Interest Rates in the Organized Money Markets of Underdeveloped Countries
Author: U Tun Wai

In current discussions of monetary and credit policy, a distinction is often made between its place in the general economic policies of highly developed and of underdeveloped countries. Any generalization about the significance of credit policy either in developed or in underdeveloped countries is indeed likely to require qualification when applied to any particular country. The distinction, however, has sufficient validity to make it worth while to examine carefully some of the characteristics that are usual in the money markets of the underdeveloped countries. It is generally believed that interest rates are much higher in underdeveloped than in developed countries. High interest rates are, indeed, found in developed countries, especially for consumer financing, but the amount of lending at high rates usually is relatively much smaller in developed than in underdeveloped countries. This is one of the contrasts upon which a general examination of the characteristics of money markets in underdeveloped countries should throw some light.

Abstract

In current discussions of monetary and credit policy, a distinction is often made between its place in the general economic policies of highly developed and of underdeveloped countries. Any generalization about the significance of credit policy either in developed or in underdeveloped countries is indeed likely to require qualification when applied to any particular country. The distinction, however, has sufficient validity to make it worth while to examine carefully some of the characteristics that are usual in the money markets of the underdeveloped countries. It is generally believed that interest rates are much higher in underdeveloped than in developed countries. High interest rates are, indeed, found in developed countries, especially for consumer financing, but the amount of lending at high rates usually is relatively much smaller in developed than in underdeveloped countries. This is one of the contrasts upon which a general examination of the characteristics of money markets in underdeveloped countries should throw some light.

In current discussions of monetary and credit policy, a distinction is often made between its place in the general economic policies of highly developed and of underdeveloped countries. Any generalization about the significance of credit policy either in developed or in underdeveloped countries is indeed likely to require qualification when applied to any particular country. The distinction, however, has sufficient validity to make it worth while to examine carefully some of the characteristics that are usual in the money markets of the underdeveloped countries. It is generally believed that interest rates are much higher in underdeveloped than in developed countries. High interest rates are, indeed, found in developed countries, especially for consumer financing, but the amount of lending at high rates usually is relatively much smaller in developed than in underdeveloped countries. This is one of the contrasts upon which a general examination of the characteristics of money markets in underdeveloped countries should throw some light.

Size of Organized Money Market

The size of an organized money market in any country may be indicated by either or both of the following ratios, although neither measurement is perfect: the ratio of deposit money to money supply and the ratio of the banking system’s claims (mostly loans, advances, and bills discounted) on the private sector to national income. The first ratio may be said to represent “the liquidity preference” approach, and the second ratio “the loanable funds” approach. The first ratio views matters from the liability side of the balance sheet of the banks, and the second from the asset side.

The ratio of deposit money to money supply actually measures banking development rather than the development of the money market. However, to the extent that the development of commercial banking is synonymous with the development of the money market, this ratio may be used as an indicator of the growth of a money market. In most underdeveloped countries, there are hardly any lending agencies of importance other than commercial banks. There are no discount houses or acceptance houses, and savings institutions (including life insurance companies) are in the early stages of development. In many countries of the ECAFE region, commercial banks in 1950 supplied 70 to 90 per cent of the short-term loanable funds in the organized money markets, inclusive of loans made by governments.1

Both ratios might be expected to be low in an underdeveloped country and high in a developed one. The ratio of deposit money to money supply should be higher in a more developed country because, with economic development, there is also development of the banking system. The greater use of banks for settlement of debts, the use of checking accounts instead of currency as a medium of exchange, and the extension of borrowing from the banking system tend to increase the importance of deposit money.

As an economy develops, the size of the typical business and industrial unit is likely to expand; the amount of self-financing tends to decline, and greater use is made of the money market to finance business operations. The net result is that the claims (loans, advances, and investments) of the banking system on the private sector tend to increase more rapidly than national income; thus the second ratio is also likely to increase. When an economy reaches a very advanced stage, the size of the typical business enterprise may grow to such an extent that more and more of the funds required to run it will be financed internally rather than from the market. But even in such a situation, any decline in bank loans to industry for investment may be partly offset by loans to consumers for financing private consumption.

A comparison, for a number of developed and underdeveloped countries, of the two ratios for a period of years (Tables 1 and 2) broadly confirms the expectations noted above. For estimating the size of the money market, however, use of the ratio of deposit money to money supply by itself may be misleading. For example, this ratio is almost as high in some of the Latin American countries as in the most highly developed countries. A possible explanation may be that, while the money markets are fairly large in some Latin American countries, they may not be functioning as efficiently as in the more developed countries.

Table 1.

Deposit Money As Per Cent of Money Supply, Selected Developed and Underdeveloped Countries1

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Sources: In general, the percentages for 1913,1921, and 1929 are based on data from the following League of Nations publications: Money and Banking, 1939–40, Vol. I, Monetary Review (Geneva, 1940); Memorandum on Currency and Central Banks, 1913–25, Vol. II (Geneva, 1926); and Memorandum on Commercial Banks, 1913–29 (Geneva, 1931). Those for 1938, 1948, and 1953 are based on data from International Financial Statistics (Washington). Exceptions are Argentina and Uruguay, 1938, for which the League of Nations sources given above have been used; Malaya, all years, for which percentages are based on data from Registrar of Malayan Statistics, Malayan Statistics Monthly; and India, currency in circulation, 1913 and 1921, for which figures have been obtained from Reserve Bank of India, Report on Currency and Finance for the Year 1953–54 (Bombay, 1954), and Banking and Monetary Statistics of India (Bombay, 1954).

