Chen Yuan

I am delighted to have this opportunity to speak about the internal structure of the central bank.

Before 1979, there was only one bank in the People’s Republic of China, namely the People’s Bank of China. It was then both an issuing bank and a bank handling credit business. Such a banking system, despite having made undeniable contributions to the development of the national economy, has barricaded effective allocation of funds and become obsolete with the development of a commodity economy.

Since 1979 when the economic reform was launched, the commodity economy has developed rapidly. This has created the need for an institution exercising financial control and management with authority, power, effectiveness, and the ability to make overall plans taking all factors into consideration. The institution should also have adequate economic and administrative means to secure effective control and management. Such an institution is the central bank. In September 1983, a decision made by the Chinese Government enabled the People’s Bank of China to function solely as the central bank—the beginning of a central bank system.

The People’s Bank of China is a state organ that exercises, on behalf of the State Council, leadership and control over the financial sector with overall responsibility in (1) formulating principles and policies that guide financial activities, submitting them to the State Council, and organizing the implementation upon approval by the State Council; (2) drafting financial laws and regulations; (3) providing rules and regulations for operation of the financial sector; (4) controlling the issuance of money, regulating the circulation of money, and stabilizing the currency; (5) controlling interest rates on deposits and loans and fixing the exchange rate of renminbi against foreign currencies; (6) formulating the state credit plan and exercising centralized management of credit funds and working capital of state enterprises; (7) imposing foreign exchange control, the control of gold and silver and of official foreign exchange reserves and gold reserves; (8) examining and approving the establishment, elimination, and merger of banks and other financial institutions; (9) providing leadership, regulation, coordination, supervision, and audits for business activities of specialized banks; (10) managing the state treasury and acting as an agent for issuing government securities; (11) regulating the issuance and trading of securities, such as stocks and bonds of enterprises, as well as regulating the financing market; and (12) engaging in international financial activities on behalf of the government.

The highest authority of central banks around the world is classified into three categories. First, the power for decision making and for execution is vested in one body, as in the Federal Reserve system of the United States and the Bank of England. Second, the highest authority is divided into a decision-making body and an executive body, as in the Bank of Japan, the Deutsche Bundesbank, and the Bank of Italy. Third, the highest authority is divided into a decision-making body, an executive body, and a supervisory body, as in the Bank of France, the National Bank of Belgium, and the National Bank of Switzerland.

The highest authority of China’s central bank falls into the first category. The Council of the People’s Bank of China has acted only as an advisor in recent years. As in many central banks, the governor plays a crucial role; however, as the People’s Bank is under the direct jurisdiction of the State Council with the governor appointed by the Premier, final decisions of monetary policy hinge to a large degree on the State Council. In terms of decision making within the central bank itself, the following three factors are crucial and decisive to ensure that decisions made are scientific and suit reality. First, the ability to capture and collect, through various channels, information and data on macro-economic performance and to keep abreast of the latest developments in the economy; second, economists who are highly qualified and well aware of the real economic conditions and are thus able to make correct judgments and come up with creative policy recommendations; and third, the smooth flow of economic information and policy recommendations to the highest decision-making body of the central bank.

We are of the view that within the central bank, information, planning, operation, and supervision, which are at the second level next to the decision-making level and are interactive, constitute the internal operating mechanism of the central bank. Such a mechanism translates policies into actions to influence macroeconomic activities on the one hand, and provides, on the other, feedback for the decision-making body so that policies can be duly revised and supplemented.

Within the People’s Bank, there has been a lack of satisfactory coordination among areas such as the regulation and supervision of financial institutions, the management of central bank resources, financial programming, and the formulation of long- and short-term credit plans, as well as the survey, research, and monitoring of economic performance, which in turn has crippled the decision making of the bank. In this sense, it is crucial for the governor of the central bank to make correct decisions on the division and coordination of internal operations.

Regional branches of the People’s Bank are set up in line with administrative division. Such a structure has had both positive and negative effects on the implementation of monetary policy.

What lies at the core of the problem here is the allocation of central bank funds, namely, how much of the funds should be placed at the disposal of the head office and its regional branches, respectively. Experience has shown that a certain degree of centralization of power is still necessary under current conditions. Such powers include imposing mandatory plans on the allocation of funds within the central bank system, examining and approving the establishment of relatively large nonbank financial institutions, and establishing the level of interest rate and its floating range.

The current trend has indicated that regional branches are mainly responsible for the implementation of orders issued by the head office, for the execution of the credit plan of the region and for organizing finance, and for the regulation of banks and financial institutions in the region.

