1962 Monetary Policy in the Eec

7/30/2019 1962 Monetary Policy in the Eec

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T H E IN S T R U M E N T S O F M O N E T A R Y P O L IC YIN T H E C O U N T R IE S

O F T H E E U R O P E A N E C O N O M IC COMMUNITV


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FOREWORD

This study of the instruments of monetary policy in the Member States ofthe European Economic Community is the outcome of a joint undertaking by thenational monetary authorities and the Directorate General for monetary andfinancial problems in the Commission of the European Economic Community.

It was originally required by the Monetary Committee and the Commissionfor their own purposes. The Committee has used it during the past year as abasic document in detailed discussions of the nature, use and effectiveness ofinstruments of monetary policy. In the course of these discussions it was sug-gested that the studies should be published and made available to wider circlesinterested in problems of Common Market monetary policy.

Our thanks are due to the Commission of the Economic Community fortaking up the Monetary Committee's suggestion and making this publicationpossible.

JONKHEER M R. E. VAN LENNEPChairman of the Monetary Committeeof the European Econom ic Community


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MAIN CONTENTS

Part oneTHE INSTRUMENTS OF MONETARY POLlCY IN THE COUNTRIESOF THE EUROPEAN ECONOMIC COMMUNITY 7Part two

THE INSTRUMENTS OF MONETARY POLlCY IN THE FEDERALREPUBUC OF GERMANY 53Part three

THE INSTRUMENTS OF MONETARY POLlCY IN FRANCE 103Part four

THE INSTRUMENTS OF MONETARY POUCY IN ITALY 153

Part fiveTHE INSTRUMENTS OF MONETARY POLlCY IN BELGIUM 181

Part sixTHE INSTRUMENTS OF MONETARY POLlCY IN THE NETHER-LANDS 215

Part sevenTHE INSTRUMENTS OF MONETARY POLlCY IN LUXEMBOURG 251


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Part one

THE INSTRUMENTSOF MONETARY POLICY IN THE COUNTRIES

OF THE EUROPEAN ECONOMIC COMMUNITY


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CONTENTS

In troductory rem arks 11

I. Basic facts of monetary policyChapter 1 : The institutional framework of monetary policy 13Chapter 2: The structural conditions of monetary policy 22

n'. The principal instruments of monetary policyChapter 3: Refinancing policy 29Chapter 4 : Opeq-market operations 36Chapter 5: M inimum reserve policy 41

III. The financing of the public sector and its influence on the liquidityof the economy and of the banks 48

TABLE

1 - Liquidity of the economy in member countries in 1960 2 3

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INTRODUCTORY REMARKS1. From the outset the Monetary Committee's regular studies of the monetaryand financial situation in the Member States have shown how necessary it isto have a careful analysis made of the means of action available to the CentralBanks and the other monetary autilOrities: discount policy, nunimum reserverequirements, open-market operations and also the possibility of influencing theliquidity of the economy and the banks as a result of the financing of the publicsector. The significance of these weapons in the Member States was not alwaysvery clear, and in any case the circumstances in which they were used were notsufficiently know n.2. A full understanding of monetary policy in the member countries pre-supposes a precise knowledge of these monetary instruments - often d ifferingin c on ce ptio n - of their use in an institutional and structural framework varyingfrom country to country and, finally, of their efficacy. It is particularly importantfor the Monetary Committee to possess such knowledge, when it has to dischargethe duty, entrusted to it by the Treaty, of advising the Council or the Commissionof the European Economic Community on these matters. In general the viewsexpressed by the Committee already contain the main features of eventualrecommendations of the two Com munity institutions to the Member States; suchrecommendations have a proportionately greater practical value the more theycan take into account the special situation and the monetary policy powers ofthe respective M em ber State.3. In the course of its work the Monetary Committee has become increasinglyconscious ofthe need for a systematic description of the instruments of monetarypolicy in the Member States, of the way in which they are applied and of theirefficacy. The responsible monetary authorities in the Member States and theservices of the Commission have closely co-operated in making studies of theinstruments of monetary policy in the Member States, which were completed bya comparative survey. Each of them was thoroughly discussed by the MonetaryCommi t te e.

The extensive knowledge gained in this way will make it easier to alignthe instruments and methods of monetary policy in the various countries. Thediscussions of the Committee give its members a chance to acquaint themselveswith the experience oftheir partners in respect to certain instruments of monetarypolicy and put forward suggestions for the improvement of their own monetarypolicy. Thus, the introduction of a system of minimum reserve requirementsin Belgium, at the beginning of 1962, and the improvement of this instrument in 11


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France, may, in this respect, be considered as progress in the achievement ofwhich the work of the Committee had some part.4. Instruments of monetary policy appear on the whole to be more comparablenow than in the early days of the Common Market. It is true that the conditionsunder which they are applied are quite different: the behaviour of individuals,groups and institutions which participate in monetary transactions is not thesame; the banking systems are not entirely comparable and finally the generaldissim ilarity in the structure of the economies also has some importance. Thedifferences are reflected, for instance, in greater or les ser interdependencebetween the various member countries and the rest of the world. In view ofthese structural differences one cannot expect - even considering the processalready begun of improving comparability of their monetary instruments - acomplete harmonization of policies in this field. Nor does the stipulation in theTreaty of Rome - that monetary policies must be co-ordinated to the full extentnecessary for the functioning of the Common Market - imply such a degree ofharmonization. Nevertheless, the instruments of policy must be perfected andthe arrangements by which they are applied must be worked out in such a wayas to attain the common aim of a co-ordina,ted monetary policy, Le. an economicexpansion which does not jeopardize the internal and external stability of thecurrencies.

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I . B A S IC F A C T S O F M O N E T A R Y P O L IC YCHAPTER 1

THE INSTITUTIONAL FRAMEWORK OF MONETARY POLICY5. In this study the term "monetary policy" will be understood to denote themean s available to the monetary authorities to influen ce the liquidity of theeconomy, in particular by acting on bank liquidity.

The responsibility for monetary policy in the Member States of the EECwith the exception of Luxembourg, which has no Central Bank of its own andis a special case by reason of its membership of the Belgo-Luxembourg EconomicUnion, is vested by virtue of the respective laws in the Central Bank, in varyingdegree from state to state. In some member countries the State, however, hasalso assigned certain powers in the field of monetary policy to other officialinstitutions or to the government itself or has even taken the final responsibilityfor monetary policy, but has at least provided for its own participation in deci-sions on monetary policy.

Besides this, there is a factual lim itation on the powers of the CentralBanks: governments, that is to say, exert an influence on monetary trends bytheir debt-management policy and by the placing of their liquid funds. In fact,this policy is generally the reflection of a co-ordination - varying, however,in degree from State to State - between the competent public bodies and theCentral Bank.

6. It is perhaps not always precisely possible to determ ine the scope ofgovernment intervention in monetary policy or, conversely, the degree of autonomyof the Central Banks. The existing legislation governing relations betweengovernment and Central Bank give only an imperfect picture of these relations,\Which are often very complex. In practice the government, where it has verystrong powers to Plirticipate or even to intervene in this field, m ight not alwaysavail itself of its authority. Conversely, where these legal provisions give tothe Central Bank a very far-reaching autonomy, the government may still insiston its views being taken into account. These legal provisions, therefore, comeinto play only in the event of sharp conflict, whilst the day-to-day conduct ofmonetary policy and of collaboration between Government and Central Banktends to depend on the p ersonalities engaged. 13


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The following is a brief description of relations between Government andCentral Bank in so far as they are laid down by laws and regulations.7. In the Federal Republic of Germany the Deutsche Bundesbank is empow-ered by the Act of 1957 to fix interest and discount rates as well as minimumreserve ratios within pre'scribed lim its, and to determ ine the principles governingits credit and open-market operations. In the exercice of these powers theBundesbank is independent of instructions of the Federal Government. It is,however, required to support the general economic policy of the Federal Govern-ment at least as far as this obligation is consonant w ith its special task, whichis briefly defined in the Act as the n safeguarding of the currency" (die W hrungz u s ic he rn ).

The 1957 Act also goes into some detail on co-operation between theGovernment and the Central Bank.a) The Bundesbank has to advise the Federal Government of matters of primaryimportance in the field of monetary policy and upon request furnish informationto the Federal Government.b) The members of the Federal Government are entitled to take part in thedeliberations of the Central Bank Council. They have no vote, but may proposemotions. A t their request the taking of a decision is deferred, but for not morethan two weeks.c) The Federal Government invites the President of the Deutsche Bundesbankto participate in its deliberations on matters of importance in the field ofmonetarypolicy.