End of year data unless otherwise noted. For definition of deposit money and money supply, see International Financial Statistics (Washington). For 1913, 1921, and 1929, deposit money is measured by sight deposits of commercial banks, which added to notes in circulation are taken to approximate the money supply.

For deposit money, the year 1914 has been used.

Total deposits with commercial banks have been used for deposit money.

For notes in circulation, the year 1923 has been used, and for deposit money, the year 1925.

Data for notes in circulation are for October 1914.

Data for notes in circulation are for October 1921.

Data are for 1952.

Government deposits are included in deposit money.

Figures for currency in circulation for 1913,1921, and 1929 are estimates.

March data.

Based on 1939 data.

Table 2.

Banking System’s Claims on Private Sector as Per Cent of National Income, Selected Developed and Underdeveloped Countries1

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Sources: Based on data from International Financial Statistics (Washington); Government of India, Department of Economic Affairs, Final Report of the National Income Committee (Calcutta, 1954); Registrar of Malayan Statistics, Malayan Statistics Monthly; and F. C. Benham, The National Income of Malaya, 1947–49 (Singapore, 1951).

Claims include those which the central banks have on the private sector; data pertain to end of year. National income is for calendar year with the following exceptions: India, Pakistan, and New Zealand, year beginning April 1; Japan, calendar year for 1938 and year beginning April 1 for 1948–53; Australia and Union of South Africa, year beginning July 1; and Burma, year beginning October 1.

Based on 1937 data.

Negligible amounts of claims on Government are included prior to 1952.

Claims on Government are included.

Based on 1939 data.

Judging by the first ratio, the money markets in Brazil, Chile, Colombia, and Peru are relatively the largest in Latin America; the only substantial markets in Asia are in Ceylon, Malaya,2 and Japan.3 According to the second criterion, the size of the money market is significant in Chile, Colombia, Cuba, and Peru in Latin America, and only in Japan in Asia. Only in Japan do both ratios approximate those prevailing in developed countries. In relation to the whole economy, money markets are quite small in Burma, India, Indonesia, Pakistan, and Thailand among the Asian countries and in Bolivia, the Dominican Republic, Guatemala, and Honduras in Latin America.

In Table 1 an attempt has also been made to measure the relative growth of money markets. The data used, however, are subject to a number of limitations. In the League of Nations data on the currency component of money supply which are used for the earlier years, notes in circulation are included rather than currency in circulation. Furthermore, the League’s statistical coverage of commercial banks was incomplete. In some cases, where separate data for sight deposits were not available, total deposits were used as the equivalent of deposit money. In spite of these limitations the record gives a broad picture of the development of money markets in underdeveloped countries. In Brazil, Colombia, Ecuador, El Salvador, Nicaragua, and Peru, there appears to have been a growth in the relative size of the money market over the last four decades. Long-term series are not available for Asian countries except India and Japan. In Japan, the money market had already been fairly well developed by the turn of the century; in India, the data for 1929 and earlier years are not reliable because total deposits have been used for deposit money and the currency component of money supply is an estimate.

Level and Structure of Interest Rates

The structure of interest rates in the organized money markets of underdeveloped countries is usually more or less the same as in the developed ones. The short-term rate of interest is generally much below the long-term rate, as indicated by the spread between the government treasury bill rate and the government bond yield; the rate at which bills of exchange are discounted is also lower than the rate at which loans and advances are granted.

The lowest market rates are usually the call loan rates between commercial banks.4 The next lowest are those paid by commercial banks on short-term deposits, followed by the government treasury bill rate. Then come the rates at which commercial banks discount commercial paper, varying according to the type of security and the date of maturity. In most countries, especially in Asia, the government bond yield comes next, followed by the lending rates of commercial banks (Table 3).

Table 3.

Structure of Interest Rates, Selected Countries, 19541

(In per cent)

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Sources: International Financial Statistics (Washington); Union Bank of Burma, Bulletin: Reserve Bank of India, Trend and Progress of Banking in India, 1953; Bank Indonesia, Report for the Year 1953–54; Bank of Japan, Economic Statistics Monthly; Central Bank of the Philippines, Annual Report, 1953; Bank of Thailand, Current Statistics; Banco Central del Ecuador, Boletín; Banco de Guatemala, Boletin Estadístico; B. H. Beckhart, Banking Systems (New York, 1954).

Annual averages. The rates are free market rates prevailing in the main money center; e.g., for India, rates in Bombay. Where the rate is the legal maximum, it is so designated by an asterisk (*).

As of end of year.

Yield on long-term government bonds. Brazil, yield of dollar bonds in New York, 3⅜’ of 1979; Ceylon, 3’s of 1965–70; Chile, dollar bonds in New York, 3’s of 1993; Colombia, dollar bonds in New York, 3’s of 1970; Cuba, dollar bonds in New York, 4½’s of 1977; Egypt, 3.25’s of 1973; India, 3’s of 1966–68; Indonesia, 3’s of 1991; Japan, weighted yield (simple interest) to latest redemption date of medium-dated government bonds; Pakistan, 3’s of 1968; Peru, weighted yield on perpetual bonds; Uruguay, 5’s of 1974.