As regional branches have been established in parallel with the setup of administrative division, some of them have frequently experienced administrative intervention of local governments, which has always been translated into pressure on the head office. This has been for a long time a headache for the head office. Despite the fact that the system of the People’s Bank is vertical, regional branches have maintained close ties with local governments because of mutual interests. We have thus been caught in the dilemma that although we hope to reduce administrative intervention of local governments, we have had to rely on them to organize the implementation of monetary policy and the realization of the macro control target. Solutions have been explored and will continue to be researched in the course of the reform.

We are very interested in learning the relationship between the Federal Reserve Board and the twelve Federal Reserve banks in terms of allocation of funds, distribution of power, personnel management, and cost-profit sharing. We also hope to study, together with our American counterparts, what will be the effects of relative independence of regional branches on monetary policy.

Given the sophistication of modern economic development, central banks around the world are becoming increasingly concerned about the analysis and study of information. Formulation of correct monetary policy and effective implementation require a department for information analysis and research that responds quickly, captures various kinds of information, and makes comprehensive and accurate judgments. Great progress has been made in this area in the People’s Bank of China in recent years; however, our research department still lags behind its counterparts in Western central banks with regard to the scope and speed of information, ability of comprehensive analysis, and quality of the research team.

Within the People’s Bank, three departments are engaged in research; the Department of Research and Statistics, the Office of Policy Research, and the Research Institute of Finance and Banking, The three are responsible for different areas of research: long-term research, information analysis, theoretical research, and strategic research. Their work is to describe monetary developments, to study the relationship between money and macroeconomy, to study changes in the government budget, prices, output, investment, and the balance of payments, and to provide analysis, judgments, and policy recommendations as references for the decision-making body of the bank.

Paul A. Volcker

When things are going smoothly, I think what Miguel Mancera said this morning is quite true, the central bank is not very prominent, it does not appear to have terribly difficult decisions to make, because the necessary adjustments are not very large. Most people will not know what the central bank is when things are going smoothly. It is only when things go poorly that the central bank becomes prominent.

I think I made the main points that I wanted to make in this area the other day when I spoke of the importance of a central bank having an adequate status, adequate prestige within the whole governmental apparatus. If it is going to be able to take the kind of decisions, the kind of difficult decisions that it is occasionally forced to take, and have those decisions respected not only by the rest of the government but also by the public at large—and that is a larger concept in the precise legal status of the central bank—it helps to have a strong degree of legal independence; specifically, that it does not simply report, let us say, to the finance minister, or some other minister, which is the pattern followed in some countries. The tendency these days has been moving in the other direction, to provide more independence, which, I think is a reflection of the recognition of severe inflationary problems around the world and the idea that the central bank has to be given more authority to deal with them. The most striking illustration of that is what goes on in Europe in connection with the discussion of European monetary unity and what characteristics a central bank should have in that connection. But I will let Governor Godeaux speak on that.

Most central banks in that connection, I might say are self-financed. The easiest, I do not know about in socialist countries, but the easiest and most assured way to make money in a capitalist country is to control the printing press. When you create money, which has no interest, you can acquire assets with the money you create; it is a sure way to make money. Most central banks are authorized to keep a small fraction of the money they make to finance themselves and that itself provides a certain degree of independence and authority. I understand that this is not the case in China, but I recommend that the situation in China be reviewed. Otherwise, you are not consistent with the practice in almost all the rest of the world.

But, more fundamentally, the status and prestige of the central bank will lie with public attitudes, with the strength of the people running the bank and how independent they are, and how much they are willing to fight for what they think is important in terms of stability, or whatever. But this is nothing, as these remarks suggest, that comes automatically; if you are going to have influence, or if you are going to have real autonomy and real independence of judgment, you have to earn it. You earn it in part by the importance, for instance, of the research function, the channels of information, and the professionalism of the staff, as the Vice-Governor of the People’s Bank remarked. That seems to me absolutely essential and it has to be built up over many years. I think it is typical, certainly of the Federal Reserve, but typical of most central banks, in most countries, to give a lot of attention to the research function, a lot of attention to having the best possible economists on the staff, and lawyers and others, insofar as those professions are important. A lot of attention is given to training, a lot of attention is given to continuity. That is quite characteristic of most central banks, and it has always appeared to me, from the standpoint of a developing country, that the Bank of Mexico has had particularly interesting and important experience in that connection.