The 1957 Act contains no other provisions concerning the relation betweenGovernment and Central Bank. In particular, it provides for no appeal or arbi-tration authority in the event of disagreement.

The wide institutiona'l autonomy of the Bundesbank is supplemented bythe personal)ndependence of the members of the Central Bank Council (Zentral-bankrat), th highest body of the Bundesbank. This Council consists of thePresident and Vice-President of the Deutsche Bundesbank, the other members(at present seven in number) of the Board of Managers of the Bundesbank andof the eleven Presidents of the Lnder Central Banks (Landeszentralbanken).These are the Main Offices (Hauptstellen) of the Bundesbank in the Lnder,the Hanseatic cities and West Berlin. The members of the Board (Direktorium )are proposed by the Federal Government; the Presidents of the Lnder CentralBanks by the Bundesrat (the Upper House of Parliament, consisting of represent-atives of the Lnder Governments) on nominations from the competent Lnderauthorities. A ll are appointed for a period of eight years by the President ofthe Federal Republic. The President of the Deutsche Bundesbank, who ischairman of the Board of Management, also presides over the Central Bank

14 Council, which as a general rule meets fortnightly.


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8. In France the Institutional framework of monetary policy is determ inedby the Act of 2 December 1945 on the nationalization of the Banque de Franceand the major banks (grandes banques) and on the organization of the creditsystem . This Act was superimposed on the laws, decrees and conventionswhich formerly defined the status of the Banque de France. It set up a "Conseilnational du crdit n (National Credit Council) whose task is to decide on thegeneral lines of credit policy and to study ways of adapting it to the economicdevelopment of the country. The Government, the National Credit Council andthe Banque de France thus share responsibility in monetary matters.

The Governor of the Banque de France is appointed for an indefiniteperiod by a decree of the Council of M inisters meeting under the chairmanshipof the President of the Republic. The Governor is assisted by two deputygovernors, appointed in the same way, and he presides over the General Councilof the Bank which includes the following:i) seven members are appointed by the M inister of Finance to represent generalinterests (labour, industry, agriculture, etc.);ii) four members who are ex officio members in their capacity as General Man-agers of the leading specialized credit institutions in the public sector;iii) one member is elected by the personnel of the Bank. Two auditors, who aresenior officials in the M inistry of Finance, attend the meetings of the GeneralCouncil in an advisory capacity.

The Banque de France fixes among other things the rates and conditionsapplying to rediscounting and open-market operations. Since the beginning of1961 it has also been responsible for fixing, within lim its authorized by theConseil national du crdit, the minimum reserve ratio (coefficient de trsorerie).

The Conseil national du crdit is presided over by the Minister of Financeand Economic Affairs, the Governor of the Banque de France being ex officioVice-President. The 43 members of this Council include eleven representativesof the borrowers, eight of workers' organizations, eight of the M inistries respon-sible for economic matters, eight of finance and banking institutions and, finally,eight members exercising or having exercised managerial functions in public orsemi-public credit institutions. Secretarial services for the Council are providedby a special department of the Banque de France, it is the Governor of the Bankwho almost invariably takes the chair at meetings. The Conseil national ducredit makes proposals, renders opinions or formulates recommendations fortransmission to the responsible M inisters. But its main functions are to taken decisions of a general nature" (dcisions de caractre gnral) concerning theregulation of banking activities (minimum reserve ratios), scale of bank ratesand charges, regulations on hire purchase credits, etc.).

The control of the banking and allied professions is the responsibility ofthe Commission de contrle des banques, which is also presided over by the 15


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Governor of the Banque de France. If we further take into consideration that thelatter is also chairman of the Comit des Bourses de valeur's (Stock ExchangeCommittee), which has authority over the capital market, we see the importanceof his role and the action which he can take in widely differing fields, in closeliaison with the M inister of Finance, who is himself represented at all levelsin the machinery just described.9. In Italy powers in the matter of monetary poHcy have been vested to alarge extent in the Comitato Interministeriale per il credito e il risparmio (Inter-m inisterial Committee for Credit and Savings). The powers of the Central Bankin this field must be considered as derived or delegated functions.

T he Com itato In term in isteriale - established in 1947 - is under the chair-manship of the M inister of the Treasury, and includes the M inisters of PublicWorks, Agriculture, Industry and Trade, External Trade and the Budget. TheGovernor of the Banca d'Italia takes part in the Committee's meetings.

This Committee determines monetary policy and has wide powers ofsupervision over the banks. Its decisions are carried out by the M inistry of theTreasury and by the Banca d'italia which is under the control of that M inistry.The M inister has power to change Bank rate and this he does in practice on theproposal of the Governor of the Central Bank.

The Banca d'Italia is directed by a Consiglio superiore (Council) whoserole is sim ilar to that of a Board of Directors and which consists of the Governorand of twelve members appointed by the general meeting of shareholders. Theseare principally the savings banks (holders of 59 % of the Bank's capital), othercredit institutions and pension funds and insurance companies. The Councilappoints the Governor, the General Manager (representing the Governor) andthe Deputy General Manager, who make up the managing board of the Bank. Theseappointments must be confirmed by decree of the President of the Republic. TheConsiglio superiore is not competent in the field of monetary policy, which is,as mentioned above, the ~esponsibility of the Comitato Interministeriale towhich the Governor of the Banca d'italia belongs. The administration of theBank is kept quite separate from the exercise of monetary powers.10. In the Netherlands. the Nederlandsche Bank (a joint-stock company whollyowned by the State) has the task, under the Act of 1948, to regulate the valueof the Netherlands monetary unit in such a way as is deemed most conducive to&he w elfare of the country and to keep its value as stable as possible..

Powers in monetary matters are vested in the Board of Managers of theBank, which consists of the President and the Secretary together with at leastthree and at most five Managers. Members of the Board of Managers are appoint-ed for seven years by the Crown on nomination by a joint meeting of the Boardof Managers and the Board of Directors (Raad van commissarissen). The.y are16 also suspended or dismissed by the Crown (see also the last paragraph of this


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section). The Bankraad (Bank Council) is another body responsible for monetarypolicy. It has 17 members and is presided over by a Royal Commissioner whoexercises Government supervision over the Bank and who may participate in anadvisory capacity at meetings of the Board of Directors and at joint meetings. .F our members of the Bank Council are appointed by the Board of Directors fromamong its own members and twelve are appointed for four years by the Crownon nomination by the busines& and labour organizations in such a way thattrade (including transport), industry and agriculture are represented by twomembers each and labouc, financial and banking circles by three members each.

Meetings of the Bank Council which take place at least six times annuallyare attended in an advisory capacity by the Board of Managers of the Bank, theTreasurer-General and repre sentatives of the M inistries of Economics, Agri-culture and Social Affairs. At the meetings the President of the Bank reports oneconomic and financial developments and on the Bank's policy. The BankCouncil is entitled to give its advice to the M inister of Finance in matters whichare of importance for guiding the Bank's policy, and the Minister of Financemay request its opinion, after consulting the Board of Managers.

When he considers it necessary for the co-ordination of monetary andfinancial policy, the Finance' M inister may give instructions to the Board ofManagers after consulting the Bank Council. Nevertheless, the Board of Managersmay within three days submit its objections to the Crown, which then examinesthe ministerial directives. If these are confirmed, the Board's objections andthe decisions of the Crown are published in the Ned erlan dse S taa tsc ou ran t"provided such publication is not contrary to the interests of the State. Membersof the Board of Managers failing to apply directives of the Finance M inisterwhich have not given rise to any objec.tions or have been confirmed by theCrown may be removed from office after consultation with the Council of State.

11. In Belgium powers in the field of monetary policy are to some extentdecentralized. The Banque nationale de Belgique, which is a joint stock companywith half of its capital held by the State, is chiefly competent for discountpolicy, fixing the rediscount conditions and the minimum reserve ratio (coeffi-cient de rserve montaire). This ratio is fixed by the Commission bancaire(Banking Commission), but on the proposal of the Banque nationale de Belgique.Open-market operations are the responsibility of a special body, the" Fonds desrentes" (Government Stock Equalization Account).

The Banque nationale is directed by a Governor and administered by theManaging Board which is presided over by the Governor; it is assisted by theConseil de rgence (Council of Regents). The Governor is appointed by the Kingfor five years; the Managers - at least three and not more than six - are lik e-wise appointed by the King fora period of six years, on a proposal of the Conseilde rgence. 17


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The Managing Board conducts all business which is not the preserve ofthe Conseil de rgence. In case of urgency the Managing Board may change therates for discount and advances on securities but must refer the matter to theConseil de rgence at its next meeting.