Against government securities and gilt-edged securities.

March 1952 rates.

Rate at which five-year bonds are available on tap.

Rates of Bank Indonesia, July 1953.

Rate on loans against deeds.

1953 rates.

Rates of Bank Melli Iran.

In the absence of adequate data, the government bond yield for a number of countries listed in Tables 3 and 4 is the yield on bonds floated in foreign currencies in foreign centers. Such yields, it is true, may not accurately reflect the level of long-term interest rates in the domestic money markets. But insofar as government bonds floated in foreign centers are bought and sold in the domestic money market, there should be a close relation between the two yields. Thus, for example, in 1954, the yield on Japanese Government bonds that had been floated in New York was 7.27 per cent, while the yield on bonds floated in Tokyo was 6.48 per cent. There was, however, a considerable disparity between the yield on Indonesian Government bonds floated in Amsterdam before the war (3.16 per cent in 1954) and the yield on bonds floated in Indonesia in 1950 (5.92 per cent in 1954). This difference arose because the former bonds were fully guaranteed by the Netherlands Government.

Table 4.

Government Bond Yields, Selected Countries1

(In per cent)

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Sources: Data for Japan are from Bank of Japan, Economic Statistics of Japan; all other data are from International Financial Statistics (Washington).

Annual averages. Long-term bonds in most cases. Prewar and postwar bonds are, in general, not the same. For a full description of the bonds, see International Financial Statistics and notes to Table 3.

6½ per cent bonds of 1926–57 replaced under the Readjustment Plan of 1944.

More or less short-term bonds; although the bonds are 4½’s of 1977, they are callable at par on any interest date (June 30 and December 31) on 60 days’ notice, or for sinking fund on 30 days’ notice. Since 1948, prices have been above call and yield to next call has been negative.

Within each category of interest rate there are differences of many kinds. The rates at which commercial banks lend vary according to the size of the loan,5 the type of borrower, and the collateral offered. As in more highly developed countries, the larger the loan the lower is the rate of interest charged. On better security, such as government bonds, rates of interest are low, and the lowest rate is sometimes—for example, in Ceylon—even lower than the government bond yield. In most cases, however, the minimum rate at which commercial banks lend against government securities is a little higher than the government bond yield. The commercial banks charge higher rates as the type of collateral becomes less liquid; thus, the rates on stock exchange securities will be more than on government bonds, and the rates on stocks of merchandise higher still. The highest rates are on loans with no collateral. Commercial banks take into account the creditworthiness of their customers as well as the collateral offered; for this reason many of the commercial bank lending rates against government securities are quoted in Table 3 between maximum and minimum rates. It is quite possible for a person with “inferior” collateral but a good credit standing to obtain loans at cheaper rates than another person with very good collateral. For example, in Pakistan, during 1954, rates for clean advances (i.e., without collateral) varied from 2¾ per cent to 9 per cent per annum, compared with 3½ per cent to 6½ per cent for advances against jute merchandise.

In general, the level of interest rates in underdeveloped countries, even in organized money markets, is higher than in the more developed countries.6 The more notable difference between the two groups of countries, however, is that the range of interest rates is generally much wider in underdeveloped countries. The volume of loans granted at relatively low rates in an underdeveloped country is not very important, as only limited amounts of financial assets are available to serve as collateral for lending at low rates. It is usually the foreign business firms with longer experience and larger capital which are able to borrow at the lower rates. Most of the indigenous firms have to pay the higher rates; this is especially true where foreign banks occupy an important position in the banking system, and the minimum rates quoted in Table 3 are in practically every case rates charged by foreign banks.

The level of interest rates in the organized money markets in Latin America is generally somewhat higher than in Asia. This is true not only of government bond yields,7 which are shown in Table 4, but also of central bank rates8 and of market discount rates, where data are available. Thus, for example, in 1954, the market discount rate in Colombo was between 3 per cent and 6½ per cent per annum, while in Mexico it was as high as 10.41 per cent. Cuba’s low government bond yield shown in Table 4 is more apparent than real, because the bonds are callable at par on any interest payment date (June 30 and December 31) on 60 days’ notice or for sinking fund on 30 days’ notice, thus making the yield resemble a short-term rate like the treasury bill rate. Of the Asian countries listed in Table 4, Indonesia and Japan are exceptions to the general pattern of low government bond yields in Asia, which compares quite well with the yields of government bonds of the United Kingdom, the United States, and the Netherlands.

The high government bond yields in Latin American countries stem partly from the greater political uncertainty in that area and also from the general inflations of the past. On the other hand, the close political and economic ties between countries in Asia and either the United Kingdom or the Netherlands have enabled the Asian countries to float low-interest government bonds not only in the U.K. and Netherlands capital markets but also in their own markets. Latin American countries are also generally more developed than those of Asia (except Japan), and thus have a greater demand for investment funds without having fully developed capital markets to supply adequate finance for both private investment and government bonds at low rates of interest. Japan, though more developed, resembles the countries of Latin America in many respects, such as a large demand for investment funds and the inflationary heritage which causes high interest rates. In addition, Japan’s organized money markets are effectively linked to the demand and supply of loanable funds in rural areas, which have lowered rural rates of interest but raised the rates in the main money centers.