Let me say too, perhaps because it strikes me out of American experience recently where we have had quite a few scandals in government and quite a few accusations of political influence, that a central bank that deals with money, by its nature, and deals with very difficult financial decisions, to be effective, really has to be beyond suspicion, in terms of its basic financial character and in terms of its absence of any sense of financial or other corruption. By and large, central banks around the world have had a good record in that respect, and if they do not have a good record, it will be very destructive of what they are trying to do in terms of policy, I think by the nature of their responsibilities, a bad record will be even more destructive than for other government agencies that are accused of corruption or the lack of good financial controls.

A third related point is that it helps when, at least again in the American context and contrasted with some other government agencies, the personnel and the senior personnel are by and large career oriented; they are not people who are there temporarily—in this year and out the next. They are not people who are appointed essentially for political or partisan reasons, or for ideological reasons; they are there professionally. In the Federal Reserve, the top governing body is the Board of Governors—seven people. They are appointed as part of the political process; they are appointed by the President and must be approved by a majority of the Senate; that is the way all senior government officials are appointed, and in that respect the Federal Reserve is no different. But it is different in two respects. By and large, the tradition is that the people appointed to the board are not highly partisan; they are not political and very seldom do they have a political background. They typically have a professional background. The terms are very long, fourteen years as a member of the Board of Governors; the chairman has a shorter term—maybe that is appropriate too—but the basic board terms are very long to provide an element of independence in a nonpolitical orientation.

People on the Federal Reserve Board are not looking for a political office; they are typically not looking for another job; that is their job, and that is what they have been professionally interested in. It is not at all unusual for a career staff person to be appointed to the Board of Governors; that is unusual in other departments. Very seldom does the head of a department, or the undersecretary, or the vice-minister come up through the ranks. But in the Federal Reserve that is not particularly unusual. Except for the Board of Governors, the staff is almost entirely career oriented and nonpolitical.

The same holds true for the presidents of the various Federal Reserve banks. They are not always career people. In fact about half of them are career people; half of them have been appointed from outside, but they are not appointed by the President, nor are they appointed by part of the political process. They are nonpolitical people; they are professional people. So all of that has helped contribute to independence in fact, whatever the law says, and the law in the United States does provide for independence for the Federal Reserve, meaning independence from the President; it is the U.S. Congress that passed the law, and Congress can always change the law. But they would have to go through the process of changing the law. What the law provides is that, unlike other government departments, the Federal Reserve does not report to the President of the United States. It does not mean that the department, the agency, or the chairman, in particular, does not maintain communication with the President. It does not mean that it does not maintain very frequent communication with the Secretary of the Treasury. It means that neither the President nor the minister of finance can order the Federal Reserve to do anything. You can discuss problems, and that discussion can go both ways.

Perhaps the relationship of the Federal Reserve to the finance ministry is symbolized by something that has become a custom over many years. There is typically at least one meeting a week between the Secretary of the Treasury and the Chairman of the Federal Reserve, at lunch, and they may meet much more frequently than that, but they do try to meet once a week at least. Even when there is no special problem, that meeting on alternate weeks takes place at the Federal Reserve and at the finance ministry, so that there is no sense that one agency or the other is responsible to the other one. We maintain a formal quality in where the meeting takes place.

Let me just conclude by saying a few words about the regional organization of the Federal Reserve, since that request was made specifically. I suppose we have certain resemblances to China in the sense that we are both large countries, with a population spread over a vast area, and indeed, I think with centers of influence in the country spread over a vast area. Perhaps I can talk with a reasonably dispassionate view on this subject, because I once worked for the Federal Reserve Bank in New York, and I was chairman of the Board of Governors, so I have seen the Washington perspective and the regional perspective firsthand. From either perspective, as I am sure you know in China, the relationship is not always perfectly smooth and harmonious. Between the regions and the central office, there is bound to be some tension in that relationship and indeed to some degree that tension is deliberate.

I must say that in practice the relationship has changed quite a lot over the years. As I indicated the other day, when the Federal Reserve system was established seventy-five years ago, there was some idea that monetary policy, at least, might be modified a little bit to suit the needs of different regions of the country. That idea did not last very long and it is virtually impossible to think about now in terms of the speed and ease of communication and financial flows through the country. As a practical matter it is impossible to have different monetary policies in different parts of the country. And through the years, literally decades, a considerable effort was made, with the emphasis naturally coming from Washington, to make as sure as the central authorities could that monetary and supervisory policy was administered uniformly through the twelve Federal Reserve districts.