The Conseil de rgence meets at least once weekly. It consists of theGovernor, the managers and ten regents. The regents are elec~ed by the generalmeeting of shareholders for three years. Two of them are chosen on a proposalof the most representative labour organizations and three are proposed by themost representative organizations of industry, trade and agriculture. Two regentsare selected from the management of public finance institutions. The remainingthree are nominated by the M inister of Finance. The Conseil de rgence discussesgeneral questions concerning the Bank, the monetary situation and the economicdevelopment of the country. It fixes the rates and conditions for discount,advances on securities and loans. However, the Governor of the Bank maysuspend execution of the decisions of the Conseil de rgen ce; in such caseshe has to submit the decisions to the Conseil gnral (General Council), whichfor that purpose is called together at short notice. The Conseil gnral consistsof the members of the Conseil de rgence and the eight to ten members of thecollge de censeurs (Auditing Board) and is presided over by the Governor.

Finally, the Finance M inister exercises control ove~ all the Bank'soperations through the intermediary of a Government commissioner, appointedby the King, who has a right of suspensive veto in respect of any measurecontrary to law or to the" interests of the State" and who may attend the meetingsof the various bodies of the Bank in a consultative capacity.

Beside the Banque nationale de Belgique there are further institutionswith powers in respect to monetary policy. The Fonds des rentes has alreadybeen mentioned. Next to it the Institut de rescompte et de garantie (Rediscountand Guarantee Institute) influences the money market. Finally, there is theCommission bancaire (Banking Commission) which, in addition to its functionsin supervising the banks and issues of securities on the capital market, admin-isters the system of the so-c.alled bank cover ratios (coefficients bancaires).But beginning in 1962 this regulation has been replaced by a conventionalsystem of minimum reserve requirements.

The decentralization of responsibilities in respect to monetary policy ismodified by the fact that the Banque nationale de Belgique, as the principalauthority responsible for monetary policy, is represented and can express itsopinion in all these institutions. Thus, the Fonds des rentes is jointly admin-istered by the Treasury and the Bank. The Institut de rescompte et de garantieis directed by a Comit de direction (Board, of directors) with responsibilitiesfor daily transactions consisting of a Chairman and seven members who areappointed by the King and may be dismissed by hint. Four of these members arechosen from a list which includes tbree candidates nominated by the general

18 meeting of shareholders (banks and financial institutions) for each seat to be


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filled. It is customary that the chairman and two members of the Comit dedirection are from the Banque nationale. The operations of the Institute aresupervised by a Government Commissioner who has a right of veto at all meet-ings of the Comit de direction.

The most important decisions of the Commission bancaire - in par ticula rthose relating to the former regulations on the bank cover ratio - are subjectto ministerial approval. Under the new system of minimum reserve requirementsthis approval is only required when the rate of these reserves is raised by morethan three points in the course of any 30-day period.12. Luxembourg has no Central Bank. Under agreements between Luxembourgand Belgium the circulation of Luxembourg notes and coins is lim ited to a sym-bolical am ount "f 300 million francs. Belgian notes and coin are also legaltender in the Grand Duchy.

Luxembourg's sovereignty in monetary matters extends only to fixing theparity of its currency. A public institution, the Caisse d'pargne de PEtat (StateSavings Bank), exerts a considerable influence on the movement of credit inLuxembourg. It acts as bank of the State and accepts deposits expressed inLuxembourg francs; as far as possible it grants credits only to borrowers residingin the Grand Duchy; its liquidity surpluses are invested preferably in readilynegotiable money market paper in Belgium. The business of the Bank is aslarge as that of all the other banks in the Grand Duchy put together.

Deposits w ith the Caisse d'pargne de l'Etat are guaranteed by the State,which supervises the Bank's activities. The Caisse d'pargne de l'Etat iscontrolled by a commissioner, appointed by ministerial decree, who can attendmeetings both of the Board of Directors and of the Managing Board. It is alsosupervised by the commissariat for the control of banks.

The Caisse d'pargne de l'Etat has a Board of Directors consisting of theDirector, the Deputy-Director, both appointed by Grand-Ducal Decree, and amaximum of five other directors appointed by ministerial decree. These includethe Honorary Director of the establishment, a representative of the- Chamber ofCommerce, one of the Chamber of Handicrafts and one of the National LabourOffice. The Board of Directors fixes the interest rate and credit conditions,assumes responsibility for the investment policy of the Bank and supervisesthe work of the management.

It is to be noted that decisions of the Board of Directors submitted forministerial approval become effective despite any objection by the M inistry ifthe Board, after deliberating, confirms its previous attitude. Nevertheless, theGovernment has the right to dissolve the Board of Directors.

The Managing Board which at present is composed of three membersappointed by ministerial decree, in addition to the Director and Deputy Director, 19


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decides as to the acceptance or rejection of individual applications for creditsor loans and is responsible for all the business of management which is notespecially reserved to the Board of Directors.

To sum up :i) the powers of the Caisse d'pargne de l'Etat in the sphere of monetarypolicy apply only to deposit money;ii) the monetary policy followed by this autonomous public establishment islaid down by the Government subject to the above reservations;iii) the operations of the Caisse d'pargne de l'Etat ,!-re under the direct controlof the Government represented by a supervising Commissioner.13. Apart from their powers in the sphere of monetary policy in the strictsense of the term , the central banks of all the Member States have wide powersin the field of ba7lking policy, supervision and control. From the monetary pointof view the scope of these responsibilities goes beyond the mere supervisionof liquidity and solvency, particularly in those countries where monetary policymakes use of selective methods and where the bank's supervisory authoritiesalso have to fix interest rates for debtors and creditors.

These powers are particularly extensive in the case of the Banca d'italiaand the Banque de France. In Italy the Central Bank is alone responsible forthe execution of decisions taken by the authorities controlling banks, Le. theCom itato interministeriale per il credito e il risparm io (Interministerial Committeefor Credit and Savings) and the M inister of the Treasury; to this end it hasavailable extensive machinery and in fact exercises very wide responsibilities.

In the same way the Banque de France gives execu'tory force to the deci-sions taken by the Conseil national du crdit whether these be of a general orindividual nature, and helps to implement these decisions and those of the Com-mission de contrle des banques (Banking Control Commission) which, aspointed out above, is presided over by the Governor of the Banque de France.In Italy the powers of the authorities dealing with monetary policy and thesupervision of banking also extend to long-term credit establishments. In Francethe specialized establishments are under the direct supervision of the State.But it goes without saying that despite this difference in structure these estab-lishments must be able to adapt their operations to the requirements of generaleconom ic policy.

In the Federal Republic of Germany, the Law on the Credit System (Gesetzber das Kreditwesen) which came into force at the beginning of 1962 expresslyprovides for co-operation between the Federal Supervisory Office on the CreditSystem (Bundesaufsichtsam t fr das Kreditwesen) and the Deutsche Bundesbank,which has powers of its own in certain fields of banking control, in particular20 as regards the granting of large credits. Before submitting its proposals for the


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appointment of the Chairman of this Office to the President of the FederalRepublic the Federal Government must consult the Central Bank. The FederalSupervisory Office issues regulations concerning solvency and liquidity onlyby agreement w ith the bank of issue. When the Federal M inistry of Economicsor the Federal Supervisory Office on the Credit System prescribes terms forgranting credits or accepting deposits, these regulations may not be promul-gated without consultation with the Bundesbank. The terms must be such as toreinforce the credit policy measures taken by the Bank.

In Belgium, the Banque nationale de Belgique has a representative onthe Commission bancaire which is the body exercising powers of superintendenceand control over the banks. It also places its technical resources at the disposalof this Commission, in this way acting as does the Banque de France vis--visthe Conseil national du crdit or the Banca d'Italia vis--vis the Comitato inter-m inisteriale. At the request of the Commission bancaire the Bank carries outenquiries and gives its opinion, for instance to the Commission when this bodyis fixing maximum interest rates for certain classes of credit which it is competentto dete rm ine.

In the Netherlands, powers of supervision and control over the banks areexercised by the Central Bank itself.

The 1956 law on the credit system confers on the Bank fairly wide powerswhich it may use to discharge the functions assigned to it in its statutes. Thesepowers include the right to consult the bankers' association and concludeagreements with them when it considers that the situation is shaping in sucha way as to impair the accomplishment of its task. It was thus that the Neder-landsche Bank put into operation its system of minimum reserves, which is notprovided for in the law on the Central Bank.

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CHAPTER 2

THE STRUCTURAL CONDITIONS OF MONETARY POLICY14. The methods and efficacy of monetary pollcy are determined in varyingdegrees in the Member States by the structure of the national economy in generaland of the banking system in particular. Here we indicate only the main struc-tural data.