The lower market discount rate and the lower rate on advances and overdrafts in Asia are due mainly to the greater importance of foreign exchange banks in the banking systems of Asia. These banks, by their access to world money markets, are able to charge relatively low rates of interest on loans and discounts. Even in Asia, the interest rates in the organized money markets of Korea, Japan, and Thailand are higher than in other Asian countries partly because in Japan and Thailand foreign banks play a minor role in the supply of loanable funds and in Korea because of the inflationary conditions.

Influence of Central Bank Rate

Central banks have been established in most underdeveloped countries; in Latin America for the most part they were established in the twenties and thirties, whereas in Asia, except in India, Japan, and Thailand, they are of postwar origin. The statutes of a number of central banks in Asia (for example, Burma and Ceylon) have granted them wide powers including that of control over the rates at which commercial banks may grant loans, but these powers have not so far been exercised. Where central bank lending to commercial banks is substantial, one would naturally expect changes in the bank rate to be reflected immediately in market rates. Where such lending is nominal, the influence would be felt directly only if marginal lending should influence the market rate.

In most underdeveloped countries, central bank lending to commercial banks is not of any great consequence. In nine countries, Bolivia, Burma, Ceylon, India, Indonesia, Israel, Mexico, Panama, and Thailand, there has been practically no lending; and in nine others, Brazil, Cuba, Egypt, Honduras, Japan, Pakistan, the Philippines, Uruguay, and Venezuela, it has been equal to about 10 per cent or less of the claims which commercial banks have on the private sector. In some Latin American countries and Turkey, central bank lending to commercial banks has been of great importance; in Chile, Colombia, Ecuador (development banks), and Turkey it has been equal to about one fourth, and in Costa Rica, El Salvador, Guatemala, and Nicaragua to about one third to one half, of the claims which commercial banks have on the private sector. Only in Paraguay has it exceeded the volume of those claims (Table 5). For most of those countries where central bank lending to commercial banks has been large, and also in Japan, the volume of such lending has even exceeded the balances maintained by the commercial banks with the central banks.

Table 5.

Central Bank Loans to Commercial Banks in Relation to (a) Commercial Banks’ Claims on Private Sector and (b) Commercial Banks’ Balances with Private Banks, Selected Countries, 1938 and 1948–541

(In per cent)

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Sources: Based on data from International Financial Statistics (Washington).

Data as of end of year.

1937 data.

Claims on private sector include only loans.

In spite of the small direct dependence of commercial banks on the central banks for funds, the latter are able to influence market rates by changes in the bank rate because of their economic, and at times their legal, position in the domestic money market, with wide powers for selective credit control, open market operations,9 and moral pressures. The postwar changes in the bank rate occurred mainly during the few years following the outbreak of the Korean conflict. The influence of central bank rates may not be accurately indicated by comparing commercial bank lending rates and other rates in organized money markets immediately before and after the central bank rate is changed. This is especially true when central bank rates have been changed because of a change in market rates rather than with a view to influencing them. In Japan, the Bank of Japan raised its discount rate on October 1,1951, from 5.11 per cent to 5.84 per cent. The higher bank rate immediately caused all other money market rates to rise by more or less corresponding amounts. In India, the Reserve Bank of India raised its bank rate from 3 per cent to 3½ per cent on November 15, 1951, and the lending rates of commercial banks increased by ½ per cent, in spite of the fact that market rates had already risen significantly during the second half of 1950 and early 1951. In India, the movement of the central bank rate, therefore, both followed and led a corresponding movement of market rates.

In Ceylon, when money conditions became tight as economic activity fell sharply from the high level reached as a result of the Korean conflict, the commercial banks offered higher rates of interest on deposits,10 but their lending rates, which had not been changed during the period of high economic activity, were maintained at the same level. When, however, on July 23, 1953, the central bank raised its bank rate, i.e., the rate at which it makes advances to the commercial banks against the pledge of government securities, from 2.5 per cent to 3.0 per cent per annum, the whole lending rate structure of the commercial banks rose by about the same amount and the maximum rate for interbank call loans rose by more than 1 per cent. This occurred in spite of the fact that the central bank does not usually lend to the commercial banks and its lending which began in the second half of 1953 and in early 1954 was small.11 When the central bank rate was lowered to 2½ per cent on June 12,1954, the commercial bank lending rates hardly changed. This seems to indicate both that, when the trend is downward, market rates are rather sticky, and that commercial banks were waiting for a signal from the central bank before they raised their lending rates in 1953.

In Chile, the central bank discount rate was raised from 6 per cent to 8 per cent in March 1951, but its rediscount rate remained unchanged at 4.5 per cent. Monthly data on market rates of interest are not available, but the weighted six-month average rate charged by all banks on all loans was stable in the first half of 1950. When activity rose during the Korean conflict, this weighted average market rate rose by 0.6 per cent, to 10.98 per cent; and with the change in the central bank rate, it rose to 11.43 per cent in the first half of 1951 and to 12.02 per cent in the second half of the year.12 These changes indicate that the central bank rate in Chile, as in India, both follows and leads the movements of market rates.

