lic y i s c o n t r o ll e d th ro u g h th e c h o ic e betw een th e is s u a n c e o f ty p e s of 1 i s e c u r i t i e s w hich w i l l be p u rc h a se d by banks and th o s e w h ich | w i l l be bought by i n d i v i d u a l s and o th e r f i n a n c i a l i n s t i t u t i o n s and th ro u g h th e management o f te rm s , m a t u r i t i e s and l^ B o r i n s t a n c e , P a u l T. E lls w o r th , "G e n e ra l I n t e r e s t T h e o ry ." The A m erican Economic Review. P a p e rs and P ro c e e d i n g x&V iTTTMar cK, T 93F T ,^70.---------------- ’ ----- --------------------- 1 3 j . F r a n k lin E b e r s o le , "R ate o f I n t e r e s t ," The A m erican Economic R eview . P a p e rs and P ro c e e d in g s XXVIll (M arch, 193&), 75 j and J . F r a n k lin E b e r s o le , "The I n flu e n c e o f I n t e r e s t R a te s upon E n t r e p r e n e u r ia l D e c is io n s i n B u s i n e s s — A Case Study,™ H arvard B u s in e ss Review XVII (Autumn, 1 9 3 8 ), 3 5 -3 9 . 185 o th e r ty p e s o f s e c u r i t i e s s u ite d to c o n d itio n s a t a tim e . Even i f , how ever, f i s c a l p o lic y i s as e f f e c t i v e a s some a d v o c a te s e la im , and even i f m o n etary p o lic y were to be l a r g e l y s u p p la n te d by f i s c a l p o l i c y , i t would n o t do away w ith th e im p o rta n c e o f th e c e n t r a l b an k . The d e f i c i t fin a n c e can be alw ays p o w e rfu l, r e g a r d l e s s o f th e i n t e r e s t e l a s t i c i t y o f p r i v a t e sp e n d in g , i f th e c e n t r a l bank f in a n c e s th e governm ent d e f i c i t . ^ When th e p u b lic s e c to r o c c u p ie s a c o n s id e r a b le p a r t of an economy, a r e q u i s i t e t o e x e r c is in g e f f e c t i v e f i s c a l p o l i c y , when d a i l y b a la n c e s o f governm ent r e c e i p t s and (d isb u rsem en ts have s u b s t a n t i a l e f f e c t s on bank r e s e r v e s , when i n t e r e s t c h a rg e s on governm ent s e c u r i t i e s e x e r t con s i d e r a b l e in f lu e n c e over s e c u r i t y m arket i n g e n e r a l, and when v a r io u s ty p e s and te rm s o f governm ent s e c u r i t i e s have i a l o t t o do w ith th e in v e stm e n t p o l i c y o f o th e r f i n a n c i a l I i i n s t i t u t i o n s and i n d i v i d u a l s , th e c e n t r a l b an k , a s w e ll j * t as th e governm ent eah n o t be i n d i f f e r e n t t o ea ch o t h e r 's j I a c t i o n s . I T h e re f o re , e v e ry developm ent i n f o s t e r i n g c l o s e r r e l a t i o n s o f th e two a r e prim a f a c i e d e s i r a b l e . The d i r e c t s u b s c r i p t i o n o f c e n t r a l banks t o governm ent s h o r t- te r m ! llfFellner, o p. , cit.. pp. 17^-80. 186 s e c u r i t i e s does n o t have any s t a i n a s s u c h .15 F u rth e rm o re , t h e o u t r i g h t s u b s c r i p t i o n o f c e n t r a l banks t o governm ent lo n g -te r m s e c u r i t i e s i s n o t n e c e s s a r i l y u n d e s i r a b l e . 16 O pen-m arket o p e r a tio n s i n governm ent s e c u r i t i e s by th e T re a s u ry sh o u ld be c o o rd in a te d t o th e c e n t r a l bank p o lic y .- 1 -/ The c e n t r a l b a n k 's open-m arket o p e r a tio n s sh o u ld be ad j u s t e d t o g o v e rn m e n t's c a sh r e c e i p t s and c a sh p a y m e n ts.18 The T r e a s u r y 's a c c o u n ts w ith banks sh o u ld be managed to c o in c id e w ith th e c e n t r a l b a n k 's r e s e r v e p o l i c y . 19 C e r t a i n l y th e T re a s u ry sh o u ld c o n s u lt w ith th e c e n t r a l bank ab o u t t y p e s , te rm s , and i n t e r e s t r a t e s of s e c u r i t i e s when 15The Board o f G overnors of th e F e d e r a l R eserve S ys tem o f i t s own a c c o rd , su p p o rte d th e n e c e s s i t y t o have d i r e c t t r a n s a c t i o n s i n Government s e c u r i t i e s w ith th e T re a s u ry i n o r d e r t o re d u c e u n n e c e s s a ry d is tu r b a n c e s i n th e money m a rk e t. See "S e n a te B i l l s 3206 and 3 2 6 8 ," F e d e r a l R eserve B u l l e t i n . XL (May, 195*0, *03. 16J a p a n e s e Government su cceeded i n overcom ing d e p r e s s io n s and f in a n c in g Government n eed s w ith o u t i n f l a t i o n th ro u g h t h i s mechanism d u rin g th e p e r io d o f 1931-1936* See E . B. S chum peter, "Government P o lic y and R ecovery i n Jap an ," S chum peter ( e d . ) . The I n d u s t r i a l i z a t i o n o f Jap an and Man- chucho (Hew York: The M acm illan Company, 19*+0), p p . I k - 19* 1?W. H elson P eac h , " T re a s u ry In v estm en t Funds and Open M arket O p e r a tio n s ," The J o u rn a l o f F in a n c e . VI (M arch, 1 9 5 1 ), *+5-53. • ^ F e d e r a l R eserve Bank of K ansas C itv . "The I n t e r p r e t t a t i o n o f Government A c c o u n ts," c i t e d i n Lawrence S. R i t t e r ^ Money and Economic A c t i v i t y (B o sto n : Houghton M i f f l i n Company, 1 9 5 2 ), p p . 2 8 3- 8 6 . l ^ Bank R e s e rv e s : Some Ma.ior F a c to r s A ff e c tin g Them. (New Y ork: F e d e r a l R eserv e Bank o f New York, 1 9 5 1 ), p p . 1 1 - l k . th e y f l o a t or r e t i r e or c o n v e rt. 187 S hortcom ings in h e r e n t i n f i s c a l p o lic y and r e d is c o v e ry o f m onetary p o l i c y . I t h as been le a rn e d t h a t w e ll p ro p a g a te d f i s c a l p o lic y a l s o h as some in h e r e n t s h o r t com ings. One o f th e o u ts ta n d in g f i s c a l p o l i c y a d v o c a te s h im s e lf p o in te d o u t s e v e r a l sh o rtc o m in g s: a governm ent commitment t o keep f u l l employment th ro u g h f i s c a l p o lic y w ould le a v e th e governm ent a t th e mercy o f m o n o p o lists o f b u s in e s s or l a b o r ; i t i s d an g ero u s t o a c h ie v e f u l l employ ment th ro u g h f i s c a l p o l i c y u n le s s th e r e a r e b e t t e r i n s t r u m ents t o c o u n te r i n f l a t i o n c l o s e l y a s s o c ia te d w ith f u l l employment s i t u a t i o n s ; r e l i a n c e on f i s c a l p o l i c y p e r p e t u a t e s m a la d ju s tm e n ts ; th e b u rd e n s o f p u b lic d e b t r e s u l t i n g from d e f i c i t f i s c a l p o lic y a r e n o t n e g l i g i b l e ; a n n u a lly U nbalanced b u d g e ts would c a u se e x tra v a g a n c e o f governm ent s p e n d in g .20 B e sid e s th e s e more o r l e s s l o g i c a l d i f f i c u l t i e s , t h e r e a r e some o th e r and more d e t r im e n ta l sh o rtco m in g s i n f i s c a l p o l i c y i n p r a c t i c e . The problem o f tim in g f i s c a l A rth u r S m ith ie s , “F e d e ra l B udgeting and F i s c a l P o l i c y , ’* Howard S . E l l i s ( e d . ) , A S urvey o f C ontem porary Econom ics. V ol. I ( P h ila d e lp h ia * The B la k is to n Company, 1 9 ^ 9 ), p p . 