15. The volume of payments transactions with foreign countries is an im portantfactor in monetary policy. If we take as a rough frame of reference the relationbetween exports and services supplied, on the one hand, and the gross nationalproduct- on the other, we obtain for the different States of the European EconomicCommunity in 1960 the following figures (as percentages of the gross nationalproduct) :

Luxembourg1 80Netherlands 50Belgium 34Germany FR2 25Italy 16France 15

Such considerable differences cannot fail to influence the extent to whichthe national econom ies are dependent on the world econom ic situation. W ith thealmost complete liberalization of trade and services, the return to convertibilityand the sweeping relaxation of restrictions on capital movements, relationswith foreign countries have tended to develop more widely in all the CommunityStates, particularly Italy and France, Le. the two countries which were formerlythe most sheltered against fluctuations of the economic situation in othercountries.

Doubtless, the foreign trade and payments transactions of France andItaly are still small (in relation to the national product) compared with those ofthe Netherlands, Belgium and Luxembourg, and their responsible authorities caninfluence econom ic trends by monetary measures with less heed to their rapidrepercussions on external trade. Furthermore, certain restrictions still imposed,particularly on short-term capital movements, make Italy and France less1 In 1959

22 2 Excluding Berlin and Saar.


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senSItIve to international capital movements of this sort than Federal Germany,the Netherlands, Belgium and Luxembourg. The policy on interest rates inFrance and Italy allows more latitude, and they are largely allowed to find theirown level. It would seem, however, that in recent times this relative autonomyvis--vis the trend of interest rates abroad has tended to disappear, the moreso as the banks in all M ember States except France are allowed to hold halancesin foreign currency and invest on foreign money markets, and they do so on aconsiderable scale.16. The habits of the investing public, particularly as regards liquidity, formanother structural factor which monetary policy must take into account. Hereagain we have only a rough basis of comparison. We may get some idea of thediverse structure by comparing the relationship in the different Member Statesbetween the liquid assets of households, non-banking undertakings and publicauthorities, on the one hand, and the gross national product, on the other. Thebreakdown of these liquid assets varies from country to country and it is initself an important structural factor in monetary policy. _

Table 1LIQUIDITY OF THE ECONOMY IN M EMBER COUNTRIES

IN 1960

Country Primary l iquid ityas ". of GNPCurrency

in c ir cu la ti onas ". o f p rim aryliquidiry

S ec on da ry liq uid ityas ". of GNP

Germany FRBelgiumFranceItalyLuxembourgNerherlands

1836343743127

4156423641145

252521304138

1 Including Belgian notes and coin Circulating on Luxembourg territory (estimated).

If we consider the most liquid portion of this .. liquidity of the economy ",Le. currency in circulation and sight deposits (primary liquidity) the situation isas follows in the different countries.

In the Federal Republic of Germany, the ratio of primary liquidity to thegrOss national product is very low (18 %) and has remained remarkably stable onthe whole since 1950. In the Netherlands it reached 27 % in 1960 after wide 23


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fluctuations, with a predominantly downward trend, since 1950. In France,Belgium, Italy and Luxembourg the ratio in 1960 was respectively 34 % , 36 %,37 % and 43 % ; it had risen from 1950 onwards in France, Italy and Luxembourg- with more marked variations in the first of these three countries - and hadfallen off in Belgium since the same date.

The share of currency in circulation in "primary liquidity It (which is apointer to. the growing requirements of the banks for liquidity to finan ce theincrease in the note and coin circulation in an expanding economy) also variesgreatly from country to country; the Federal Republic of Germany, Luxembourg,France and the Netherlands with 41 % , 41 %, 42 % and 45 % respectively in 1960show roughly equal rates but the percentage is definitely lower in Italy (36 %) andappreciably higher in Belgium, where it reached 56%.

The volume and composition of "secondary liquidity" - som etim es called"liquid savings" in France - also show very wide differences in the variousMember States. In France, the Netherlands and to a lesser extent in Italy andLuxembourg, households and enterprises hold short-term securities of the Stateand other public authorities, which in the case of France represent a third ofthe volume of secondary liquidity, in addition to their savings deposits andfixed deposits. In Federal Germany and Belgium personal savings and cashsurpluses of firms are not to any great extent invested in this liquid form . Forthis reaSOn secondary liquidity in these countries consists almost exclusivelyof time deposits and savings deposits w ith banks and savings banks.

For reasons of a statistical and terminological nature any comparison ofthe ratio between secondary liquidity and the gross national product in theMember States can only be made with reservations, since secondary liquidityis not everywhere defined in the same way. Thus, in the Netherlands the statis-tics of secondary liquidi ty, for reasons pertaining to the nature of the institutions,omit deposits administered by the savings banks. If these deposits are addedto facilitate comparison and to take into account the fact that savings deposits- despite their capital character - are essentially liquid investment for theirholders, the situation in the Community countries may be summed up as follows:

In 1960, the countries with the lowest ratio of secondary liquidity, ofvarying composition, to gross national product were France (21 %), FederalGermany (25 %) and Belgium (25 %). In Italy, the ratio was 30 %, in the Nether-lands 38 % and in Luxembourg 41 % . In recent years it has steadily increasedin all the Member States, with the Federal Republic of Germany in the van; inthat country the 1948 currency reform radically curtailed monetary assets andnew resources were in the first instance kept in the most liquid form possible.It is not intended to analyse the


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17. The structure of the banking system is another material factor in monetarypolicy. It also differs greatly in the various Member States.

In the Federal Republic of Germany most banks undertake all types ofbanking operation. In addition to sight, time and savings deposits, they canaccept long-term deposits and conversely grant medium and long-term as wellas short-term loans. Even the savings banks, which in the past generally con-fined themselves to savings and long-term credit operations, are transactingan increasing amount of short-term deposit and credit business. Although theirmain task i s to provide finance for relatively small businesses, the largest ofthem , and in particular their central giro institutions, which are at the hub oftheir networks, take an important part in the large scale financing of industryand in underwriting syndicates. Another large category of banks includes mort-gage loan institutions and building societies; these finance their long-termoperations almost exclusively by bond issues and direct borrowing.

In Luxembourg. the banks accept sight, time and savings deposits and,conversely, grant medium and long-term as well as short-term loans. Even theCaisse d'pargne de l'Etat (State Savings Bank) which, before the last worldwar, used to confine itself to savings and long-term credit operations now doesa considerable amount of short-term deposit and credit business.

Dutch commercial banks traditionally accept short-term deposits and. makeshort-term advances. However, these banks have in recent years been attractingsavings on an increasing scale, and this has led to some growth in longer termloan operations. On the other hand, the Dutch savings banks accept almostexclusively dePosits on savings account, as they are obliged to do by the 1956law on the banking system: they make chiefly medium and long-term loans. Theagricultural credit co-operatives have the same powers as the commercial banksand savings banks. The major part of their deposits comes from savings; short-term lending, particularly to agriculture, is on a smaller scale than medium andlong-term . A special credit establishment, the Bank voor Nederlandsche Gemeen-ten, makes long-term loans to local authorities.

In Belgium the deposit banks accept sight and time deposits as well asdeposits on savings account. Although they are not forbidden to make long-term loans, these banks offer mainly short and medium-term advances, perhapsbecause a large part of their assets is immobilized in the form of State fundswhich they are obliged to hold in pursuance of the minimum reserve rules.Private savings banks can accept deposits of all kinds, but they chiefly confinethemselves to savings book accounts and most of the advances they make areon a long-term basis, with short-term loans playing only a small part. But themain collector of savings in Belgium is the Caisse gnrale d' pargne et deretraite (General Savings and Pensions Bank). This semi-official establishmertt,which accepts only savings-book deposits, is the chief provider of medium andlong-term loans. It invests chiefly in public funds, building loans and, to alesser extent, in loans to industry and agriculture; it also finances exports. The 25


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Caisse gnrale is also very active in the money market, particularly in day-to-day loans, taking up short-term Treasury certificates and the purchase of bankacceptances. Specialized establishments grant medium and long-term credits toindustry and local authorities, finding the money chiefly by issuing their ownbonds.18. The banking systems in France and Italy are very different from thoseof the countries mentioned above. In both countries the law draws an almostclear distinction between short-term credit establishments and those concernedwith medium and long-term credits.

In France, the first category includes the deposit banks (banques dedpts), which alone hold nearly 90% of the deposits held by the banking estab-lishments proper. The banques de dpts may not accept deposits from thepublic for a term longer than two years. Since March 1957 they have also had theright to accept savings deposits under the name of "special accounts n, towhich strict rules apply. Their lendings and investments,. and more particularly,the acquisition of participations, are subject to certain restrictions.