The ultimate objective of any change in the central bank rate is not merely to influence market rates of interest, but also through them to affect the quantity of credit extended by the banking system. Sometimes this control can be achieved without affecting market interest rates, because the central bank rate change acts as a signal to commercial banks to ration credit. In an underdeveloped country, the raising of market interest rates through bank rate changes may, as in the case of Ceylon noted above, cause interest rates to remain high even after the inflationary danger has passed. Partly because of this, and partly because data on market rates of interest are not available in every country where central bank rate changes have taken place, an attempt has been made in Table 6 to assess the impact of the changes in the bank rate on the volume of credit granted by commercial banks to the private sector and to the economy as a whole.

Table 6.

Postwar Changes in Central Bank Rates and Credit Extended by Commercial Banks, Selected Countries

(In per cent)

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Source: International Financial Statistics (Washington).

Claims are as of end of month.

Claims in corresponding month of previous year = 100.

Claims in month of change = 100.

11 months later.

July 1953 = 100.

8 months later.

August 1953 = 100.

Comparisons are between December and December.

It is true that many other factors affect the flow of credit extended by commercial banks. But if changes in the central bank rate are to be effective, then an increase in the bank rate should cause commercial bank credit to contract, or at least its rate of expansion to slow down; a decrease in the bank rate should cause credit expansion, or at least reduce the rate of decline in credit. From Table 6 it can be seen that in most cases (e.g., Brazil, Costa Rica, India, Japan in 1951, and Peru) the rate of credit expansion was checked when the bank rate was raised; and that when the bank rate was lowered, the rate of credit expansion increased (e.g., El Salvador, Ceylon for total volume of credit, the Philippines, and Turkey). In Chile and Nicaragua, however, the reactions were in the opposite direction, while in Guatemala the change in the bank rate had no effect either way.

From the foregoing evidence it may tentatively be concluded that changes in central bank rates in underdeveloped countries influence both the level of interest rates in the organized money markets and the amount of credit extended by commercial banks.

Connection with World Money Markets

Very little statistical information is available about the connection between organized money markets in underdeveloped countries and world money markets. It is generally believed, however, that the countries of Asia have had close links with the money markets of the metropolitan powers which ruled them, namely, the United Kingdom, France, and the Netherlands. On the other hand, Latin American countries have had comparatively little access to the New York or Canadian money markets.

The supply of loanable funds from world money markets to an underdeveloped country is channeled in two ways: (1) The branches of foreign exchange banks operating in an underdeveloped country obtain overdrafts or loans from their head offices or from other sources in the world money markets. (2) The banks in underdeveloped countries rediscount both export and import bills of exchange in the world money markets and thereby replenish their funds for further lending.

For purposes of illustration, an attempt may be made to compare these two sources of financing for Ceylon. The first method of obtaining funds seems to be less important for Ceylon, since the commercial banks’ foreign borrowing plus the interbank deposits from foreign centers is generally much smaller than the sum of “foreign currency on hand” and “balances due from banks abroad” and also smaller than the total of export and import bills discounted (Table 7). Neither the exact amount of export and import trade financed through bills of exchange nor the amount of bills rediscounted by commercial banks in world money markets is known. Their magnitudes may, however, be estimated on certain assumptions, as indicated in Table 7. Commercial banks in Ceylon having access to world money markets would, with a view to replenishing the limited funds at their disposal, prefer to rediscount foreign bills of exchange rather than to hold them to maturity. With the funds thus obtained they can make loans and overdrafts at rates higher than the discount rate. Therefore, it is safe to assume that most if not all of the import and export bills discounted by the commercial banks in Ceylon are rediscounted in world money markets, such as London.

Table 7.

Indicators of Assistance from World Money Markets to Commercial Banks in Ceylon, 1949–541

(Cols. 1–6 in millions of rupees)

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Source: Central Bank of Ceylon, Bulletin.

Columns 1–4, data as of end of year.

Sum of foreign borrowings, foreign interbank deposits, and demand deposits of nonresidents.

Foreign currency on hand and balances due from banks abroad.

It is assumed that commercial banks hold bills for an average period of about two weeks before discounting them.

If monthly data on import bills discounted were taken instead of end of year data, the percentages for 1952, 1953, and 1954 would be 32.2, 23.3, and 26.8, respectively.

If monthly data on export bills discounted were taken instead of end of year data, the percentages for 1952,1953, and 1954 would be 72.2,82.0, and 82.3, respectively.

It has further been assumed that commercial banks hold bills for an average period of about two weeks before they are rediscounted. Considerable financial assistance is thus received by the commercial banks in Ceylon through the mechanism of rediscounting bills of exchange. About one fourth to one third of the import trade and about three fourths of the export trade of Ceylon is estimated to be financed through London or other world money markets.

In other sterling area countries, similar results could be expected. In Burma, most of the prewar rice export trade was financed by London and Bombay, which in turn was dependent on London for funds. Finance from London was obtained by rediscounting bills of exchange. After the war, when rice exports were handled by the government-owned State Agricultural Marketing Board, this method of obtaining finance declined. Burma, however, is still connected with London; in 1950–51, when there were insufficient local banking funds to finance the large volume of import trade created by the sudden relaxation of import controls, and in 1952, when there was a shortage of funds because of expansion of domestic output, the foreign exchange banks, mainly British, were able to import funds to meet the situation. During the peak season of 1952, such funds were estimated at K 50 million, or about a quarter of commercial bank loans, advances, and bills discounted outstanding.