1 7 6 -7 8 . 188 p o lic y h a s n e v e r been a d e q u a te ly s o l v e d .2- * - The m argin of e r r o r s i n e x e r c is in g f i s c a l p o lic y i s to o la r g e t o be r e l i e d on s o l e l y . Boom f o r p u b lic spending i s n o t a s w ide a s was \ once th o u g h t. The p s y c h o lo g ic a l a t t i t u d e o f th e p u b lic a g a in s t th e f r e q u e n t, s w i f t , and a p p a r e n tly c a p r i c io u s changes i n t a x a t i o n i s su p p o se d ly n o t f a v o r a b le . I t i s e a s i e r t o p re v e n t money from re a c h in g p e o p l e 's hand th ro u g h m onetary p o l i c y th a n t o w heedle i t back a g a in by means o f in g e n io u s t a x e s , a p a r t o f f i s c a l p o l i c y . 22 At any r a t e , th e p o stw a r e x p e rie n c e c l e a r l y demon- f ‘ s t r a t e d t h a t f i s c a l p o l i c y a lo n e i s n o t e f f e c t i v e enough t o keep an economy on an even k e e l and i s e s p e c i a l l y v u ln e r a b le t o i n f l a t i o n a r y p r e s s u r e s . N e v e r th e le s s , d o u b ts on p o s s i b l e e f f e c t s o f i n t e r e s t r a t e p o l i c y , m is g iv in g s t h a t h ig h e r i n t e r e s t r a t e i s n o t enough d e tr im e n ta l to ■ i checking sp e n d in g , a p p re h e n s io n o f governm ent f o r i n c r e a s e s i n th e b u rd en o f i n t e r e s t c h a rg e s on governm ent s e c u r i t i e s , u n d e s ir a b le e f f e c t s o f h ig h e r i n t e r e s t r a t e s on th e c a p i t a l 21see E v e r e tt E. Hagen, "The Problem o f Timing F i s c a l P o l i c y ." The A m erican Economic Review XXXVIII (May. 1 9 * 8 ), * 1 7 -2 9 . 22The l a s t two c r i t i c i s m s a r e a d e q u a te ly r a i s e d by D. H. R o b e rts o n . See D. H. R o b e rtso n , "What h as happened t o th e R ate of I n t e r e s t , " U t i l i t y and A ll t h a t (New Yorki The M acm illan Company, 1 9 5 2 ), p p . 9 2 -9 * . 189 m a rk e t, a n x ie ty f o r p o stw ar d e p r e s s io n s , and i n c i p i e n t re q u ire m e n ts o f c a p i t a l f o r r e c o n s t r u c t i o n o b s tr u c te d c e n t r a l banks t o r e v iv e e f f e c t i v e m onetary p o lic y i n o rd e r to c o u n te r i n f l a t i o n a r y f o r c e s . However, th e c o n tin u o u s menace of ram pant i n f l a t i o n and r e c o n s i d e r a t i o n of th e e f f e c t s o f i n t e r e s t r a t e p o lic y have come t o re c o v e r an im p o rta n t r o l e f o r m onetary p o l i c y . In a d d i tio n t o t h e t r a d i t i o n a l e f f e c t s o f i n t e r e s t r a t e changes on borrow ing and s a v in g — th e im p o rta n ce of “ th e e f f e c t s on le n d e r s of i n t e r e s t r a t e changes was r e c e n t l y w e ll r e c o g n i z e d .23 & w r i t e r s t a t e d t h a t s E f f e c t s on le n d e r s have been most n e g le c te d , and r a t e changes h ro u g h t ab o u t by th e open-m arket o p e r a tio n s of th e c e n t r a l bank in f lu e n c e th e d i s p o s i t i o n or th e a v a i l a b i l i t y of le n d e r s t o make fu n d s a v a i l a b l e t o b o rro w e rs , e i t h e r f o r th e c o n t in u a t io n o f o u ts ta n d in g In d e b te d n e s s p r f o r I n c u r r in g new d e b t t o f in a n c e e x p a n s io n .2^" Though i t i s t r u e t h a t t h i s a s p e c t of i n t e r e s t e f f e c t s h a s been d is c u s s e d l a r g e l y i n th e U n ite d S t a t e s , 23 se e F . A. L u tz , “The I n t e r e s t R ate and In v estm en t i n a Dynamic Economy,1 * The A m erican Economic Review XXXV (Decem ber, 19*+5)> 828-30; and P a u l M cCracken, **The P re s e n t S t a t u s o f M onetary and F i s c a l Policy,** The J o u r n a l of F in a n c e V (M arch, 1 9 5 0 ), 2k— 3 9 . I t i s i n p a s s in g n o ted t h a t Keynes i n h i s T r e a t i e s re c o g n iz e d th e im p o rta n ce o f t h i s phenomenon in th e te rm -of “f r i n g e o f u n s a t i s f i e d borrowers.** oh- ^ R obert V. R osa, “ I n t e r e s t R a te s and th e C e n tra l Bank,** Money. T ra d e , and Economic Growth (Hew Yorki The M acm illan Company, 1 9 5 1 ), P* 282. 190 v a r io u s c o u n t r i e s , r e g a r d l e s s o f t h e i r v a l u a ti o n o f e x a c t t e f f e c t s and t h e i r w orking p r o c e s s e s o f a h ig h e r i n t e r e s t r a t e p o l i c y , have ad o p ted f l e x i b l e e f f e c t i v e m onetary p o l i c y and succeeded i n overcom ing r a g in g i n f l a t i o n . Y et, i t was n o t done w ith o u t s tro n g and in c e s s a n t o p p o s itio n from th e T re a su ry and th e Governm ent, and w ith o u t trem en dous c o s ts o f an economy under i n f l a t i o n . I f c e n t r a l banks had n o t been u t t e r l y s u b ju g a te d t o g o v ern m en ts, th e y could have c e r t a i n l y m inim ized such l o s s e s . I f autonom ous m o n etary p o lic y had been m a in ta in e d , i t would have been g r e a t l y b e n e f i c i a l t o an economy. From t h i s v ie w p o in t, i t was a r e g r e t t a b l e developm ent t h a t c e n t r a l banks had been made s u b s e r v ie n t t o g o v ern m en ts. Of c o u rs e , t h i s does n o t c o n f l i c t w ith th e s ta te m e n t made e lse w h e re t h a t th e f o rm u la tio n o f c l o s e r r e l a t i o n s betw een governm ents and c e n t r a l banks is : d e s i r a b l e d e v e lo p m e n ts. The p o in t i s t h a t w h ile f i s c a l p o l i c y and m o n etary p o l i c y , t h e r e f o r e , th e governm ent and th e c e n t r a l bank a r e in s e p a r a b ly in te rw o v e n , th e y a l s o have t h e i r own m ain sp h e re o f in f lu e n c e and p rim a ry d u t i e s t o a s o c i e t y . C lo s e r r e l a t i o n s a r e i n e v i t a b l e a s w e ll a s d e s i r a b l e , y e t such r e l a t i o n s sh o u ld be so fo rm u la te d t h a t th e y do n o t im p a ir p rim a ry f u n c tio n s o f e i t h e r o n e. T h is p roblem , how ever, w i l l be d is c u s s e d i n th e l a s t p a r t o f t h i s c h a p te r 191 i n c o n n e c tio n w ith th e problem o f c o n t r o l and s t a b i l i t y . I I I . CLOSER RELATIONS WITH THE GENERAL PUBLIC T here i s no & - p r io r i re a s o n a g a in s t th e c e n t r a l bank h av in g c l o s e r r e l a t i o n s w ith th e g e n e r a l p u b lic e x c e p t th e fo llo w in g two r e a s o n s . As long as a s o c i e t y i s based on th e p r i n c i p l e o f m axim izing p r i v a t e e n t e r p r i s e , i t sh o u ld n o t com pete w ith com m ercial banks in o r d in a r y b u s in e s s . I f th e c e n t r a l bank, a s a p u b lic a g e n t, i s r e q u ir e d h o