The banques d'affaires (investment banks) are empowered to carry outall the usual credit operations of deposit banks but are exempted from therestrictions applied to the latter in the matter of share holdings. They areauthorized to accept deposits for periods or at notice of more than two years.They may also receive deposits for periods of less than two years from tradersand private individuals w ith whom they have financial relations.

The people's hanks and the agricultural credit co-operatives, which arenot under the supervision of the Conseil national du crdit but conduct businessin their own sectors on the same lines as the banks, also make short and mediumterm loans.

The distribution of long-term credit is mainly effected by a certain numberof specialist establishments which attract savings. They have close financialrelations with the Treasury and their activities are supervised by the State.The "long and medium-term credit banks n, which come under the Conseil na-tional du crdit, play only a lim ited part here.

Special mention should be made of the savings banks proper, which inFrance are not a part of the banking system . Under their statutes they placethe funds which they collect w ith the "Caisse des dpts et consignations n,a public establishment which uses these funds to finance medium and long-term loans on a large scale, particularly for local authorities and for housing.

Since the thirties a distinction has been made in the Italian banking system~etween short-term and long and medium-term credit establishments. But thisdistinction is not very strict and there is overlapping. W ithin certain lim its,

26 which moreover are narrower for banks than for savings banks, these" aziende


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di credito" can also carry out medium-term operations. They may accept sight,time and savings deposits w ithout upper lim it and there is a close relationbetween them and the special credit institutions, a part of whose capital theyhold.

These special institutions (for industrial and agricultural long-term loansand the financing of public works) obtain about 60 % of their resources by is-suing cash cettificates and placing" bonds on the capital market, 2S % by recourseto the banks and 15 % from the Treasury. They are concerned almost entirelyw i th long-term loans.19. The structure of the capital market and the policy followed on that marketby the responsible bodies have an important bearing on monetary policy. Thekey factor here is the greater or lesser volume of bank holdings of long-termsecurities which to some extent determ ines relations between the money marketand the capital market and the degree in which interest rates on the capitalmarket are dependent on the monetary policy of the Central Bank. Finally,.itis important to know how much control is exercised over issues by the State.

In the Federal Republic of Germany the credit institutions (commercialbanks and central giro institutions of the savings banks) form syndicates forthe issue of bonds and shares. They have set up a committee, the "CapitalMarket Committee", which endeavours to regulate access to the capital marketand ensure a certain consistency in the terms of issue. Representatives of theDeutsche Bundesbank may express their opinion on the situation of the capitalmarket. From the point of view of monetary policy it is not irrelevant to observethat, in relation to the very marked increase in the volume of their operations,the banks and the savings banks hold a growing volume of transferable secu-rities - in particular bonds issued by local authorities - and that their sub-scriptions have sometimes accounted for almost half the total of certain issues.The liquidity policy measures adopted by the Deutsche Bundesbank thereforegenerally have direct and appreciable repercussions on the capital market andconsequently also influence investments financed by capital from that source.

As regards the banks the situation in the Netherlands is sim ilar to thatin the Federal Republic. The Dutch commercial banks can buy and sell stocksand shares without lim it but their holdings in the past have generally beensmaller and more stable than those of the German banks. Changes in monetarypolicy and the tightening of bank liquidities following the measures introducedby the Central Bank have not set off any increase in sales or purchases ofstocks r.nd shares. This is explained by the traditions of the Dutch banks.Changes in the policy of the Central Bank therefore do not have the same rapideffects on the financial market as in the Federal Republic. This is also dueto the fact that. although they are authorized to use their funds to invest inreal estate and grant loans on mortgage, the establishments which attract savings,including the private savings banks and the Post Office savings banks, purchaselarge quantities of securities on local stock exchanges. In addition the 27


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Nederlandsche Bank has a certain influence on the volume of capital marketissues and authorizes issues by foreign companies according to the capacityof the Netherlands capital market to absorb them.

In Italy the banks (aziende di credito) can buy fixed interest-bearingsecurities, particularly those issued or guaranteed by the State, and bondsissued by the specialized credit institutions. Their holdings are relativelylarge; at the end of 1960 they represented about 20 % of the commercial creditsof these banks. But the banks do not sell these securities on the stock exchange;they pledge them with the Central Bank when they need liquid funds.20. In Belgium an d France the deposit banks' holdings of long-term securitiesare negligible, either because of the regulations or because of tradition. TheBelgian banks may only hold securities issued or guaranteed by the State whichcomplete their" cover It as required by the regulations on banking ratios. However,since the introduction of a system of minimum reserves, under which, in prin-ciple, the banks have reserves only with the Centrai Bank, this" cover" require-ment refers only to the average deposits in the period from January to October1961. As to the French deposit banks, their holdings ofsecurities are insignificantin relation to their other investments.

28


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I I . T H E P R IN C IP A L IN S T R U M E N T S O F M O N E T A R Y P O L IC YCHAPTER 3

REFINANONG POLICY21. Rediscount policy concerns the different forms of direct aid which underits sta~utes the Central Bank can grant the banks1 either by purchasing fromthem government or private bills (. Rediscount. in the strict sense) or by grantingthem advances (" advances on securities "). In this wider sense of the conceptof rediscount policy the expression II refinan cing p olicy II is sometimes used.

By influencing its cost, changes in Bank rate can modify the demand forcredit from the economy. But since the war particularly central banks have alsomade use of quantitative lim itation of credits to the banks as part of theirdiscount policy.

But whether it is exercised by manipulating interest rates or by quanti-tative lim its discount policy differs in importance and efficacy within theCommunity according to the traditions of the banking systems and the practicesof the respective central banks.

22. In all Common Market countries the Central Bank imposes certain con-ditions and certain lim itations on the help it grants the banks by rediscountingbills and making advances on securities.

In this field the actiVity of the Central Bank is more likely to be anessential weapon in the arsenal of monetary policy in a country like France,where four-fifths of bank credit to commerce and industry takes the form ofdiscounting of trade -bills, than in the Netherlands, where the banks mainlyhelp firms and individuals by overdraft facilities. In this respect Federal Germany,Belgium and Italy are in an intermediate position, since in these countriesbank credits made available by discounting commercial bills represented, atthe end of 1960, 42 % , 40 % and 33 % respectively of all short-term credit grantedto the economy by the banks.1 In the Netherlands this aid from the Cenual Bank is made available through exchange brokers(wisselmakelaars), 29


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The relative volume of bank credit granted by discounting depends tosome extent on the policy followed by the Central Bank itself to encourage orrestrain certain forms of credit and also on the practices of the banks, in partic-ular their greater or lesser tendency to borrow from the Central Bank. In theNetherlands intervention by the Central Bank is considered simply as a meansof helping the banks to overcome transient difficulties, and it must not have theeffect of putting the banks permanently in debt to the Central Bank. In Franceand Belgium, on the contrary, the high volume of such indebtedness has been aregular feature of the banking system , at any rate until recent years. A largepart of the assets of the Banque de France (40 % at the end of 1960) consists ofre disc oJ .1 nte d b ills .

The volume of the direct help of the Central Bank naturally depends onthe abundance or insufficiency of the liquid funds which the banks receivefrom other sources, but also to some extent on the distribution of the liquidassets of the economy between the institutions managing them (banks, special-ized credit institutions, Treasury). Thus in the Netherlands again the comfortablecash position of the banks generally makes it unnecessary for them to call onthe Nederlandsche Bank for help in substantial amounts or for long periods,whereas in France shortage of liquidity obliged the banks in the post-war yearsup to 1958 to have recourse to the Banque de France almost constantly.