In India, a study of the movement in short-term rates in Bombay and London also indicates the existence of a connection with London.13 During the postwar period, 1948–54, the short-term rates in Bombay were much higher than those in London during India’s busy season, which is roughly from December to May, while in the slack season the rates in Bombay were lower than the London rates. The relative positions of the annual average rates have therefore depended a great deal upon the length of the busy season and the extent to which the Bombay rates have been higher in the busy season and lower in the slack season. In spite of this, the annual averages of the short-term rates have moved together fairly closely (Chart 1). The London discount rate seems to influence the short-term rate in India. Thus, the more than seasonal rise in short-term rates in India in the latter half of 1951 and in early 1952 was preceded by a rise in the London market discount rate (Chart 2). This rise in the London market discount rate occurred several months before the Bank of England raised its discount rate on November 8,1951.

Chart 1.
Chart 1.

Interest Rates in India and the United Kingdom, Annually, 1945–551

(In per cent per annum)

Citation: IMF Staff Papers 1956, 002; 10.5089/9781451930863.024.A006

1 Based on data from Reserve Bank of India, Bulletin (Bombay); International Financial Statistics (Washington) through the September 1955 issue; and data supplied to the Fund.
Chart 2.
Chart 2.

Interest Rates in India and the United Kingdom, Monthly, 1948–551

(In per cent per annum)

Citation: IMF Staff Papers 1956, 002; 10.5089/9781451930863.024.A006

1 Based on data from Reserve Bank of India, Bulletin (Bombay); International Financial Statistics (Washington) through the September 1955 issue; and data supplied to the Fund.

In the Philippines, much of the foreign trade is financed through export and import bills. During 1949, the value of export bills passing through the commercial banks in the Philippines amounted to 51 per cent of exports, and the value of import bills to 52 per cent of imports.14 It may be assumed that most of these bills were rediscounted in New York, and therefore that the money market in Manila is closely connected with New York.

An underdeveloped country by having access to world money markets benefits from the lower rates there prevailing; but it also suffers from the disadvantage that, by its very dependence, its domestic rates of interest tend to fluctuate with changes in interest rates and lending facilities in the developed countries. However, the example of Argentina during the period 1935–39 indicates the extent to which an underdeveloped country can follow a policy of monetary “insulation.” In Argentina, the large inflow of capital during 1936 and 1937 was “sterilized” by the sale of treasury bonds and treasury bills by both the Government and the central bank, the proceeds being used to purchase foreign exchange. The amount of funds sterilized amounted to M$N 1,060 million by May 1937. When the balance of payments position became unfavorable in the latter half of 1937, the foreign exchange was released from the sterilized official holdings and the central bank repurchased some of the treasury bonds it had sold previously. By this method, the level of interest rates and the amount of domestic credit created by commercial banks were stabilized. During 1936–37, the period of capital inflow, money was cheap but interest rates fell only slightly and during 1937–38, when interest rates rose again, the increase was very moderate because of the policy of monetary “insulation” followed by the monetary authorities (Table 8).

Table 8.

Interest Rates in Argentina, December 1935–December 1938

(In per cent per annum)

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Source: League of Nations, Money and Banking, 1938–39, Vol. I, Monetary Review (Geneva, 1939), p. 62.

Ceylon’s experience during the period of high activity resulting from the Korean conflict illustrates the manner in which the central bank can, by timely action, reduce the inflationary impact of, and control the movement of, banking funds. In 1950 and 1951, the central bank—through its readiness to purchase, in any amount at any time, sterling up to six months forward at the spot rate of Is. 6d. per rupee—successfully encouraged commercial banks to retain balances overseas, especially in London. When the worst of the monetary inflation had passed, the central bank in January 1952 reversed this policy, and forward exchange rates were increased. It also fixed working sterling balances for each bank and refused to purchase sterling forward from any bank whose actual balance in sterling exceeded the working balance limit.

Seasonal and Cyclical Fluctuations

Seasonal fluctuations

The economies of most underdeveloped countries are export economies depending mainly on one or a few agricultural commodities with strong seasonal characteristics. Therefore, their demands for loanable funds fluctuate seasonally. Whether these fluctuations also produce seasonal interest rate movements depends upon the elasticity of the supply of loanable funds.

Judging by the changes in call loan rates or in the discount rates prevailing in the market, seasonal fluctuations are to be found in interest rates in Burma, India, Lebanon, Mexico, and Pakistan (Chart 3). For most other countries, data are not available, but in Ceylon there seem to be no seasonal fluctuations, presumably because of easy access to the London money market. In India and Pakistan, rates are higher in the busy season, November to April, while in Burma they are highest in the first quarter of the year. The seasonal change in interest rates is not so pronounced in Lebanon and Mexico.

Chart 3.
Chart 3.