At the same time, the more purely administrative function has been pretty well decentralized. The various Federal Reserve banks hire and fire and train their own people; they each have their own research department. While there is some interaction with Washington, those operations tend to work quite independently. Washington exerts some general control over salary levels, but these days does not set individual salaries for the senior officials in the region; they have their own Board of Directors, comprised of local businessmen, and no salaries or other employment conditions are set, subject, of course, to some general restraint in the local areas rather than in Washington.

I would point out two things. First, even in administrative matters, the reserve banks are a good deal less autonomous than they were ten years, twenty years, or thirty years ago, for purely technological reasons. The Federal Reserve system as a whole, and the regional Federal Reserve banks, carry out certain more or less mechanical functions: they issue currency, they clear checks, they run the system for sending money electronically through the country. Those functions, except for the electronic function, used to be done more or less by hand. It was not necessary to have precise operational uniformity around the country.

These functions are now all done by computer, including counting the currency. Even those computers are very sophisticated and have to be uniform throughout different districts. When you are sending funds around the country electronically, the electronic systems have to be able to interact with each other. When a bank in New York gives an order to send money to a bank in California, or vice versa, they have to know exactly how to do that, the way the order is specified, the way it will be received. Those systems basically have to be identical, in both banks. These are big, important functions, so that banks are forced into more and more uniformity between them and that brings less opportunity for administrative experimentation or administrative differences.

I would also point out that the Federal Reserve regions do not conform with political subdivisions. In the State of New York, there is a Federal Reserve bank in New York City, but it does not quite conform with the State of New York, although it almost does in that case. But most Federal Reserve banks cover a lot of states, five states, ten states; so there are no political regional officials that feel either a sense of responsibility to the local Federal Reserve bank or particularly oppressed by the local Federal Reserve bank; they are only one of many.

There has never been a lot of interaction at the local level with the local political authorities. There are some meetings, some contact from time to time, but it is practically unknown for local political authorities to try to exert influence on the regional Federal Reserve banks, and that may be a somewhat different situation than in China.

The question that is asked from time to time is that if we were starting anew, not in 1913, but if we were starting today, would we have this, administratively, very cumbersome system of twelve different Federal Reserve banks. The answer to that is almost certainly no. You would not think of doing it in today’s nation where transportation and communication are so quick and cheap. You would not think of setting up so many banks—you might have regional offices—but they would not have the same amount of autonomy that the Federal Reserve banks were intended to have. But if you ask the question somewhat differently, does it make sense to have some regional offices, maybe not twelve, but maybe four or five, would that still make sense? My answer would be a strong yes, because it does help to bring some perspective to the councils of the Federal Reserve system that are a little different than what you have in Washington. But if that is going to be effective and they are really going to be useful, some authority must be given to the regional authorities, and that is done in the Federal Reserve system, because the presidents of the twelve Federal Reserve banks come together and meet with the seven members of the Board of Governors in Washington.

This group of nineteen is the main policy-making body of the system so far as monetary policy is concerned. A body called the Federal Open Market Committee controls open market operations; open market operations are the most important instrument of policy. Months will go by when that is the only instrument used, sometimes years. So the presidents serve as equals on the open market committee, and it is that which makes that position a really important office. It gives influence in the overall policy-making to some sense of what is going on in the rest of the country. Only half the presidents can vote; they rotate, but they all meet together and discuss together. Sometimes, the size of the group is a little cumbersome, but it is a way of maintaining a wide representation, and a balanced thoughtful view as to what policy should be. I would suggest to you, the more independent the central bank, the more autonomous the central bank, the more necessary it is to have the policy-making body a representative board, rather than a single person—at least in the context of the United States; I do not know about other countries.

But if the Federal Reserve has as much authority as it has, to give all that authority basically to one person would not work. It would make the organization very vulnerable. You want the protection, so to speak, of a governing body rather than a governing person, and when you read about the Federal Reserve I know it often does not appear that way; it is always personalized, the chairman gets all the attention. You would think the chairman is making all the decisions. It is fair to say that the chairman has more influence than any other single member, but it is a board making the decisions, and for a large country with a quite independent central bank, there is something to be said for that approach. In that context, I continue to think that the regional structure, which has some roots in and participation with the local business community, continues to be a source of strength, even though it is rather cumbersome and even though in the end monetary policy has to be controlled centrally and be uniform throughout the country.

Miguel Mancera

When asked if there is a need for a strong central bank, one can go further and ask whether there is a need for a central bank at all. In countries—nonexistent today—that had only a commodity currency, there was no need for a central bank. In the case of a metallic standard, for instance, an officially recognized mint would be enough to transform gold, silver, or whatever into legal tender. In another case, that of countries which use a foreign currency as legal tender, there would be no need for an issuing bank either.