The importance of direct aid - rediscounting of bills and advances onsecurities - from the Central Bank to the. banks not only differs from one countryto another according to the structure of the banking system and customs in thematter of credit, but also varies according to how much use is made of otherinstruments of monetary policy introduced or developed since the war, such asthe open-market policy and the minimum reserve policy.23. A lthough in France, Belgium and Federal Germany the banks usually callupon the assistance of the Central Bank in the form of rediscounting, in theNetherlands and even more in Italy they tend to prefer advances on securities.Despite the relatively large volume of bank credit made available to the economyin Italy by discounting commercial bills, the liquidity requirements of the banksare only covered to a very secondary extent by rediscounting, if we except therefinancing of bills relating to stocks of agricultural products. The reason forwhich Italian banks prefer advances on securities is that this method is lesscostly than rediscounting, although the nominal rate has been identical foryears, because the interest on discounting is paid in advance. In Federal Germany,Belgium and France ~dvances on securities are rather the exception; moreoverthe rate for them is usually higher than Bank rate.24. The degree of interdependence between Bank rate and the lending andborrow ing rates fixed by the banks for their customers varies from one countryto another. The rates charged to borrowers, which can influence the demand ofcommerce and industry for credit, are in particularly close relation to Bank rate

30 in Federal Germany, France and Italy. In the Federal Republic and Italy the


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relationship is based on an agreement between the banks which is approved bythe State, and in France on decisions of the Conseil national du crdit. In theFederal Republic of Germany the rates for borrowing linked with Bank rate aremaximum rates and the banks may operate below them. In France and Italy, onthe contrary, it is the minimum rates which are modified and the banks mayapply higher rates. The effective rates charged to borrowers do not necessarilyfollow the fluctuations of Bank rate, but they nevertheless tend to do so moreor less closely, according to the liquidity position of the banks. In France theconnection between Bank rate and the rates charged by the banks to borrowerswas recently relaxed. Bank rate and the basic rate which serves as a standardfor the minimum terms applicable to credit customers are only identical whenthe former is between 3Y z and 4Yz% . Variations of Bank rate below or abovethese limits only affect the basic rate to the extent of one half of the divergenceto 3Yz% and 4Yz% . In Belgium and the Netherlands the banks are in the habit offollowing Bank rate although there is no regulation obliging them to do so. InLuxembourg they fall in line with the interest rate fixed by the Caisse d'pargnede l'Etat.25. The rates of interest paid on deposits by the banks areas a general ruleless directly linked to Bank rate than are the rates for advances. In Germanythe Federal Office for the credit system (Bundesaufsichtsamt fr das Kredit-wesen), set up in January 1962, decides by agreement with the Deutsche Bundes-bank whether and how far deposit rates shall follow changes in Bank rate. InFrance there is no direct link between the rates of the Banque de France andthe rates of interest which the Conseil national du crdit fixes for sight andtime deposits with banks. However, the Conseil national du crdit settles theinterest rates for time deposits with banks slightly below the rates paid forgovernment bills of comparable maturity date. Interest rates for savings bankdeposits follow the same rules.

Since the beginning of 1962 in Belgium interest rates on time deposits inBelgian francs have been fixed by agreement between the Banque nationale deBelgique and the Association belge des banques in the light of the money marketsituation, the balance of payments and the economic trend. Previously maximumrates of interest on deposits were linked with Bank rate by an inter-bank agree-ment approved by the M inistry of Finance. In Italy, the maximum rates of intereston deposits are fixed by an agreement between the banks and are not tied to theofficial Bank rate. When the latter is changed the deposit rates are neverthelessreviewed by the Comitato interm inisteriale per il credito e il risparm io, andamended where necessary. In the Netherlands, on the other hand, there is noagreement between the banks and the State does not intervene in the matter ofdeposit rates. These are established in the light of market conditions andinterest rates for time deposits generally follow the market rates for Treasurybonds.26. The manipulation of Bank rate as an instrument of monetary policy hasvaried in importance in the Member States over recent years. Between the endof the war and the end of 1961 the rate was changed 24 times in the Federal 31


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Republic of Gennany, 22 in Belgium , 17 in France, 16 in the Netherlands andonly 4 times in Italy.

In general, changes in Bank rate are considered as a means of influencingthe demand of industry and commerce for credit; since Bank rate in varyingdegree affects the interest rates which the banks charge to borrowers, it largelydetennines the cost of money. To the extent that changes in Bank rate alsoaffect the rates paid on bank deposits, such changes may directly or indirectlyinfluence the trend of rates on the capital market.

However, the degree to which changes in Bank rate affect the economydepends partly on the business trend. When overall demand is very strong andfirms have reason to expect this trend to continue for some considerable time,the mere raising of Bank rate may have little effect on their decisions. In suchan economic situation the use of this instrument alone will not appreciablyabate the demand for credit. But if there is any feeling - prompted perhaps bycredit policy measures of the Central Bank - that demand will weaken, anyincrease in the cost of borrowing following a rise in Bank rate may seriouslyinfluence business calculations and consequently decisions. This will still bethe case when on the contrary, in order to maintain a certain level of econom icactivity or to stimulate activity in a period of recession, Bank rate is lowered andthe cost of borrowing consequently reduced. Here again any additional demandfor credit seems to depend rather on the business outlook for firms - thoughthey may still be influenced by the lower Bank rate - than on the reduction inthe cost of borrowing.

Generally speaking, the Central Banks of the member countries do notconsider that changes in Bank rate greatly influence the demand for credit byaffecting its cost; they feel -that the banks and their commercial and industrialcustomers interpret such changes as an indication of the general lines of monetarypolicy in the near future. Changes in Bank rate are significant as a pointer,and it is this aspect which influences the decisions of finns, particularly whereinvestment and stock-building are concerned.27. Since the return to convertibility and the extensive liberalization ofinternational payments and capital movements, the external aspect of discountpolicy, which was neglected for many years, has assumed a growing importance.The central banks are now required more than in the past to conduct their monetarypolicy, and in particular, their policy on interest rates, w ith an eye to thetrend in other countries. This also demands the closest possible co-ordinationof economic policy in a wider sense. Conversely, as the recent trend has shownon several occasions, central banks may be faced with a dilemma: should they,or should they not, pursue for reasons of external econom ic policy a policy oninterest rates which is not justified by the internal econom ic situation?28. A change in Bank rate necessarily has a blanket effect on all sectors of32 the economy. For this reason some member countries apply a selective credit


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policy by means of differential rates. Such a policy, however, is less prominenttoday than in the past: at present only the Banque nationale de Belgique andthe Banque de France apply a certain differentiation in rates.

The Banque nationale de Belgique applies different rates according to theguarantee s offered by the bills presented to it for discounting (acceptances,dom iciliation, etc.) and according to whether the bank acceptances offeredconcern imports or exports. The Banque de France, which in 1947 temporarilyadopted a system of differing rates for commercial and for financial paper,has since 1957 been applying a preferential rate to the discounting of billsre pre senting export credits.

In fact, in all countries where it is followed, selective credit policy isapplied less by differentiation in rates than by direct control of the distributionof credit either through directives and recommendations of the monetary authoritiesor by authorizations granted or rediscount assurances given by the CentralBank. Thus, in France the lim itation of total medium-term credits outstandingat any time is el'1sured thanks to the control exercised by the monetary authoritiesand particularly the Banque de France at the time when bank credit is granted.The distribution of this form of credit is controlled at the source. Once approved,these credits can be refinanced automatically by the banks (having due regardto their cash ratio) at the Banque de France through specialized bodies. TheBanque nationale de Belgique also influences the distribution of bank credit bycertifying bank acceptances and thus automatically providing a rediscountassurance.29. As the manipulation of Bank rate is not sufficiently effective in certaincircumstances in controlling the volume of bank advances and particularly inlim iting the supply of credit in periods of excess demand and abundant bankliquidity, the monetary authorities in some EEC countries have introducedrediscount ceilings for banks.

It is mainly in France and Federal Germany that rediscount ceilings areused as an instrument of monetary policy. In the Netherlands, where the banksare only in debt to the Central Bank in exceptional cases, and in Luxembourg,this instrument is never used. In Belgium the purpose of the rediscount quotasimposed on the banks is rather to keep a check on their management. In Italythere are no rediscount ceilings in the strict sense and when the Banca d'italiagrants "refinancing" credits to the banks it takes into consideration the exigen-cies of monetary policy and thus makes this help dependent on the observanceof a certain ratio between advances mae and deposits held by the bank.30. In France, where the rules concerning rediscount of certain preferentialcredits (export, stocking of grain, medium-term bills) are laid down and amendedby the Central Bank as part of a selective credi t policy, the ceiling for therediscounting of ordinary bills is an essential element in controlling bankliquidity. Since the war the banks have perforce become heavily indebted to the 33


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Banque de France, so that they have almost always beed very near their ceilingsand have only a narrow margin for calls on the Bank. They are sometimes obligedto make use of the facility offered them of applying for permission to go abovetheir ceilings temporarily, but in this case they must pay penal rates which aresometimes very high and which they cannot pass on to their customers. Whenthey have excess liquidity, as during the last three years, the banks makefirst use of it to take up - principally for reasons of profitability - not short-term but medium-term bills. This tendency was accentuated in 1961 when aminimum liquidity ratio was imposed, coupled with a lower pi'escribedminimumfor holdings of government paper.

In the Federal Republic of Germany the red isco un t quotas. a re fixedfor each bank as a multiple of the amount of its own funds, which implies peri-odical adjustments of the ceilings in step with the increase in the banks' ownresources. Apart from these periodical increases, the rediscount quotas haveoften been amended during recent years for reasons of monetary policy. Theywere reduced under the restrictive credit policy of 1957 and 1959, and thenraised again after March 1961 when the Bundesbank relaxed this policy. But ina general way the refinancing credits are well below the ceilings themselves.Thus the influence of this instrument of monetary policy is linked with changesin the margins not made use of, since the amount of such margins may appre-ciably influence the credit policy of the banks. It is particularly in conjunctionwith changes in minimum reserve ratios - which determine, among other things,the volume of "refinancing. by the banks - that these quotas are an effectiveinstrument, especially when the Central Bank is applying a restrictive policy.