Seasonal Fluctuations in Interest Rates, Selected Countries1

(In per cent per annum)

Citation: IMF Staff Papers 1956, 002; 10.5089/9781451930863.024.A006

1 Based on data for 1951–54 from International Financial Statistics (Washington) and Union Bank of Burma, Bulletin (Rangoon).

The experience of Burma and India indicates that seasonal fluctuations were more violent before the big depression of 1929 when the interest rates were much higher than in recent years and central banks had not yet been established (Charts 4 and 5). There was hardly any seasonal fluctuation in interest rates in India during 1948–50 because of the Reserve Bank of India’s willingness to support the government bond market, and commercial banks were selling government bonds to meet the increasing demands for funds, both seasonal and otherwise. With the reversal of this policy by the Reserve Bank of India in 1951, seasonal fluctuations in the call loan rate became apparent (Chart 4), but they are still not so pronounced as in predepression days or even as before the war.

Chart 4.
Chart 4.

Seasonal Fluctuations in Call Money Rate, India, 1926–541

(In per cent per annum)

Citation: IMF Staff Papers 1956, 002; 10.5089/9781451930863.024.A006

1 Based on data from International Financial Statistics (Washington) and Reserve Bank of India, Banking and Monetary Statistics of India (Bombay, 1954).
Chart 5.
Chart 5.

Seasonal and Cyclical Fluctuations in the Chettiar Current Rates of Interest in Burma1

(In per cent per annum)

Citation: IMF Staff Papers 1956, 002; 10.5089/9781451930863.024.A006

1 Duplicate of chart in U Tun Wai, Burma’s Currency and Credit (Calcutta, 1953), pp. 150-51. That chart is based on data from Report of the Burma Provincial Enquiry Committee, 1929–80 (Rangoon).

Prewar data on interbank call loan rates in Burma are not available, but Chettiar15 interest rate statistics throw light on the subject. The Chettiar call deposit rate or current rate was fixed for only one month at a time after account was taken of all the other indigenous rates in the market and, more important still, the rate for joint stock bank advances to the Chettiars.16 Therefore, it can be concluded that changes in Chettiar current rates were representative of changes in Rangoon market rates as a whole. The seasonal fluctuations in interest rates were very large in Burma at the end of the nineteenth century (Chart 5). With each succeeding decade, however, they became smaller, because more and more British exchange banks came to be established in Burma, thus improving Burma’s access to the London money market and the availability of seasonal funds. The Chettiar current rates during 1934–41 probably do not represent the market rates because, with the big depression in 1929, Chettiars ceased making new loans17 and their credit with the joint stock banks was not so good as previously. There was probably more seasonal fluctuation in interest rates during the 1934–41 period than is suggested by the Chettiar current rates.

Cyclical fluctuations

The available evidence suggests that interest rates in organized money markets in underdeveloped countries are subject to cyclical fluctuations similar to those in developed countries. Most of the evidence comes from experience during the great depression beginning in 1929 and during the period of high economic activity, and the subsequent decline, related to the Korean conflict. For Burma and India, indeed, fairly long series are available, the Burmese series showing movements of the Chettiar current rate of interest (explained above), and the Indian series movements of the bank rate of the Presidency Bank of Bengal, i.e., the rate charged for demand loans on such securities as government paper.18 For countries which are linked closely to world money markets, cyclical fluctuations seem to have been a common feature for a long time (Charts 5 and 6).

Chart 6.
Chart 6.

Bank Rate of the Presidency Bank of Bengal, India, 1856–19201

(Average of daily rates2 in per cent per annum)

Citation: IMF Staff Papers 1956, 002; 10.5089/9781451930863.024.A006

1 From Reserve Bank of India, Banking and Monetary Statistics of India (Bombay, 1954), p. 690.2 The rates were not changed daily but about 15 to 20 times a year.

The great depression. During the great depression, interest rates in developed countries moved in two different ways. In one group of countries, represented by Sweden, the United States, and the United Kingdom, which had depreciated their currencies, interest rates fell rapidly, with the long-term rate falling much more slowly than the short-term so that the spread between the two widened. In the other group, the countries of the gold bloc, such as France, Belgium, the Netherlands, and Switzerland, interest rates not only did not fall but they even tended to rise. These gold bloc countries, because of nondepreciation, had balance of payments deficits, lost gold to depreciating countries, and were faced with deflation. The deflationary pressure reduced income and prices, so that government revenues fell and budget deficits increased. Since most governments in this group covered their deficits by domestic borrowing, private savings were absorbed by the government and interest rates began to rise. This rise was accentuated when the central banks, following the “rules of the gold standard,” adopted a tight money policy and raised the bank rate.