t t o d is c r i m in a te a g a in s t anybody e x c e p t i n c e r t a i n c a s e s where d i s c r i m i n a t i o n i s p o s i t i v e l y d e s ir e d f o r prom oting th e p u b lic i n t e r e s t , i t had b e t t e r l i m i t i t s c o n n e c tio n w ith th e g e n e r a l p u b lic to th e l e a s t e x te n t t h a t i s r e q u ir e d t o e f f e c t m onetary p o l i c y , so a s to av o id a lle g e d c e n s u re s o f d i s c r i m i n a t i o n and f a v o r i t i s m . The l i q u i d i t y c o n s id e r a ti o n o f th e c e n t r a l bank w hich was re g a rd e d d u rin g th e 1 9 2 0 ’s a s an e s s e n t i a l re a s o n f o r th e c e n t r a l bank n o t t o d e a l w ith th e g e n e r a l p u b l i c , i s n o t so im p o rta n t u n d er th e f i d u c i a r y s ta n d a rd where th e c e n t r a l bank can alw ays p r o v id e i t s e l f w ith l i q u i d i t y by is s u in g a s much n o te s a s a r e w an ted . (Of c o u rs e p o s s i b le u n d e s ir a b le e f f e c t s of such p r a c t i c e s on e x t e r n a l r e l a t i o n s or p o l i t i c a l r e l a t i o n s a r e a n o th e r q u e s t i o n .) On th e o th e r hand, i f th e e x e r c is e o f m onetary c o n t r o l r e q u i r e s t h a t th e r e sh o u ld be c lo s e r e l a t i o n s b etw een th e c e n t r a l bank and th e g e n e ra l p u b l i c , th e c e n t r a l bank sh o u ld n o t h e s i t a t e t o o b ta in such r e l a t i o n s h i p s . From t h i s v ie w p o in t, developm ents f o r th e p a s t tw e n ty - f iv e y e a rs a r e g e n e r a l l y sp e ak in g i n th e r i g h t d ir e c tio n * D e p o sit b u s i n e s s . E xcept i n F ra n c e , a l l c e n t r a l banks i n th e o th e r f o u r c o u n t r ie s have k e p t p r i v a t e de p o s i t s w ith th e m .a t a minimum am ount. D e p o s its a r e n o t o n ly th e main so u rc e o f b a n k s ' e a r n in g s , b u t a l s o th e y a r e n o t u s e f u l f o r c r e d i t c o n t r o l p u rp o se b ecau se th e i n i t i a t i v e o f d e p o s it r e s t s n o t w ith th e c e n t r a l bank b u t w ith th e g e n e r a l p u b l i c . F u rth e rm o re , th e t r a n s f e r of d e p o s its from th e c e n t r a l bank t o o th e r banks or v ic e v e r s a c a u se s u n d e s ir a b le d is tu r b a n c e s t o r e s e r v e p o s i t i o n o f th e banks a s a whole th ro u g h th e mechanism o f m u ltip le c r e d i t ex p a n s io n and c o n t r a c t i o n . T h is adds a b u rd en t o th e c e n t r a l < b a n k 's c r e d i t c o n t r o l . On th e o th e r hand, th e c o n c e n tr a tio n o f p u b lic fu n d w ith th e c e n t r a l bank can e x c lu d e u n d e s ir a b le e f f e c t s o f movements o f p u b lic fu n d s from b a n k s ,to th e c e n t r a l b a n k . Only th e c e n t r a l b a n k 's monopoly o f p u b lic fu n d s makes i t p o s s i b le f o r th e c e n t r a l bank t o c o n t r o l bank r e s e r v e s a d e q u a te ly .25 D ir e c t l o a n s . The p r i n c i p l e s of n o n - c o m p e titiv e , n o n - d is e r im in a to r y and h ig h ly l i q u i d c e n t r a l banking n a t u r a l l y le a d th e c e n t r a l bank t o r e s t r i c t i v e p r a c t i c e s on d i r e c t lo a n s t o th e p u b lic , and most c e n t r a l banks have p r a c t ic e d i t . An e x c e p tio n a l c a se i s th e Bank of P ra n c e . As a m a tte r of f a c t , th e Bank h as o f te n used d i r e c t lo a n s a s a c o n t r o l m echanism . Though th e F e d e r a l R eserve Banks new ly s t a r t e d d i r e c t lo a n s in 193*+, th e y have n e v e r amounted t o a c o n s id e r a b le f i g u r e . D ir e c t lo a n s sh o u ld be l im ite d t o a minimum even though th e y a re sometime u s e f u l f o r c r e d i t c o n tro l, such a s when o th e r banks a r e to o c a u tio u s to accommodate n e c e s s a r y fu n d s f o r th e l e g i t i m a t e u se o f th e g e n e r a l p u b l i c . B e sid e s th o s e above m entioned d i s a d v a n ta g e s , how ever, f o r th e n e c e s s i t y o f c l a r i f y i n g th e c e n t r a l b a n k 's s p e c i a l p o s i t i o n (m onetary a u t h o r i t i e s t o e x e r c is e a g g r e g a te , i n d i r e c t c o n t r o l s ) i t does n o t seem w ise f o r th e c e n t r a l bank to c o n t r o l c r e d i t c o n d itio n s th ro u g h such an in s tr u m e n t. I n s te a d o f th e c e n t r a l bank a n o th e r g o v ern m en tal o r g a n iz a tio n , such a s th e R e c o n s tru c t i o n F in an c e C o rp o ra tio n , had b e t t e r assume such a 2^See Howard S. E l l i s , "The R e d isc o v e ry of Money," Money. T rade and Economic G row th, o p. c i t . , p p . 2 6 8 -9 . 19b r e s p o n s i b i l i t y i n c lo s e c o o p e ra tio n w ith th e c e n t r a l bank. Qpen-m arket o p e r a t i o n s . As was m en tio n ed , co n tin u o u s and e x te n s iv e u se of open-m arket o p e r a t io n s , tho u g h d e a lin g s a r e i n p r a c t i c e l im ite d t o governm ent s e c u r i t i e s , have s u b s t a n t i a l e f f e c t s over s h o r t- te r m , a s w e ll - a s lo n g -te rm , c a p i t a l m a rk e ts i n g e n e r a l . T hus, th e y have p ro v id e d th e c e n t r a l bank w ith ch an ces t o in f lu e n c e n o t o n ly banks butr f a l s o o th e r f i n a n c i a l i n s t i t u t i o n s ahd g e n e r a l p u b l i c . As a c r e d i t r e g u l a t o r o f a n a t i o n , th e e x te n s io n o f th e c e n t r a l b a n k ’ s c o n t r o l to t h a t f i e l d i s d e s i r a b l e a s long a s m onetary c o n t r o ls a r e l e s s d e t r im e n ta l t o a s o c i e t y th a n o th e r f i s c a l c o n t r o l s or d i r e c t c o n t r o l s , and i f some kinds o f c o n t r o l s a r e in d is p e n s a b le . In t h i s c o n n e c tio n , i t i s n o te d t h a t a s th e volume o f p u b lic t r u s t fu n d s grows th e employment o f such furids i n th e open-m arket by th e governm ent, e s p e c i a l l y by th e T re a s u ry , come t o have s u b s t a n t i a l e f f e c t s on bank r e s e rv e s w hich a r e q u i t e s im i l a r t o th o s e o f th e c e n t r a l bank open-m arket o p e r a t io n s . B ecause o f th e im p o rta n ce i o f e f f e c t s o f such o p e r a tio n s on bank1 r e s e r v e s i t i s d e s i r a b l e f o r th e c e n t r a l bank t o ta k e over governm ent o p en -m ark et o p e r a tio n s a t l e a s t on an a d m in is t r a tiv e 195 level. 26 S e le c ti v e c o n t r o l s . I t seems t h a t th e a c q u ire m e n ts o f s e l e c t i v e c o n t r o ls by some c e n t r a l banks a r e g e n e r a l l y sp e ak in g a l s o d e s i r a b l e d ev e lo p m e n ts. I t h as been r e a l i z e d t h a t o r d in a r y c r e d i t p o l i c i e s a p p r o p r ia te t o an economy a s a w hole may n o t be a p p r o p r ia te o r n o t e f f e c t i v e enough in s p e c i f i c a r e a s . 