Except in very special situations, countries have found domestic fiduciary money—the so-called fiat money—to be preferable as legal tender to commodity currencies or foreign currencies. The main reason for this is the large social cost implicit in the acquisition of the respective commodity or foreign exchange.

Yet even if fiduciary money is to be used, the need for a central bank is not yet compelling. After all, money could be issued by the ministry of finance or by some other government department, in the same fashion as coins are still issued in many countries, albeit in many cases under the directives of the central bank. Paper money could also be issued by commercial banks as, indeed, was the case in many countries, over long periods.

Paper money is generally issued by central banks for historical reasons. The extended use of paper money was developed in many countries by one or more commercial banks, which over time were permitted to issue substantial amounts of bank notes. However, as the issue of legal tender and the seigniorage associated with it have been widely recognized as a privilege of the state, central banks began to develop, to the point that today, perhaps in all countries using domestic fiduciary money, they are the sole institutions empowered to issue bank notes.

Since central banks evolved from the model of commercial banks, the former also conduct some basic banking operations, such as deposit taking and foreign exchange dealing. They also perform two other normal banking operations—lending and investing in securities—which for central banks are of the utmost importance.

It is mainly through lending and investing in securities, as well as by means of foreign exchange dealings, that “base money” is created or destroyed. Let us recall that base money is usually understood to include not only bank notes and coins but also sight deposits in the central bank, which are mainly those of other banks.

In previous sessions, we discussed the role of central banks in promoting price stability and balance of payments equilibrium. The achievement of both objectives depends to a large extent on the evolution of the monetary base and on how money is created or destroyed. A too rapid monetary expansion will eventually produce inflationary pressure, and this expansion is bound to occur if the government (or other entities) indulges excessively in borrowing from the central bank.

It is by no means a foregone conclusion that when the central bank is under the control of the government the latter will irresponsibly rely on the financing of the former. There are historical experiences that prove the opposite. In my own country, where the central bank is not independent, there have been long periods when fiscal policy has been carefully conducted and reliance on central bank credit has not been excessive. On the other hand, even if a central bank is independent, monetary stability is not guaranteed. The central bank could opt, by its own decision, for an expansionary policy. History also records some examples of this.

Nevertheless, historical and international experience demonstrates a well-established and positive correlation between the independence of the central bank and price stability. What is the explanation for this correlation? There is not an easy answer. One explanation that I find convincing, however, is that politicians are subjected to many pressures to spend liberally, which they simply cannot often resist, even though in many cases they are fully aware of the consequences of excessive spending. This inability to exercise the necessary restraint seems to be a justification for an independent central bank.

On the other hand, it may happen that as the government spends liberally and the central bank does not accommodate the borrowing requirements of the public sector, interest rates increase, perhaps to very high levels. As a result, the private sector is crowded out of the financial markets. In that case, the central bank may come under significant pressure from actual and potential credit users, foremost among them the government itself, to expand credit in order to lower interest rates. It takes a strong and courageous central bank to be able to resist the joint pressure of the government and the private sector, which will most likely include, among other unpleasant elements, harsh criticism in the media.

Since both politicians and central bankers may be subjected to strong political pressure to adopt an expansionary policy, why are central bankers usually more reluctant than politicians to yield? In spite of my being a central banker, I would not dare to say that it is because we are more sensible or virtuous men. That would be nonsense. The difference stems from other reasons. One is that central banks are usually—albeit in many instances unfairly—held responsible for the stability of the currency, either legally or politically; whereas they are not held, at least directly, responsible for the construction of public works, for subsidizing certain prices, or for other actions involving expenditure. Therefore, central bankers, out of enlightened views or simply because of self-protection, tend to adopt and implement policies consistent with price stability.

A second reason for central bankers’ concern with price stability is that in the case of independent central banks, the term of tenure for the members of the governing body is fairly long, and, more important, it does not coincide with the term of office of politicians. This gives central bankers a longer-term responsibility and concern over the consequences of monetary mismanagement. Still another reason why central bankers are often more prudent than politicians in monetary matters is that, because of either legal provisions or of tradition, the former are chosen from among people with at least some alleged, if not always real, understanding of the influence of monetary policy on the economy.