But, in Federal Germany as in France, the efficacy of the rediscountceilings as a means of controlling bank liquidity depends on the banks possess-ing a reserve of liquidity, for instance in the form of holdings of open-marketsecurities or foreign cutrencies.31. Summing up, even in countries where the direct help of the Central Bankmakes an appreciable contribution to bank liquidity, the refinancing. policy,that is to say changes in Bank rate and rediscount ceilings, often appearssomewhat ineffective unless it is supplemented by other measures directlyaffecting the available resources of banks.

This is evident from the monetary policy trend noted in the member coun-tries. In Federal Germany, for instance, the system of rediscount quotas isused particularly to reinforce the control exercised over bank liquidity by theminimum reserve policy and by open-market operations of the Central Bank.

In France, the introduction of rediscount ceilings in 1948 necessitatedat the same time a system of freezing that part of the assets of the bankswhich consisted of short-term government paper (minimum holdings of Treasurybonds), which became general in 1960 as part of the m inimum reserve require-

34 menrs system .


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But conversely, the manipulation of discount rates and ceilings has oftenproved a useful adjunct to other courses of action. Thus under a policy of re-stricting bank liquidity a reduction of the rediscount ceilings may, as pointedout above, reinforce the effectiveness of the minimum reserve policy.

35


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CHAPTER 4OPEN-MARKET OPERA TIONS

32. Generally speaking, the Central Banks of the Member States are empow-ered to conduct open-market operations, but their interventions on the marketplay a lesser role in practical monetary policy than is the case in the Anglo-Saxon countries. Since the war, however, open-market operations have tendedto assume more importance among the instruments of monetary policy.33. Up to the present, however, only the Central Banks of the Netherlandsand of Federal Germany have systematically used the technique of open-marketoperations to act on the cash positions of the. banks. In the other member countriesopen-market transactions or the like are effected only occasionally or on a verysm all scale.

In France the scope for the Central Bank to engage in open-market oper-ations is lim ited for two reasons. First, the Bank's statutes permit such oper-ations only with short-term bills, but in this matter the Central Banks of theother member countries abstain in practice from buying and selling long-termsecurities, although their statutes. do not forbid this. Secondly, the open-marketportfolio of the Banque de France is not large. The Bank generally confinesitself to taking private bills in pawn and to purchasing Treasury bonds fromthe banks to help them meet temporary pressure on their cash position. As ageneral rule it abstains from selling bills to the banks, which are thus led touse any excess liquidity to increase their holdings of mobilizable medium-termbills - for reasons of yield - and to reduce their indebtedness to the Banquede F rance.

In Italy, there is practically no organized money market on which supplyof and demand for short term funds can meet. It is therefore not possible reallyto speak of an open market. In recent years, however, the Treasury, w ishing toattain the objects of an open market, has occasionally issued relatively long-term securities (Buoni del Tesoro poliennali) proceeds from which have beenblocked in order to withdraw liquidity from the economy and the banks. A fundwas recendy established which will receive annual payments from the Treasuryand will purchase government paper quoted below par with a view to providingthe market w ith liquid resources if necessary. Finally, swap transactions, whichwill be discusselI below , can be likened to some extent to open-market oper-ations in their effects. These operations consist of sales of foreign currency

36 for lire concluded by the Exchange Office with the banks. These sales of currency


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by the Exchange Office, which is in close contact with the Central Bank, havehad the effect of attracting bank liquidity towards foreign money markets.

In Belgium open-market operations are not carried out by the CentralBank itself but by a special body, the Fonds des rentes, controlled jointly bythe Banque nationale de Belgique and the Treasury. Following successive newarrangements, this fund is in a position to buy and sell short and long-termsecurities on the money or financial markets. Fairly considerable means havebeen placed at its disposal and it may also have recourse up to a certain pointto credit from the Central Bank and issue its own short-term certificates. Underits statutes it has fairly extensive means of influencing by its operations notonly the liquidity of the banks but also that of the economy.34. In the Netherlands and in the Federal Republic of Germany,; the only twocountries in which the central banks systematically carry out open-marketoperations in order to act on bank liquidity, the Nederlandsche Bank and theDeutsche Bundesbank have an operating fund in the shape of short and medium-term bills, which enables them to intervene on the money market, the only fieldin which the open-market policy is applied.

The open-market policy followed in these two countries neverthelessshows certain differences. In the Federal Republic the market on which theCentral Bank carries out its open-market transactions is narrower than in theNetherlands in two respects: buying and selling of open-market securities isconfined in Federal Germany to credit institutions (Le. banks) and to a smallnumber of public institutions; in the Netherlands, on the other hand, along withbanks and exchange brokers (wisselmakelaars), the institutions which acceptsavings deposits and private businesses also figure both as buyers and sellersof open-market securities. This does not mean that all participants in the marketcan be contracting parties with the Nederlandsche Bank; the latter engages inopen-market transactions only with the banks and the exchange brokers. On theother hand - and this is the second essential difference - the market is wider inthe Netherlands, where open-market transactions also take place between thevarious participants. In the Federal ;Republic, on the contrary, such a marketbetween the banks as chief participants in the open market has not so far devel-oped. Transactions take place only between tb-- banks and the Deutsche Bundes-bank. In the Netherlands, therefore, cond;' .s for the formation of a "marketprice" for open-market securities are rath _ more favourable than in the FederalRepublic where this" price" is largely determ ined by the Central Bank which,however, may allow itself to be guided - and this happens very often - by theinfluence of the trend of bank liquidity.

The differences in the structure of the open market in Federal Germanyand in the Netherlands give rise to other differences in the technique of open-market transactions in the two countries. For lack of a sufficiently wide marketin the Federal Republic, the Deutsche Bundesbank itself fixes the rates forsale and repurchase of open-market securities. By modifying the level of these 37


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rates, the Bundesbank encourages the banks to buy short and medium-term open-market securities (Treasury bills and bonds) or to mobilize them with it. It thusleaves the initiative to the banks while itself remaining passive. It fixes thesesale and repurchase rates by maintaining, with due regard to market conditions,a certain relation between them and Bank rate. This is explained by the factthat the banks can at any time have recourse to discouht credit and that mostof them are almost permanently in debt to the Central Bank, even if only to beable to fulfil their minimum reserve obligations. Where there is excess liquiditythe banks are thus able to choose between reducing their discount commitmentsand investing in open- market bills. In the contrary case the choice is betweenincreasing their discount activities and mobilizing open-market bills. Conse-quently, rates for the sale of short-term open-market securities (up to 90 days)are in practice no higher than the Bundesbank discount rate. We may thereforesay that the open-market policy of the Deutsche Bundesbank is an instrumentboth of interest rate and of liquidity policy.

In the Netherlands, on the other hand, market rates for open-market billsare more loosely related to discount rates because the Dutch banks have recourseto discounting by the Central Bank only exceptionally. The gap between themarket rates for open-market bills and Bank rate is therefore generally widerthan that between rates for sale and Bank rate in the German system . Whereasthe Deutsche Bundesbank itself fixes rhe rares for sale and repurchase - withdue regard to the rrend of rates on rhe money market - the Nederlandsche Bankas a general rule only buys or sells open-market bills ar the market rate andaccording to market requiremenrs. To ease very short-term strains ir also buysopen-marker securities for a shorr petiod fixed in advance under the n repurchaseagreements" .

As an accompaniment ro rhe Nederlandsche Bank's open-marker policy,the Netherlands Treasury, like the Italian Treasury, has on occasion withdrawnliquidiry from the banks and the economy by making long-term loan issueswhich were hardly required by the budget situation and sterilizing the proceedsby, for instance, advance repayment of external debts.35. If we take into consideration the total liquidity of the banking system ,open-market transactions as practised in the Netherlands and the Federal Republicof Germany are of qualitative rather than quantitative significance. This istantamount to saying that in general these transactions in no way influence the'total volume of liquidity at the disposal of the banking system (cash and potentialliquidity) but merely its composition. The advantage of these transactions lieschiefly in the fact that they constitute a flexible instrument convenient forbalancing out temporary fluctuations in the cash position of the banking system .Except in the Netherlands and the Federal Republic, there are limitations whichput a brake on the use of this instrumen t in the various countries. As a usefulcomplement to the armoury of monetary policy, it would be desirable to createconditins for the commensurate development of open-market transactions as38 described above in the countries where they are non-existent or inadequate.