2? F u rth e rm o re , i f o r d in a r y c r e d i t c o n t r o ls f a i l t o l i m i t th e su p p ly o f c r e d i t d u rin g an i n f l a t i o n a r y p e r i o d , i t i s q u i t e n a t u r a l and n e c e s s a r y t o l i m i t c r e d i t from th e demand s id e by s e l e c t i v e c r e d i t c o n t r o ls or by some o th e r m eans. E f f e c t s o f s to c k m arket s p e c u la tio n on in v e stm e n t a r e fo rm id a b ly d is t u r b i n g and v e ry much i n s e n s i t i v e t o t r a d i t i o n a l c r e d i t c o n t r o l in s tr u m e n ts . In v e stm e n t, i n ^ P e a c h , l o c . c i t . ^ A s a c l a s s i c a l exam ple, th e c o n tro v e rs y on i n t e r e s t r a t e p o lic y o f th e F e d e r a l R eserv e System i n y e a rs p r i o r to th e c o l la p s e o f s to c k m a rk e ts , A r e d is c o u n t r a t e h ig h enough t o sto p s to c k m arket s p e c u la tio n was c e r t a i n l y doomed t o menace o r d in a r y b u s in e s s t r a n s a c t i o n s . The F e d e r a l R eserv e System k e p t a low r e d is c o u n t r a t e i n o rd e r to a id f o r e i g n e f f o r t s t o re c o v e r th e g o ld s ta n d a rd a t th e c o s t o f i n t e r n a l e x c e s s iv e boom. 2®David M. E a s tb u rn , M The P h ilo so p h y o f S e le c ti v e C r e d it R e g u la t io n ,” C h a rle s R. W h ittle s e y ( e d . ) , R eadings i n Money and Banking (New York: W. W. N orton and Company, 1 9 5 2 ), p p . 1 1 0 -1 1 . 196 t u r n , h o ld s a c a r d i n a l im p o rta n ce i n k ee p in g a sound economy and s to c k m a rk e ts a r e c l o s e l y r e l a t e d t o com m ercial b a n k in g . T h e re f o re , i t i s q u i t e n a t u r a l f o r th e c e n t r a l bank to have such a pow er. Thus, th e c e n t r a l bank, w hich h a s a d e c is iv e s ta k e i n com m ercial b an k in g , can ex ten d i t s power o ver s to c k m a rk e ts and s tr e n g th e n i t s c o n t r o l over c r e d i t c o n d itio n s a s a w hole. High m argin re q u ire m e n ts c e r t a i n l y d e p re s s s to c k m arket s p e c u la tio n and e x e r c is e s t a b i l i z i n g p r e s s u r e o ver in v e s tm e n t. F u rth e rm o re , lo w e rin g m argin r e q u ire m e n ts d u rin g r e c e s s i o n may b rin g a b o u t some r e l i e f t o th e in v e stm e n t m a rk e t. At any r a t e , m ost e c o n o m ists te n d t o fa v o r m argin r e q u i r e m e n t s . ^ I t i s a w e ll k n o m f a c t t h a t consumer d u ra b le goods i n d u s t r i e s f l u c t u a t e most w id e ly d u rin g c y c le s and con- i s t r u c t i o n c o n s t i t u t e s a l a r g e p a r t of t o t a l n e t c a p i t a l f o r m a tio n .3 ° N a tu r a l ly , a modern t h e o r e t i c a l fo rm u la , i th e s a v in g -in v e s tm e n t a p p ro a c h , s e i z e s on th e s e s t r a t e g i c ' p o i n t s t o a c h ie v e a s t a b l e econom y.31 They a r e , J ___________________ i j 2 9 see ’’Perm anent Power t o Impose S e le c ti v e C r e d it | C o n tr o ls : A S urvey o f O p in io n ,” R i t t e r , o p . c i t . . p p . 123— ! 5* ^°S ee A sher A c h in s te in , I n tr o d u c tio n t o B u sin e ss Cy c l e s (New York: Thomas Y. C row ell Company, 1950)? PP• 216- 20. ^ A c t u a l l y , consumer c r e d i t c o n t r o l s i n th e U n ite d ; S t a t e s were s t a r t e d i n o rd e r m ainly t o f a c i l i t a t e war con- | v e r s i o n , d e p r e s s i n g demand f o r d u ra b le consumer g oods .______ ! 197 f u rth e rm o re , a d m i n i s t r a t i v e l y f e a s i b l e t o c o n t r o l . The r e g u l a t i o n o f consumer c r e d i t and r e a l e s t a t e c r e d i t goes much f u r t h e r th a n th e r e g u l a t i o n o f s to c k m arket c r e d i t i n e x te n d in g pow ers o f th e c e n t r a l bank o u ts id e th e f i e l d o f b an k in g i f such pow ers a r e g ra n te d t o th e c e n t r a l bank, and some c o u n t r ie s g r a n t such pow ers t o a g o v ern m en tal d e p a rtm en t or o th e r i n s t i t u t i o n s in s t e a d o f c e n t r a l b a n k s. I t w i l l be d is c u s s e d l a t e r w hich i s a b e t t e r i n s t i t u t i o n a l a rra n g e m e n t. I t i s no u se denying t h a t th e s e s e l e c t i v e - c o n t r o l s a r e a r b i t r a r y r e s t r i c t i o n s on th e u s e s o f money and c r e d i t , and t h e i r i n f lu e n c e s a r e l i m i t e d , ^ 2 y e t e f f e c t s of th e s e c o n t r o l s seem t o outw eigh th o s e sh o rtc o m in g s. They seem t o be a t l e a s t a b e t t e r a l t e r n a t i v e to some in s tru m e n ts o f f i s c a l p o l i c y or d i r e c t c o n t r o l s b ec au se o f l e s s d i r e c t n a tu r e i n r e g u l a t i n g economic a c t i v i t i e s . D ir e c t c o n t r o l s . Some c e n t r a l banks have p r a c t ic e d c r e d i t c o n t r o l s th ro u g h s c re e n in g c r e d i t a p p l i c a t i o n s a c c o rd in g t o p r i o r i t y . The c a se commonly made a g a in s t th e 3 2See “Perm anent Power t o Impose S e le c ti v e C re d it C o n tro l: A Survey o f O p in io n ,” l o c . c i t . ; and E . C. Simmons, "The R ole o f S e le c ti v e C o n tro l i n M onetary Management,*1 j The Am erican Economic Review XXXVII (S ep tem b er, 19^7)» ; S 3 3 - 4 1 T j 198 u se o f d i r e c t c o n t r o l s i s a l s o a p p l ic a b le Jbo t h i s k in d o f c r e d i t c o n t r o ls s th e y r e s u l t i n an uneconom ical a l l o c a t i o n of r e s o u r c e s and th e y a r e c o s t l y i n th e f i n a n c i a l a s w e ll as economic se n se t o a d m i n i s t e r ,83 F u rth e rm o re , a s o c ie ty based on th e p r i n c i p l e o f m axim izing p e r s o n a l freedom and p r i v a t e e n t e r p r i s e w ith in th e ran g e w hich i s c o m p a tib le w ith s o c io - p o l itic a l- e c o n o m ic s t a b i l i t y (and most o f th e s o c i e t i e s c o n s id e re d i n t h i s t h e s i s a r e such s o c i e t i e s ) r e q u i r e s su c h d i r e c t c o n t r o l s a s a r e in d is p e n s a b le t o be lim ite d to th e l e a s t . And o r d i n a r i l y c r e d i t c o n t r o l i n t h i s way i s c o n s id e re d t o be a n u is a n c e and u n d e s ir a b le . N e v e r th e le s s , re a s o n s t h a t j u s t i f y an o r d in a r y r a tio n i n g and p r i o r i t y system (su c h a s w ar, s e v e re and a c u te s t r u c t u r a l u n b a la n c e i n i n t e r n a t i o n a l a c c o u n ts ) a l s o j u s t i f y t h i s ty p e o f c r e d i t c o n t r o l s . 