It appears then that in order to enhance the prospects for monetary stability, central banks should be independent from their governments. Central bank independence requires at least two elements. First, that the central bank cannot be forced to lend or to buy securities to any extent beyond what its governing body deems appropriate, and second, that the members of that body cannot be removed before their term expires and that such term does not coincide with that of the government. To ensure the noncoincidence of terms, the members of the governing body of the bank should be appointed one at a time, at fixed intervals, as in the United States and some other countries.

Monetary policy is so important that it is unthinkable that it should be left in the hands of one person. This is why most central banks have a board plus, in some cases, committees or other formal groups of persons that decide monetary policy. These bodies, which for the sake of simplicity I will call “the board,” will not have much practical significance if the central bank lacks the power to deny credit to the government. Should that power not exist, then monetary policy is, in fact, not decided in the central bank but elsewhere.

When monetary policy is decided in the central bank, there is still the possibility that its board is dominated by officials of the ministry of finance or of other ministries or government departments. Although this situation does not make for an independent central bank, it is to be preferred to the one described above, since the voice of the central bank officials will probably have greater weight. A somewhat better arrangement would be for the members of the board not to be government officials, even if they are appointed and can be freely removed by the government. In this scheme, the central bank is not yet fully independent, but at least it becomes a peer of the ministries and its strength is thereby considerably increased.

The best formula I have found so far is that the members of the board be replaced or reappointed, one by one, at fixed intervals—these being long enough to make it very unlikely that a given administration would be able to appoint a majority of those members. There should also be legal provisions intended to ensure that, to the largest possible extent, the members of the board are selected only from persons with the best qualifications.

On the subject of nonindependent central banks, it must be said that in some instances they may be quite strong in spite of their statutory limitations. They can be strong when they command a great ability to persuade, not only within government circles but also among public opinion leaders. The influence and persuasiveness of a central bank will rest on the quality of its research work, on its experience, and on its ability to communicate. I shall deal later with the role of economic research in a central bank and with the task of explaining monetary policy. For the moment, let me say a word about experience in central banks. It obviously derives from the permanency of the staff and from the stability of the membership of the board. I do not know of a prestigious central bank where both these conditions are not met.

Another source of power for a formally nonindependent central bank is the prestige of the staff itself and particularly of the governor and of the other members of the board. When a governor is highly regarded, the mere possibility of his resignation as a result of a policy disagreement may well deter the government from proceeding with the policy in question. Government officials would have to ponder the cost of the financial crisis that might ensue from that event. The prestige of the staff, of the governor, and of the board is also essential in another sense. A crucial element for the good functioning of the economy is confidence in the authorities. Therefore, if the monetary authorities are able to command the confidence and the respect of the government, of the financial markets, and of the population at large, as well as that of the international community, the chances for the good functioning of the economy are greatly increased.

The question arises here as to how best to promote the high quality and permanency of the staff. In this respect, the experience of the Bank of Mexico may be interesting since our staff, it seems to me, is generally well regarded. The reasons for that quality are mainly the following. (1) We try to recruit only the best people. The candidates have to pass several tests. Logically, the nature of some of those tests varies in accordance with the job to be performed. (2) We offer many training opportunities to our employees, whether they be waiters, clerks, secretaries, professionals, or officials. The most promising young professionals are offered scholarships to the best foreign universities. (3) Prospects for promotion are enhanced by the tradition of not hiring people from outside the bank except to fill vacancies at the lower ranks of each branch of service. (4) Open discussion of the problems to be tackled by the central bank is strongly encouraged. This makes many people feel that they are participating in policy-making; at the same time they contribute very good ideas. (5) Salaries enable the staff to live reasonably well. Salaries of high-ranking professionals and officials are, in quite a few cases, below market levels considering the qualifications of the persons involved: this is compensated for by pensions that are rather generous.

Coming back to the topic of central bank independence, it must be said that even if it is in fact independent, consultation between the central bank and the ministry of finance and other authorities should still be extensive. Obviously, central banks do not operate in a vacuum. Therefore, the action of a central bank will be the more effective the better it is coordinated with the government’s policies in the fields of public finance, domestic and foreign trade, industry, employment, etc.

The issue concerning central bank independence that I find perhaps the most difficult to address is accountability. In a democratic society, independence cannot mean unaccountability; yet how to make the central bank independent and yet accountable is not an easy matter. Some formulas have been suggested for this purpose. One is that monetary targets be established (some suggest that they should be set by law) and that the central bank board be held responsible for compliance. This is not a new scheme. In fact, the Bank of Mexico Organic Law had a provision of that type in the late 1930s. Unfortunately, it was never enforced and was eventually removed.