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This presupposes, inter alia, the existence or the extension of a money marketon which the monetary policy authorities can buy and sell open-market bills.36. Furthermore, monetary policy could perhaps profit by making wider useof the open-market method. If non-banking circles were able to share in dealingsin open-market bills - as they already do in the Netherlands, sometimes by directtransactions with the Nederlandsche Bank - open-market operations would nolonger influence only the composition of bank liq~idity but also its volume.To the extent that open-market bills are negotiated outside the banks withthe participation of commerce and industry, the Central Bank will be able toreduce or expand the liquidity of banks whether or not they so desire, and atthe same time to exert a certain influence on the composition of the liquidityof the economy. Doubtless, if it were desired to restrict or expand not only theliquidity of the economy but also bank liquidity, as would be appropriate incertain phases of the cyclical trend, this aim could only be attained by extendingopen-market transactions to long-term securities. It would, nevertheless, seemthat close collaboration between the Treasury and the Central Bank in makingsystematic use of open-market operations, perhaps through special institutions,should offer possibilities for a development of the instruments of monetarypolicy. As we have seen, this is already practised up to a point in Belgium,where the Fonds des rentes can also buy and sell long-term securities and blockthe proceeds of such sales by depositing them in its account with the CentralBank, financing its purchases from the balance of this account. In the Nether-lands and Italy the Treasury has on several occasions restrained the liquidityof the economy and of the banks by issuing long-term loans which were notcalled for by the budget situation and by freezing the proceeds of these issues.37. By means of forward exchange operations with the banks the DeutscheBundesbank in the Federal Republic of Germany and, in Italy, the ExchangeOffice (Ufficio italiano dei cambi, an institution closely linked with the Bancad'italia), have exerted influences on bank liquidity comparable to those of theopen market. Thanks to the progressive dismantling of exchange restrictions,the banks in Member States (except France) have enjoyed increasing opportu-nities for placing their liquid assets abroad. Such investments depend on therelationship between the interest rates ruling on the internal and external marketsas well as on the cost of the forward covering operation. By carrying out forwardcovering or swap transactions with the banks, the Central Bank can to someextent affect the movement of bank liquidity to foreign countries, particularlywhen the comparison between interest rates on the internal market and abroad,after allowing for the cost of covering the exchange risk, offers no encour-agement to invest abroad.

It is particularly the D eutsche Bundesbank which, since the beginningof 1959, has made systematic use of swap transactions, sometimes applying alower discount than the market and sometimes waiving it altogether or evenapplying a prem ium. Similarly the Italian Exchange Office has carried out swaptransactions with the Italian banks under which .the latter have bought foreign 39


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currency spot and sold it back to the Office forward in order to grant foreigncurrency credits to residents or non-residents or to increase their investmentson money markets abroad. Although the main purpose of these swap transactionsis to reduce the considerable net indebtedness of the Italian banks to foreigncustomers, they have nevertheless contributed to reducing the internal liquidityof the banks and transferring it abroad.

The Nederlandsche Bank has only once - in 1957 - carried out forwardexchange operations with the banks. This was done for various reasons, inparticular to avoid any contraction of the money market due to currency spec-ulation by operators outside the banks. In recent years the interest rate policyfolloweeJ by the Nederlandsche Bank has aimed at stimulating the investmentof bank liquidity abroad and there has therefore been no reason to offer specialincentives, such as swap deals, to encourage the export of money by banks.

Forward exchange operations such as are carried out by the DeutscheBundesbank, and up to a point by the Italian monetary authorities, may beconsidered as the complement of or substitute for an internal open-market policywhere the Central Banks use them to restrict or enlarge the internal liquidityof the banks without having to carry out opoo-market operations. This being so,such operations could be important if the strategical reserves of the CentralBank for open-market purposes proved insufficient. Forward exchange transactionsalso enable the Central Bank to allow money market rates to move up and downindependendy of rates abroad, although within very narrow lim its. The inter-dependence of the national money markets through the medium of the internationalexchange market has in fact become so close now that the banks in the MemberStates - particularly in Federal Germany and Benelux - are no longer subjectto restrictions in placing their liquid assets abroad, that it calls for co-ordina-tion of the interest rates policies of the Central Banks.

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CHAP TER 5M INIM UM RESERVE POLICY

38. A further weapon has been added to the monetary policy armoury of mostMember States since the war: the policy of m inimum reserves. The m inimumreserves system enables the monetary authorities to act directly on bank liq-uidity, and thus c;>ntheir ability to provide credit. The policy of minimum reservesis thus a useful addition to discount and open-market policies, which tendmerely to modify the composition of the aggregate liquidity of the banks.39. Two systems of m inimum reserves may be distinguished in the EEC membercountries: the first, which in its pure form exists only in Federal Germany andthe Netherlands, obliges the banks to keep minimum balances at the CentralBank; the second, which until recently operated in its pure form in France andBelgium, makes it incumbent on them to hold a minimum portfolio of governmentpaper.

In Belgium since the reform early in 1962, this system has largely tendedtowards the traditional system of minimum reserves under which the banks mustin principle keep deposits at the Central Bank. However, the monetary author-ities applying the new regulations can fix the proportion of their reserves whichthe banks mayor must hold in the form of deposits w ith the Fonds des rentesor of government bills of a special type deposited with the Central Bank. Undertransitional arrangements the banks are further required to continue to holdthe m inimum portfolio of government paper laid down by the old cover ratio, butonly on the basis of the average amount of their customers' deposits during areference period, so that this m inimum holding will no longer follow variationsin the volume of deposits.

In France the regulations on the so-called "plancher" (m inimum holdingsof government paper) introduced in 1948 were supplemented in 1960 by the mini-mum reserve system (syst me du coefficient de trsorerie), under which theminimum reserves include, along with Treasury bonds, cash holdings and privatebills which the banks may mobilize without reference to their discount ceiling(these are principally. bills representing mobilizable medium-term credits, andbills intended for the financing of exports and grain stocks).

Italy is in an intermediate position: the banks may constitute m llmumreserve.> with the Central Bank either on current account or in governmentpaper. 41


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In the Federal Republic and the Netherlands, the minimum reserves havefrom the beginning been a flexible instrument of monetary policy. In France,Belgium and Italy they were introduced immediately after the war because ofthe need to prevent the banks from liquidating their large holdings of governmentpaper. If these had not been blocked, the Bank rate measures would have beenpractically without effect, because of the possible mobilization of these secu-rities or failure to renew them on maturity.

In France and Belgium the recent reforms referred to above allow of amore flexible and efficient use of the minimum reserve ratio as an instrumentof monetary policy. In Italy the present system also makes it possible, if thisshould be necessary, to handle this instrument of monetary policy in a flexiblewa y. However, the m onetary authorities have done so only recently


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public are subject to the regulation, whether they are sight or time deposits,cash certificates (" bons de caisse") or special accounts.

In Italy the minimum reserve obligation applies to all credit institu-tions with the exception, however, of a few specialized credit institutions.A ll sight, time and savings deposits from the non-banking sector are subject toth ese' a rr angemen ts .

In Belgium the banking ratio system applies only to the banks, Le. toinstitutions accepting deposits for not more than two years. In the new minimumreserve regulations effective from 1962, the following types of bank liabilitiesare made subject to the holding of reserves, as under the former system of coverratio:a) sight deposits and deposits for a fixed period not exceeding one month ;b) deposits for fixed periods of from one month to two years;c) deposit book accounts.

41. Until 1961 the minimum reserve ratios had long remained unchanged inBelgium and Italy, although legally they could have been altered. In Italy th eratio of about 25 % , applied without distinction to sight, time and savings depos-its, had remained in force since 1947; it was altered for the first time, to22.5 % , at the end of January 1962.

In Belgium the banking cover ratio was also set at the siune level forsight and time deposits, but at different levels for the various kinds of banks(50 to 65 %). After the reform , the transitional arrangements provide that theminimum portfolio of government paper should be calculated, at the same rates,on the average amount of deposits between January and October 1961. Accordingto the new regulations the monetary authorities can fix the m inimum reserveratio (coefficient de rserve montaire) and vary it from nil to 20 % for sight andone-month deposits and from nil to 7 % for one-month to two-year deposits.These rates cannot be increased by more than three points w ithin any periodof 30 days without the approval of the M inisters of Finance and of EconomicAffairs.

In France, where the mtnlmum holding of government paper had only beenaltered once since 1948, greater flexibility was introduced at the end of 1960under the minimum reserve system (systme du coefficient de trsorerie). Theestablishment of this system in fact enabled the M inister of Finance to reduce

1962 Monetary Policy in the Eec

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