3^ A c tu a lly , i n a m o n etary economy o r d in a r y r a t i o n i n g and p r i o r i t i e s can be s tr e n g th e n e d by e n fo rc in g c o rre sp o n d in g c r e d i t r a t i o n i n g a c c o rd in g t o p r i o r i t y . ' They a r e th e two s id e s o f th e same c o in . T h e re f o re , i t i s q u i t e n a t u r a l t h a t v a r io u s 33For a d e t a i l , see E v e r e tt E . Hagen, " D ire c t v s . F is c a l-M o n e ta ry C o n tro ls : a C r i t i q u e ," The J o u rn a l of F in a n c e V (M arch, 1 9 5 0 ), *+9-62. 3*+For i n s t a n c e , c r e d i t s c re e n in g w hich h as been in p r a c t i c e i n F ra n ce s in c e 19^5* 199 m o n etary a u t h o r i t i e s ad o p ted some s o r t of c r e d i t p r i o r i t y sy ste m d u rin g and r i g h t a f t e r th e war i n c o o p e ra tio n w ith o th e r g o v ern m e n tal a g e n c ie s . C re d it p r i o r i t y r a t i o n i n g can a l s o s i n g u l a r l y e x e r t a g r e a t in f lu e n c e over economy due to th e f a c t t h a t most in v e s tm e n ts and some consum ptions can n o t he r e a l i z e d w ith o u t c r e d i t s ex ten d ed by f i n a n c i a l o r g a n i z a t i o n s . F u rth e rm o re , th e y have a s p e c i f i c a d v a n ta g e . As long as th e c r e d i t r a t i o n i n g i s c a r r i e d out th ro u g h o r d in a r y banking i n s t i t u t i o n s , p r e s s u r e o f c r e d i t p r i o r i t y i s p s y c h o lo g ic a lly l e s s th a n t h a t o f o r d in a r y r a t i o n i n g b ec au se m ajor one o f f u n c tio n s o f f i n a n c i a l i n s t i t u t i o n s i s c r e d i t r a t i o n i n g , a c c o rd in g t o s a f e t y and p r o f i t a b i l i t y , and cu sto m ers ta k e i t f o r g ra n te d t h a t b a n k e rs should do s o . Of c o u rs e , t h i s a d v a n ta g e sh o u ld n o t be to o much e x a g g e r a te d . I f th e c r e d i t r a t i o n i n g i s to o s e v e r e , f i n a n c i a l i n s t i t u t i o n s can n o t i h e lp b u t d i s c l o s e th e n a t u r e o f th e r a t i o n i n g . And i n d i v i d u a l s c re e n in g o f c r e d i t a p p l i c a t i o n s by th e c e n t r a l bank seems t o be beyond th e f a v o r a b le e f f e c t of r a tio n i n g th ro u g h c r e d i t s i d e . M oral s u a s io n s . These c o n t r o l s , how ever, should be d i s t i n g u i s h e d from m oral s u a s io n s w ith th e t i n t o f s e l e c t i v e c o n t r o l s . Most m onetary a u t h o r i t i e s have a l s o from tim e t o tim e r e s o r t e d t o c r e d i t c o n t r o l s th ro u g h p u tti n g i .... .. ___ _______________________________________________ 200 m oral r e s p o n s i b i l i t i e s on th e s h o u ld e rs o f f in a n c in g i n s t i t u t i o n s t o meet n a t i o n a l r e q u ir e m e n ts . N a tu r a lly , th e s e m easu res a r e on one hand weak to r e a l i z e p rim a ry o b je c ti v e s o f th e c o n t r o l s , y e t th e y a r e , on th e o th e r hand, l e s s in i m i c a l to optimum a l l o c a t i o n o f r e s o u r c e s and th e m a in te n an ce o f freedom o f p r i v a t e e n t e r p r i s e . In r e a l i t y , th e y have n o t o n ly a c h ie v e d re m a rk a b le r e s u l t s i n c o u n t r ie s l i k e Canada and England where v e ry sm a ll number o f banks ru n most o f banking b u s in e s s , b u t a l s o i n c o u n t r ie s l i k e th e U n ited S t a t e s where numerous b a n k e rs a r e engaged i n b a n k in g . I t seems t h a t t h i s k in d o f s e l e c t i v e c o n t r o ls a re w e ll in c o rp o r a te d i n t o c e n t r a l b a n k in g . In most c o u n t r ie s m oral s u a s io n s have been v e ry e f f e c t i v e f o r a c o n s id e r a b le le n g th o f y e a rs an d , i f n o t s o , c e n t r a l banks co u ld n o t have been so h e a v ily r e l i e d on d u rin g th e 1 9 2 0 ’ s a s th e s t a b i l i z e r o f economy. N e v e rth e le s s , r e c e n t te n d e n c ie s a r e such, t h a t c e n t r a l banks a r e l e g a l l y empowered to o b ta in c o o p e ra tio n o f banks c o m p u ls o rily . The Banks o f E ngland and o f Jap an a r e o u ts ta n d in g c a s e s . I t depends on th e mode of a p p l i c a t i o n w h eth er t h i s k in d o f arrangem ent i s d e s i r a b l e or n o t . I f th e y a re used o u t r i g h t l y t o e n fo rc e t i g h t c r e d i t r a t i o n i n g o f c e n t r a l b a n k s, th e y a r e c e r t a i n l y u n d e s ir a b le f o r th e same re a s o n s a s were d e s c r ib e d above. 201 I f th e y a r e used o n ly s u p p le m e n ta lly t o th e t r a d i t i o n a l m o ral s u a s io n s , i t i s no doubt t h a t th e y would prom ote c e n t r a l b a n k s 1 l e g i t i m a t e power o f c o n t r o l l i n g c r e d i t s co m p a tib le w ith p r i v a t e e n t e r p r i s e . Exchange c o n t r o l s . The same comment can be made on c e n t r a l b a n k s ’ r o l e i n exchange c o n t r o l s . A lth o u g h ex change c o n t r o ls have been e x te n s iv e ly i n s t i t u t e d i n v a r io u s c o u n t r i e s f o r one re a s o n o r a n o th e r s in c e th e t u r n o f' th e 1 9 2 0 ’s , 35 th e y a r e e s s e n t i a l l y in c o m p a tib le w ith an economy based on p r i v a t e e n t e r p r i s e . B e sid e s i n t e r n a t i o n a l im p l ic a tio n s of th e s e c o n t r o l s , 3^ th e y have sh o rtco m in g s in h e r e n t i n d i r e c t c o n t r o l s . They a r e o n ly p e r m is s ib le u n d er c e r t a i n l im ite d em ergency c o n d i tio n s . A c tu a lly , exchange c o n t r o l s in p r a c t i c e a r e l a r g e l y due t o th e la c k o f a d e q u a te d o m e stic m o n e ta r y - f is c a l p o l i c y . T his n a t u r a l l y le a d s t o th e problem o f how t o o b ta in a d e q u a te f is c a l- m o n e ta r y p o lic y i n p r a c t i c e . T h is a s p e c t w i l l be d is c u s s e d a t th e end o f t h i s c h a p te r . 3 5 jaCob V in e r, T rade B e la tio n s betw een F re e-M ark et and C o n tro lle d Economies fG eneva: League o f N a tio n s, 1 9 # 3 ), PP. 9 - 5 ^ 36Ibid 1. p p . 