Undoubtedly, there is considerable difficulty in adopting monetary targets that are not highly debatable. This is why some of the most respected central banks have changed the nature of their monetary targets over time, even in recent years. At any rate, some sort of monetary targeting should be tried, and the central bank should preserve the possibility of modifying the objectives should they prove unsuitable for fostering orderly economic conditions. The new Organic Law of the Bank of Mexico, in force since 1985, provides for establishing an annual ceiling on domestic credit, although a certain notorious loophole that makes the provision ineffective is still present.

What is generally agreed upon is that a way to make the central bank accountable is to require that its policies and their implementation be explained extensively to the public. For this purpose, the central bank and its officials should communicate through reports, articles, speeches, panel interventions, private meetings, etc. Presentations to parliamentary committees may also be included; whether all these measures satisfy the accountability requirement in a democratic society is a matter for debate. With regard to the role of the research department of the central bank, I can hardly find something to add to what has been expressed in the background paper provided by the IMF.

Finally, in reference to the role of the branches of a central bank I would like to say that they can be most useful as currency distribution centers, as providers of clearing services, as gatherers and preliminary analyzers of data and information, generally, and as vehicles for the central bank to communicate with the local communities. Nevertheless, I believe, they should be absolutely forbidden from deciding on fundamental questions related to credit operations or foreign exchange dealings.

Jean Godeaux

I am in complete agreement with the considerations expressed by Mr. Volcker and by Mr. Mancera. I shall therefore not attempt to repeat what they have excellently said. I shall simply bring into the debate some illustrations taken from the history, both distant and contemporary, of my former central bank, and more generally, of central banks in Europe.

In Europe—apart from the Bank of Sweden and the Bank of England, which were created in the seventeenth century—the central banks were created throughout the nineteenth century, from the beginning (the Banque de France) to the last quarter of the century (the Reichsbank). Basically, their legal form and their institutional setup reflect the circumstances and the preoccupations of the period, despite successive, sometimes important, amendments. Each of these central banks did, at one time, exercise the functions of a commercial bank. Their statutes still contain elements reminiscent of the commercial company that they once were. They are the product of custom, tradition, and of a prudent incorporation of elements of “modernity.”

The important exception is the Deutsche Bundesbank, the only central bank with “modern” statutes. It is, no doubt, the distant heir to the Reichsbank, but its basic legislation originates in the Bank Deut-scher Länder, which was later substantially amended when the Bundesbank was created, several years after the end of World War II.

The commercial past of practically all of the European central banks is not without significance. Though it would be conceivable, in no country was the monetary function entrusted to a ministerial department or a government agency. I believe that, in a sense that is more than symbolic, central banks must be “market” participants, “market” operators.

As Mr. Volcker reminded us, central banks existed even before the words “monetary policy” had been invented. Their original mission was to regulate the issue of fiduciary money, “paper” currency, to appropriate the seigniorage, to teach people how to use bank notes and not solely coins, and most important to avoid “financial crises,” the sudden scarcity of means of payments that had periodically plagued nascent industrial economies.

Whatever their precise legal form and organizational structure, experience teaches us that to be successful in the discharge of their responsibilities, central banks must be “influential” and “autonomous.” Both characteristics are closely interconnected. When I say autonomous, I mean not only that the central bank should not be subjected to instructions from the political authority, but that it should be financially independent and not have to rely for its operations on funds from the state budget.

As both Mr. Mancera and Mr. Volcker underlined, in the final analysis, the influence and the autonomy of the central bank do not rest upon legal arrangements but on public opinion. The government must be convinced that in case of conflict with the central bank, public opinion would side with the cental bank. The governor must be keenly aware of the conditions and the limits of such public support.

The question is, How does the central bank acquire and maintain influence and autonomy? In this context I see four considerations that deserve comment. In the first place, the central bank must acquire and display expertise and professionalism. This depends on the quality of research that is done in the central bank and on its ability to communicate effectively. This requires high-quality recruitment, freedom to determine salary scales and career “profiles.” Central bank personnel should have a profile distinct from that of civil servants. It means also that at the top there should not be political appointees, I should say “purely” political appointees, for nobody can deny that appointments to important positions can never be entirely devoid of some political significance. In my country, Belgium, of the six governors that have held office since World War II, five had been central bank officials at one point in their careers.

A second element is the ability to be and to be seen as objective and nonpartisan. A third important factor in the success of the central bank is what I might call “political savvy.” The central bank must be close to the political process but not part of it. The days of “splendid isolation” are past. One way to achieve this is to have regular contacts between the minister of finance and the governor. I am struck by the fact that in all cases that I know, there is a weekly meeting, sometimes at lunch, but in all cases in surroundings that do not create the impression of subordination of one party to the other.

