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Mr. Jacek Rostowski is Lecturer in Russian and East European Economics at the School of Slavonic and East European Studies, London University. This paper was written while he was a visiting scholar in the Research Department. He thanks Soul Estrin for very useful comments.
Sometimes (e.g., in the USSR) they did not formally receive financial resources as such, but rather the right to extend credit according to their credit plan which was determined for them by the state bank. Once the credit plan was received there was no need to actually obtain financial resources. These were created by simply debiting the so-called “inter-branch circulation” (the “mezhdufilialny oborot” in the USSR). In other words the specialized banks, and indeed the branches of the state bank, created their own liabilities just like a central bank. Control of this central bank money was exercised by control of credit creation by State Bank headquarters via the credit plan. Once the Spetsbanki and the Republican Central Banks could draw up their own credit plans (from 1989 and 1990 respectively) they effectively became central banks, because they could still debit the “inter-branch circulation” to finance the credit they extended.
In Poland the central bank still engaged in commercial operations, though on a much reduced scale, at the end of 1992.
At the time of writing, none of the Hungarian SCBs has been privatized, in the Czech and Slovak Republics the SCBs have been partly privatized in the framework of the mass privatization voucher program, and in Poland two SCBs are “soon to be” privatized.
Unlike SCBs a central bank does not have limited liability, and cannot, even theoretically go bankrupt.
And from less use of banks by a population concerned about the possibility of further bank failures, leading to a fall in the money multiplier and a “multiple contraction of deposits effect”.
In the former Czecho-Slovakia the same was done by removing a large part of bad credits from the books of the SCBs and into a “Consolidation Bank”.
Poland now finds itself threatened with exactly this situation.
However, to prevent barriers to entry refusal to allow access to a clearing system by its participants, as is happening in Poland, would need to be forbidden under anti-monopoly legislation.
These are effectively “closed end” mutual funds. This is what has happened in Czechoslovakia in response to the opportunities created by the voucher mass privatization scheme. “Open end” mutual funds on the other hand require a law of trusts and a highly liquid stock market. As such they are likely to be unsuitable for PCEs in the early stages of their transformation.
Thus in Poland, for example, SOEs have been unwilling to issue securitized debt, as the failure to repay it when due makes them automatically subject to bankruptcy proceedings, whereas the accumulation of inter-enterprise arrears does not [Rostowski 1993].
This is why debt write-off made much more sense for the ex-GDR and Czecho-Slovakia in 1990 than it did for market socialist economies such as Hungary and Poland.
Thus all subsidies to SOEs become transparent, and the central bank covers the budget deficit openly by creating money to extend credit to government, rather than hiding it by extending unrepayable credit to banks or SOEs. Stabilization is then effected by making central bank lending to government illegal.
To make things more difficult the domestic inflation rate then needs to be negative for a certain period as prices fall.
The problem resulting from the need for reserve accumulation does not stem mainly from the size of the required payments surplus. Thus during the Polish stabilization program, by the time international reserves and the real value of the money supply ceased growing in October 1990, cash was 160 percent backed and cash and foreign currency deposits together were 70 percent backed. Although Poland did not start its stabilization program with zero reserves, this was achieved by Poland running a trade surplus equivalent to only some 2.7 percent of GDP during 1990, which gives an indication that the trade surplus which might be needed by a PCE to back its currency need not be very large.
This is not the trivial point it may appear at first sight. In Russia at the time of writing there is a severe cash shortage, resulting from loose credit policy in a hyperinflationary environment, combined with the inability of the printing presses to keep up with the demand for cash. The result is the maintenance by the Central Bank of Russia of the inconvertibility of business deposits into cash for most purposes (exceptions being such uses as the payment of wages).
Simons  suggested such an approach for the U.S. (the backing would, of course, have been in gold).
100 percent international reserve backing of the monetary base, would imply the export of a large proportion of domestic savings, which would be likely to be criticized (see Section 4 for a discussion of this question).
With or without obligatory minimum reserve requirements. Hanke and Schuler assume that liquid reserves are set voluntarily by banks.
The simplicity of the mechanism might be largely lost if there were a significant inflow of short-term capital (as has happened in 1991-92 in Argentina). This, however, is unlikely initially in the case of most PCEs because of a lack of credibility of the new monetary regime, particularly to foreigners.
And lower than if foreign currency itself were actually used as money within the country.
In British colonies which had currency boards most banks were branches of United Kingdom banks and thus had access to the Bank of England as lender of last resort via their headquarters.
Under a “marginal fractional broad money rule” total domestic money is allowed to grow as some multiple of the increase in international reserves (let us say 2). The disadvantage of this system, as stated in the previous section, is that if the country started off with almost no international reserves and if, after a period of increasing reserves and money there comes a period of loss of reserves due to some external shock, then the money supply needs to be reduced more sharply for a given fall in international reserves than it was allowed to expand while international reserves were increasing, for the maintenance of convertibility at the fixed parity is to be ensured (i.e., if the country is not to run out of reserves).
Had the nominal money supply not been allowed to grow after this period, Poland would have saved herself a further 60 percent inflation during 1991.
With both unlimited and limited liability. Public companies with widespread share ownership are unlikely to develop on a large scale initially, because of a lack of track record.
A strict currency board would not accept commercial bank deposits.
As such a pseudo-currency board of this kind would have less credibility than a fully fledged board. In Argentina the law would need to be changed for the high powered money rule to be abandoned. Since this would take time, enabling massive capital flight, Argentina seems to be very pre-committed to the rule.
Simons was writing in 1936. Readers of this paper in 1995 may have a perspective which is closer to Simons’ than the one I am able to adopt at today.
Even when, as in Poland, the bad loans were largely “liquidated” by the hyperinflation of 1989, the banks reproduced these bad loans during the high real interest rate stabilization period of 1990-92.
The hundreds of billions of rubles of credit made available to SOEs in Russia in 1992 are a good example, as are the subsidized credits for agriculture granted throughout Central and Eastern Europe.