2 2 - 3 9 . IV. . STABILITY A N D C O N T R O L 202 Economic freedom and p u b lic c o n t r o l s . The d e v e lo p m ents o f th e p a s t q u a r te r o f a c e n tu ry i n c e n t r a l b a n k in g , t h e i n t e n s i f i c a t i o n o f d i s c r e t i o n a r y c o n t r o ls i n o th e r w o rd s, sh o u ld be n a t u r a l l y ev a lu ed u nder th e g e n e ra l fram e work of s t a b i l i t y and c o n t r o l . An econ o m ist3 ? once s a i d , jo k in g ly , t h a t com plete economic s t a b i l i t y can be e a s i l y o b ta in e d i f th e governm ent b r in g s e v e ry economic a c t i v i t y under i t s co m plete c o n t r o l . But s t a b i l i t y th u s o b ta in e d w i l l n o t be a c c e p te d as d e s i r a b l e by any p e rs o n i n a d e m o c ra tic s o c i e t y based on th e p r i n c i p l e o f m axim izing economic freedom o f i n d i v i d u a l s . However, i t w i l l n o t invoke much o p p o s itio n t o say t h a t th e ac q u irem e n t o f s t a b i l i t y sh o u ld be e a r n e s t l y p u rsu e d as lo n g a s i t i s l a r g e l y c o m p a tib le w ith i n t e r n a l a s w e ll a s e x t e r n a l p e a c e , economic p r o g re s s and, above a l l , ; i n d i v i d u a l s ' f r e e c h o ic e i n economic a c t i v i t i e s . 3® In a modern s o c i e t y , m onetary p o lic y and s e l e c t i v e c o n t r o l s , i and f i s c a l p o lic y a r e w id e ly c o n s id e re d t o be c o m p a tib le i w ith th e s o c i a l i n s t i t u t i o n s a s long a s th e y a r e e x p e r t ly . 37pav id McCord W rig h t, C a p ita lis m (New YorksMcGraw- H i l l Book Company, I n c . , 1 9 5 1 ), P* 1 9 ? . 38gee A m erican Economic A s s o c ia tio n Com m ittee, *'The P roblem o f Economic I n s t a b i l i t y , The A m erican Economic Review XL (S eptem ber, 1 9 5 0 ). 505-5377___________________________ 203 and l e g i t i m a t e l y a p p lie d . Of c o u rs e , th e y have t h e o r e t i c a l l i m i t a t i o n s . N ea rly a l l e c o n o m ists s h a re th e o p in io n t h a t : 1 .. Government ta x rev en u e should be h ig h e r r e l a t i v e t o governm ent e x p e n d itu re i n p e r io d s o f h ig h employment th a n i n p e r io d s of s u b s t a n t i a l unem ploym ent. 2 . Money and c r e d i t sh o u ld be r e l a t i v e l y t i g h t i n p e r io d s o f h ig h employment and r e l a t i v e l y e a sy i n p e r io d s o f s u b s t a n t i a l unem ploy- m ent.39 S e l e c t i v e c o n t r o l s , th o u g h th e y i n t e r f e r e w ith economic freedom d i s c r i m i n a t e l y , a r e a l s o c o n s id e re d t o be i n d i s p e n s a b le t o m inim ize u n d e s ir a b le economic f l u c t u a t i o n s . They a r e re g a rd e d a s l e s s in im ic a l t o economic freedom th a n o th e r d i r e c t c o n t r o l s and some f i s c a l c o n t r o l i n s t r u ment s . E f f e c t i v e c o n t r o ls and th e l o c a t i o n o f a u t h o r i t y . The d e s i r a b l e e f f e c t s o f th e s e c o n t r o l s i n th e o ry a r e one th in g and th o s e o f th e c o n t r o l s i n p r a c t i c e a r e q u i t e a n o th e r . E x p e rie n c e s o f th e l a s t war and th e p o stw a r ; i p e r i o d s , and even th e p re -w a r p e rio d , i n some c a s e s , have j I c l e a r l y shown p o s s i b le a b u se s o f th e s e c o n t r o l s . I n f l a t i o n j ra g e d everyw here and exchange c o n t r o l s were p r a c t i c e d i n I 39i b i d . . p . 518. 20*f v a r io u s c o u n t r ie s i n s p i t e o f th e f a c t t h a t governm ents had a s tro n g power o f f i s c a l c o n t r o l , a s w e ll a s some o th e r d i r e c t co n tro ls^ and c e n t r a l banks had s u b s t a n t i a l c o n t r o l over c r e d i t c o n d i tio n s . (Of c o u rs e , v a r io u s c a u se s a d m itte d ly e x i s te d w hich were beyond th e pow ers o f g o v e rn m ents and c e n t r a l b an k s, D The more p o w e rfu l c o n t r o ls a r e th e more f a t a l i s t h e i r a b u s e . I t must be k e p t i n mind t h a t tho u g h th e abandonment o f th e g o ld s ta n d a rd has, t o a l a r g e e x t e n t , immunized c o u n t r ie s from d i r e c t shock o f i n t e r n a t i o n a l econom ic d is tu r b a n c e s and t h e i r c r e d i t system from d o m estic ru n on banking sy stem , i t h as f a i l e d t o p re v e n t economic d is tu r b a n c e s from a r i s i n g i n s i d e o f t h e i r c o u n t r i e s . The governm ent and th e T re a s u ry i s so n a tu re d t h a t i t te n d s t o f a v o r i n f l a t i o n a r y p o l i c y f o r p o l i t i c a l ex p e d ie n c y . And f i s c a l p o lic y i s more e f f e c t i v e a s a c o u n t e r - d e f l a t i o n a r y m easure th a n a s a c o u n t e r - i n f l a t i o n a r y m e asu re. As long as d e p r e s s io n s c o n tin u e and b a la n c e of paym ents does n o t d e t e r i o r a t e s u b s t a n t i a l l y , f i s c a l p o lic y g iv e s d e s i r a b l e e f f e c t s t o an economy i n c o o p e ra tio n w ith e a sy money p o l i c y . However, su ch p o l i c y can n o t be e a s i l y re v e r s e d when d e p r e s s io n s come t o end or b a la n c e o f pay m ents s t a r t s d e t e r i o r a t i n g r a p i d l y , due to p o s s i b le p o l i t i c a l r e s u l t s . T h is n a t u r a l l y le a d s t o exchange c o n t r o ls and 205 o th e r d i r e c t c o n t r o ls w hich a r e u n d e s ir a b le y e t p o l i t i c a l l y more, f e a s i b l e . On th e o th e r hand, th e c e n t r a l bank, th e t r a d i t i o n a l g u a rd ia n o f n a t i o n a l c u rre n c y , te n d s to d is f a v o r i n f l a t i o n a r y p o lic y due to th e f a c t s t h a t o r d i n a r i l y i t i s n o t d i r e c t l y r e s p o n s i b le t o th e g e n e r a l p u b lic and t h a t i t h as a long t r a d i t i o n o f p ru d e n t f in a n c e . M onetary p o lic y , how ever, i s more e f f e c t i v e a s a c o u n t e r - i n f l a t i o n a r y in s tru m e n t th a n a s a c o u n t e r - d e f l a t i o n a r y in s tru m e n t. A h ig h e r i n t e r e s t r a t e alw ays c e t e r i s p a r ib u s d e p r e s s e s th e m a rg in a l demand f o r c r e d i t and i t re d u c e s th e a v a i l a b i l i t y of c r e d i t th ro u g h u n c e r t a i n t y i n th e f u t u r e . When an economic system can n o t r e l y on any a u to m a tic s t a b i l i z i n g mechanism, such a s th e g o ld s ta n d a rd and c r e d i t mechanism based on th e r e a l b i l l th e o r y , and when i e x te n s iv e and p o w e rfu l d i s c r e t i o n a r y c o n t r o ls a r e r e q u ir e d j f o r an economy t o f u n c tio n sm oothly a s w e ll as e f f e c t i v e l y , j I t h i s o p p o s ite n a tu r e o f th e two p u b lic o rg an s and t h e i r ( i s p e c i f i c powers i s o f v e ry p r a c t i c a l im p o rta n c e . j I In a d e m o c ra tic s o c i e t y , th e e x c e s s iv e c o n c e n tr a tio n I I o f power i n th e hands o f one o rg an a s such i s n o t d e s i r a b l e .j The same p r i n c i p l e may be a p p lie d t o th e c o n c e n tr a tio n o f i i f i s c a l and m onetary pow ers in th e hands o f th e a d m in is- J t r a t i o n . F u rth e rm o re , th e p a s t e x p e rie n c e s c l e a r l y i n