A fourth area that deserves comment is what is generally referred to as “accountability.” No doubt, in a democratic system, such important powers and responsibilities as are entrusted to the central bank cannot make the bank sole master and judge. Systems do differ; there is no perfect system. In the end, as already said, public opinion must be the judge. Reporting—extensive reporting—and frequent communication are essential. A counterpart of this autonomy and “diffuse” accountability to the public at large is, I believe, what we call in French le devoir de réserve. The government should not feel or fear that the governor would be a rival before the media.

The system that exists in my country may be illustrative of this mixture of tradition and cautious evolution that characterizes the organization and structure of central banks. Under our statutes the bank is “governed, conducted” (dirigée) by a governor; it is “administered, managed” (administrée) by an Executive Committee (Comité de direction), chaired by the governor. This committee consists of a minimum of three and a maxiumum of six directors, appointed by the King, upon a proposition by the Board of Regents. There is no legal definition of dinger and administrer. The governor thereby has considerable leeway and precedence, but an element of collegiality is still involved, which is important as Mr. Volcker remarked.

The statutes provide further that the governor and the Executive Committee are “assisted” by a Board of Regents. This Board is chaired by the governor and consists of the members of the Executive Committee plus ten regents who are selected according to a complex procedure that ensures that the various economic and social constituencies of the country are represented. There is in addition a committee of censors, in effect a board of auditors. Together, these persons form the general council of the bank, which meets once a month. Finally, there is the general meeting of shareholders: the state owns half the shares and the general public holds the other half.

In addition, there is, and this is important, a commissioner of the government, a civil servant who attends the meetings of the Board of Regents and has the power to suspend and refer to the minister of finance all decisions of the bank that he deems are contrary to the law, to the statutes, or to the interests of the state. In legal terms, this means that the government could prevent an action by the bank with which it does not agree, but it does not have the power to impose any action on the bank. Since the creation of the bank, this veto power has, to my knowledge, never been exercised. But the fact that it exists gives added impetus to having close and effective informal cooperation between the government and the bank.

There is, I believe, no special merit to this somewhat complicated structure. It grew out of history. I may add that when the bank was created in 1850, it was set up by an act of Parliament, before a general company law existed. According to the ideas of the time, limited companies should exist only for a limited time; the bank was created to exist for thirty years. Therefore every thirty years Parliament had to adopt a new act extending the life of the bank and renewing its privilege of issue. This was not convenient. It made it necessary to have a parliamentary debate on the bank and, of course, on money and monetary policy at a time that was not necessarily the most opportune.

When our last period of legal life was approaching its end on December 31, 1988, we suggested that this limitation that was no longer applicable to commercial companies should be abolished. The minister of finance agreed and the act, including this feature, was voted on and approved, practically unanimously, by Parliament. The act included provisions relating to the disposition of possible capital gains on gold sales from the reserves of the bank. This possible profit had to remain invested within the bank. Only the income on such investments would accrue to the state, in this way every temptation would be avoided to sell part of the gold reserves simply to make a paper profit for the treasury. By implication, the act confirmed that the external reserves were owned by the bank and were managed by the bank in full autonomy.

What is important in this context is that the bank could easily convince the minister of finance and their “joint” proposal was quickly and unanimously approved by Parliament, including the opposition parties. This, to me, is an illustration of the influence and autonomy that the bank has achieved. That is why I have used some of your time to relate it.

I wish to end on a less parochial note. When the Delors Committee described the institutional arrangements that, in their unanimous view, would be appropriate for the future European central bank, they underlined independence and accountability as the two essential elements in the status of the system. As for the suggested structure and organization, it may be useful to quote the relevant passage (p. 19) of the report:

• A federative structure, since this would correspond best to the political diversity of the Community;

• establishment of an ESCB [European System of Central Banks| Council (composed of the Governors of the central banks and the members of the Board, the latter to be appointed by the European Council), which would be responsible for the formulation of and decisions on the thrust of monetary policy; modalities of voting procedures would have to be provided for in the Treaty;

• establishment of a Board (with supporting staff), which would monitor monetary developments and oversee the implementation of the common monetary policy;

• national central banks, which would execute operations in accordance with the decisions taken by the ESCB Council.

It is evident that from what you have heard and from what I have quoted a wide consensus emerges on the topics of this session.

Summary of Discussion