d i c a t e 206 t h a t th e predom inance o f th e governm ent over th e c e n t r a l bank i s n o t f a v o r a b le t o an economy i n th e lo n g - r u n . T h e re fo re , i t i s q u i t e w ise to d iv id e f is c a l- m o n e ta r y power in t o two and t o lo d g e m onetary power s o l e l y w ith th e c e n t r a l bank. And th e n , such an arran g em en t i s m e a n in g fu l o n ly when th e c e n t r a l bank o b ta in s a f irm independence from th e governm ent. I t i s n o t m a te r ia l w h eth er th e fo rm er i s l e g a l l y a p a r t o f th e governm ent or i t i s owned by th e governm ent. The im p o rta n t th in g i s t h a t th e c e n t r a l bank can p r e s e n t i t s own o p in io n on th in g s i n th e f i e l d o f money and c r e d i t and i t h as a v e to power to f i s c a l re q u ire m e n ts of th e governm ent, a t l e a s t s u sp e n siv e v e to pow er. B ecause th e c e n t r a l bank h as such a d e c is iv e pow er, i t must be r e s p o n s i b le t o th e g e n e r a l p u b l i c . B u t, i t sh o u ld n o t be d i r e c t l y co n n e cte d t o th e g e n e r a l p u b lic th ro u g h p o p u la r v o te s . As was m entioned i n a p re v io u s c h a p te r , i t i s n o t im p o s s ib le t o have a d e m o c ra tic c e n t r a l bank w ith o u t e l e c t i o n and th e r e i s no l o g i c a l d i f f i c u l t y in such a way o f th in k i n g . Even i f i t i s conceded t h a t th e c e n t r a l bank th u s formed i s n o t so d i r e c t l y r e s p o n s ib le to th e g e n e r a l p u b lic as th e governm ent, th e n a tu r e of m onetary p o l i c y , w hich i s much l e s s d i r e c t i n r e g u la tin g th e p u b lic th a n f i s c a l p o lic y and o th e r governm ent a c t i o n s , 207 seems to j u s t i f y such c o n s tr u c tio n of th e c e n t r a l bank. In t h i s c o n n e c tio n , i t i s n o te d t h a t th e f a c t t h a t some c o u n t r ie s g r a n t governm ents th e power t o c o n t r o l consumer c r e d i t s and r e a l e s t a t e c r e d i t s in s te a d o f c e n t r a l banks can be u n d e rsto o d on th e same g ro u n d . Such s e l e c t i v e c o n t r o ls n o t o n ly a f f e c t f i e l d s w id er th a n th o s e of m onetary p o l i c y , b u t a ls o th e y a r e l e s s i n d i r e c t i n re g u l a t i n g i n d i v i d u a l economic a c t i v i t i e s . I t i s , how ever, a d i f f e r e n t q u e s tio n w h eth er such arran g em en ts a re ap p ro p r i a t e . A f u t u r e p r o s p e c t o f c r e d i t c o n d i tio n s , th e perm anent n e c e s s i t y < 3£ a low i n t e r e s t r a t e p o lic y t o m ain t a i n an a d e q u a te volume o f in v e stm e n t a f t e r th e p o stw ar boom, may make s e l e c t i v e c o n t r o ls o n ly th e in s tru m e n ts of m onetary a u t h o r i t i e s t o r e g u l a t e c r e d i t c o n d i t i o n s . ^ In such c a s e s , I t seems w is e r t o g r a n t such pow ers t o th e c e n t r a l bank in o rd e r t o com pensate f o r th e l o s s of t r a d i t i o n a l c r e d i t c o n t r o l in s tr u m e n ts . And th e n a tu r e of su ch c o n t r o l s i n r e g u la tin g economic a c t i v i t i e s , l e s s d i r e c t th a n o th e r d i r e c t c o n t r o ls and some f i s c a l i n s t r u m e n ts, can be a n o th e r f a v o r a b le r e a s o n .f o r such a r r a n g e m e n ts. g . S a y e rs , ”C e n tra l Banking i n th e L ig h t of R ecent B r i t i s h and A m erican E x p e r ie n c e ,” The Q u a r te r ly J o u rn a l of Economics L X III (May, 19*+9), 2 0 9 -1 1 . i 208 By th e same to k e n , c r e d i t r a t i o n i n g o f some c e n t r a l banks th ro u g h s c re e n in g i n d i v i d u a l a p p l i c a t i o n s f o r c r e d i t s sh o u ld be t r a n s f e r r e d t o r e s p e c tiv e g o v ern m en ts. Of c o u rs e , i t i s a n o th e r q u e s tio n w hether c e n t r a l banks can e x e r c is e such c o n t r o ls a s an a g e n t f o r t h e i r governm ent. Judging from f a c t s t h a t c e n t r a l banks have wide knowledge and e x p e rie n c e on f o r e ig n exchange and o th e r v a r io u s f i e l d s o f c r e d i t , i t seems a b e t t e r c h o ic e t o do so and good r e s u l t s of c e n t r a l banks in a d m in is te rin g exchange c o n t r o ls te n d t o i n d i c a t e th e wisdom o f such a rra n g e m e n ts. As t o f o r e ig n exchange m arket i n t e r v e n t i o n th ro u g h a m arket m echanism , l e t us say a s t a b i l i z a t i o n fu n d , th e same re a s o n in g le a d s to a c o n c lu s io n t h a t such i n t e r v e n t i o n i s n o t n e c e s s a r i l y c a r r i e d out by th e governm ent. The w e ig h t o f re a s o n in g i s r a t h e r on th e o th e r s i d e . Such intei*- v e n tio n i s l e s s d i r e c t i n r e g u l a t i n g economic a c t i v i t i e s . C e n tr a l banks had been th e t r a d i t i o n a l g u a rd ia n o f i n t e r n a l and e x t e r n a l v a lu e of n a t i o n a l c u rre n c y and a c t u a l l y some c o u n t r i e s had a s s ig n e d th e r e s p o n s i b i l i t y o f s t a b i l i z i n g f o r e i g n exchange m arket to c e n t r a l banks i n s t e a d o f g o v ern m e n ts .1 4 '1 D isa d v a n ta g e s o f such a rra n g e m e n ts, w hich have ^ S e e Ragnar N urkse, I n t e r n a t i o n a l C urrency E x p e ri e n c e : L essons o f th e In te r-W a r P e rio d (Hew Yorks U n ited N a tio n s , 19*+7), p . l 1 +5• 209 been p o in te d o u t—- c e n tr a l bank can n o t, due t o th e r e q u i r e m ents o f b o o k k eep in g , s e c u re th e s e c re c y o f t r a n s a c t i o n s n e c e s s a r y to c o u n te r s p e c u la tio n — can be d isp e n se d w ith by s p e c i a l a rra n g e m e n ts. R e g a rd le s s o f i t s o w n ersh ip , t h e p u b lic n a tu r e of c e n t r a l banks can n o t be argued any l o n g e r . P r o f i t s or l o s s e s on t h e i r own ac co u n t do n o t mean much t o c e n t r a l b a n k s. An im p o rta n t th in g i s how c e n t r a l banks can e x e r t t h e i r l e g i t i m a t e c o n t r o ls ade q u a te ly over an economy. The c l a r i f i c a t i o n o f th e c e n t r a l b a n k 's p o s i t i o n v i s - a - v i s th e governm ent and th e g e n e r a l p u b lic i n t h i s way w i l l p ro b a b ly add to a f irm in d ep en d en ce of th e c e n t r a l b ank, and prom ote th e e f f e c t i v e and a d e q u a te u se of f i s c a l - m onetary c o n t r o l s f o r economic s t a b i l i z a t i o n and su ch u s e o f f is c a l- m o n e ta r y c o n t r o l power w i l l c e r t a i n l y m inim ize th e need o f d i r e c t c o n t r o ls and exchange c o n t r o l s . A n a t i o n , o f c o u r s e , can n o t p e rm a n e n tly e n jo y e f f i c i e n t , s t a b i l i z e d and p ro s p e ro u s economy w ith o u t much re g a rd t o o th e r n a t i o n s , even i f i t can s k i l l f u l l y e x p l o i t e v e ry p o s s i b le u se o f f is c a l- m o n e ta r y p o l i c y . A n a t i o n a l economy i s u n s e p a ra b ly in te rw o v e n w ith i n t e r n a t i o n a l economy. D uring th e g o ld s ta n d a rd p e r io d , th e c o o r d in a tio n and i n t e g r a t i o n of v a r io u s n a t i o n a l econom ies was more or l e s s a u t o m a t ic a lly a c h ie v e d . But now, when such a u to m a tic 210 mechanism can n o t be r e l i e d on and when f is c a l- m o n e ta r y p o l i c y i s e s s e n t i a l t o m a in ta in a s t a b i l i z e d n a t i o n a l economy, th e r e i s no o th e r way t o a t t a i n th e u ltim a te o b je c ti v e o f economic p o l i c y — th e p e a c e f u l, f r e e , p ro g r e s s i v e , and s t a b i l i z e d n a t i o n a l a s w e ll a s i n t e r n a t i o n a l econom ies— e x c e p t th e c o o p e ra tio n o f f i s c a l and m onetary a u t h o r i t i e s of e v e ry n a t i o n . The I n t e r n a t i o n a l M onetary Fund, in t h i s c o n n e c tio n , h as a v e ry im p o rta n t r o l e , b u t i t must be remembered t h a t th e p rim a ry r e s p o n s i b i l i t y of s t a b i l i z a t i o n p o lic y r e s t s w ith each i n d i v i d u a l c o u n try . T h e re fo re , e v e ry e f f o r t sh o u ld be made t o o b ta in th e r i g h t k in d o f n a t i o n a l f i s c a l and m onetary p o l i c y and th e w r i t e r b e lie v e s t h a t i t would be o b ta in e d o n ly th ro u g h th e f u n c t i o n a l independence o f th e c e n t r a l bank from th e governm ent, though i t i s n o t so ea sy t o p r a c t i c e a s to m e n tio n . i BIBLIOGRAPHY A. BOOKS A ndreades, A ., H is to r y o f th e Bank o f E ngland 164-0 to 1 9 0 ^ . Second e d i t i o n . London: P . S. King and Son L t d ., 1924-. 4-55 PP. A r c h in s te in , A sh er, I n tr o d u c tio n t o B u s in e ss C y c le s . ; New York: Thomas Y. C row ell Company, 1950. *+96 p p . j i B ach, G. L ., F e d e ra l R eserv e P o lic y M aking: A Study i n Government Economic P o lic y F o rm a tio n . New York: A lfre d A. Knopf, 1950* 282 p p . B agehot, W a lte r, Lombard S t r e e t . Hawtrey W ith e rs ( e d . ) . London: John M urray, 192b, 34-8 p p . 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C: The B0ard o f Governos o f th e F e d e r a l R eserve System , 19*+9. 112 pp. l ♦ ’R e s o lu tio n s Proposed by th e Commission on C urrency and Exchange and Adopted U nanim ously by th e C onference a t I n t e r n a t i o n a l F in a n c ia l C o n feren ce, B r u s s e l , ” The Recom m endations and their A p p lic a tio n . V o l. I . B ru s s e l: , League o f N a tio n s , 1922. p p .2 2 3 -2 6 . , 221 .Report o f th e Subcom m ittee on G e n e ra l C r e d it C o n tro l and Debt Management o f th e J o in t Committee on th e Economic R e p o r t. C ongress of th e U n ite d S t a t e s . 82nd C o n g ress. 2nd S e s s io n . W ashington, D. Cs U nited S t a t e s P r i n t i n g O ff ic e , 1952. R eport o f th e Subcom m ittee on M onetary. C re d it and F i s c a l P o l i c i e s o f th e J o in t Committee on th e Economic R e p o rt. Congress o f th e U n ited S t a t e s , 8 l s t C o n g ress, 2nd S e s s io n . W ashington, D. Cs U nited S t a t e s p r i n t i n g O ff ic e , 1950. F . LAW PUBLICATIONS An A ct t o E x p e d ite th e P ro s e c u tio n o f t h e War. W ashington, D. Cs U n ited S t a t e s P r in t in g O f f ic e , 19*+2. Bank o f Canada A c t. Chap. **3, 2*+-25 George V . O ttaw a: K in g ’ s P r i n t e r and C ontroller o f S t a t i o n e r y , 193^. Bank o f Canada Act Amendment A c t. 19 \ 6 . Chap. 22, 1 Edward V I I I , Ottawas K in g 's P r i n t e r and C o n tr o lle r o f S t a t i o n e r y , 193&. Bank o f Canada Act Amendment A c t. 19^8. Chap. b2, 2 George V I . Ottawas K in g ’ s P r i n t e r and C o n tr o lle r o f S ta ti o n e r y , 193&. ; I The B ank o f E n g la n d A c t . 19*+6 and t h e C h a r t e r s o f t h e B ank o f E n g ls n d . L on d on : T he B ank o f E n g la n d , 19^6. 21 p p .j T he B an k o f J a p a n Law and B v -L a w s. T ok yos The B ank o f [ J a p a n , 1952. 29 PP* j i I B r e tto n Woods A greem ents A c t. W ashington, D. Cs U n ite d I S t a t e s P r in t in g O f f ic e , 19^5* F e d e ra l R eserv e Act a s Amended to O ctober 1 , 19^5. W ashington, D. Cs U n ite d S t a t e s Government P r in t in g O ff ic e , 1935. 375 p p . F e d e r a l R eserve Act o f 191^ w ith Amendments u p t o 1928. W ashington, D. C: U n ite d S t a t e s Government P r in t in g O f f ic e , 1930. I l l p p . 222 Law M odifying and Com pleting th e Laws and S t a t u t e s w hich Govern th e Bank of F ra n c e . 1 9 ^ 6 . Law Ho. *+5-015 of December 2, 19*+ 5. r e g a rd in g 1?he N a tio n a l! z a tio n of th e Bank of F ran ce and th e L arge Banks and re g a rd in g th e O rg a n iz a tio n o f C r e d i t . 19*+5. G. DICTIONARY ARTICLE Usami, S e i j i r o , "The Bank of Japan,*’ C oncise Economic D ic t io n a r y . O sak a-C ity U n iv e r s ity e d .; 79*+-9o. H. NEWSPAPER The Times (L ondon), O ctober 15> 19*+8. Unlwa ratty of S outhern California L lorw .

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Creator Yamada, Hisaharu (author)

Core Title Changing functions of Central banks since 1930

Degree Master of Arts

Degree Program Economics

Publisher University of Southern California (original), University of Southern California. Libraries (digital)

Tag business administration, banking,economics, general,OAI-PMH Harvest

Language English

Contributor Digitized by ProQuest (provenance)

Advisor Garis, Roy L. (committee chair), Anderson, William H. (committee member), Oliver, Robert (committee member)

Permanent Link (DOI) https://doi.org/10.25549/usctheses-c20-444197

Unique identifier UC11264086

Identifier EP44742.pdf (filename),usctheses-c20-444197 (legacy record id)

Legacy Identifier EP44742.pdf

Dmrecord 444197

Document Type Thesis

Rights Yamada, Hisaharu

Type texts

Source University of Southern California (contributing entity), University of Southern California Dissertations and Theses (collection)

Access Conditions The author retains rights to his/her dissertation, thesis or other graduate work according to U.S. copyright law. Electronic access is being provided by the USC Libraries in agreement with the au...

Repository Name University of Southern California Digital Library

Repository Location USC Digital Library, University of Southern California, University Park Campus, Los Angeles, California 90089, USA