In the first group, the fall in interest rates was accelerated by a virtual cessation of capital exports, a reduced volume of world trade—and consequently a smaller need for finance from their money markets—and lastly by the very fact of currency depreciation, which brought about balance of payments surpluses leading to the acquisition of foreign assets and the expansion of the money supply.19

In the underdeveloped countries, interest rates fell during the depression, but for two different sets of reasons. In one group of countries, which is illustrated by India, the decline in rates was due to the fall in rates in world money markets, such as London.20 As in the United Kingdom, the long-term rate in India fell more slowly and less than the short-term rate, and the spread between the two rates was therefore increased. During 1925–29, the absolute difference between the government bond yield and the call money rate in Calcutta was 1.6 per cent per annum; this increased to 3.1 per cent during 1932–36. In the second group of countries, mainly those of Latin America, the fall in interest rates resulted from the abandonment of the gold exchange standard21 and changes in policy toward such protective devices as high interest rates and restrictions on bank credit creation. The fall in interest rates is shown in the substantial reduction in discount rates of central banks. In Chile, the discount rate was reduced from 9 per cent to 4½ per cent between June 1931 and August 1932, in Colombia from 7 per cent at the end of 1931 to 4 per cent at the end of 1933, and in Ecuador from 10 per cent in 1931 to 4 per cent in 1932. In other countries, such as Brazil, the price of government bonds rose and the yield fell significantly during 1932 and 1933.

The deflationary effect of the depression was rather short-lived in Japan, because interest rates were dominated by the policy of credit expansion caused by government deficit financing. There was a flight of capital when the United Kingdom abandoned the gold standard, and the Bank of Japan’s reserves fell by 400 million yen, or 50 per cent. This drain, however, was halted when Japan abandoned the gold standard in December 1931, and within a year the gold value of the yen had fallen by 60 per cent. Deficit financing was undertaken by the Government on account of the war in China and also for domestic reasons. The total volume of government bonds outstanding increased from 4,500 million yen in October 1931 to 8,200 million yen in October 1935, most of which were held by commercial banks; the Bank of Japan bought these bonds in the first instance but resold them to the commercial banks.

Partly as an antideflationary measure and partly to enable the Government to borrow money cheaply, the Bank of Japan reduced its discount rate by stages, from 5.48 per cent in 1929 to 4.38 per cent in August 1932, and still further by stages, to 3.29 per cent in April 1934. The average yield on government bonds also fell, from 6.43 per cent in 1929 to about 4 per cent in 1936. The discount rate charged by commercial banks on 60-day commercial paper, however, fell only slightly, from 4.85 per cent in 1929 to a little over 4 per cent in 1937. The reason for this small decline in commercial bank lending rates to the private sector was that the banks had utilized their available excess funds to purchase government bonds.22 At times, money conditions were relatively tight for the private sector; the call money rate of banks in Tokyo, though declining from 3.6 per cent in 1930 to 2.56 per cent in 1934, rose gradually to 2.85 per cent by 1936.

Interest rates in China fell in the early years of the depression, the interbank call loan rate in Shanghai, for example, moving from 5.04 per cent in 1929 to 1.80 per cent in 1933. Between 1933 and 1935, however, the rise in the price of silver, on which the currency system of China was based, placed the country under deflationary pressure and interest rates began to rise; the interbank call loan rate in Shanghai advanced to over 5 per cent in 1935. The deflationary pressure and the outflow of silver was halted by the demonetization of silver and the depreciation of the currency in November 1935.

Activity resulting from Korean conflict. A valuable case study can be based on the experience of a number of countries in Asia and the Far East during and after the Korean conflict. During the period of increased activity, the demand for loanable funds expanded because of the higher level of economic activity resulting from the larger volume of exports. This increased demand was met by an expansion of commercial bank credit, brought about either by utilizing excess cash balances (Burma, Indonesia, and the Philippines), by sale of government securities (especially India), or by the import of banking funds (Burma and Pakistan). The expansion of credit, however, was not sufficient to meet the larger need for funds, and, therefore, interest rates rose in the organized money markets in many of these countries. The rise occurred at all levels, affecting the government bond yield, the call money rate between banks, and the lending rates of commercial banks.23 In Burma, the call money rate rose from 1 per cent to 1½ per cent in the fourth quarter of 1951, while commercial banks raised their minimum rates by about ½ per cent for most categories of loans in April and December 1951. In Taiwan, commercial banks increased their lending rates from 3.3 per cent to 4.5 per cent per month in April 1951. In India, the minimum lending rates of exchange banks on secured advances was raised from 1½ per cent per annum in December 1949 to 2½ per cent in December 1950 and to 3½ per cent in September 1951; the maximum lending rates of the major Indian scheduled banks on secured advances was raised from 7½ per cent per annum in September 1950 to 9 per cent in December 1950. With the raising of the bank rate in November 1951, from 3 per cent to 3½ per cent, Indian commercial bank lending rates also rose by ½ per cent. In Japan, commercial bank lending rates rose slightly in September 1951, and sharply a month later after the Bank of Japan raised its discount rate from 5.11 per cent to 5.84 per cent per annum on October 1, 1951. In Malaya, the members of the Exchange Banks’ Association in December 1951, raised its rates on loans against most types of collateral by ½ per cent. In the Philippines, the weighted average rate on loans, discounts, and overdrafts of commercial banks rose from 5.92 per cent in the second quarter of 1950 to 6.19 per cent in the first quarter of 1951.

After activity had fallen sharply, interest rates fell again in some countries (Burma, Malaya, and the Philippines), but in others, such as India and Japan, where the dear money policy continued to be used as an anti-inflationary measure, interest rates, generally speaking, remained high or continued to rise. In India, the call money rate rose from 1.0 per cent in 1951 to 2.46 per cent in 1954, and the government bond yield from 3.42 per cent to 3.99 per cent during the same period. In Japan, although the call money rate rose to 8.06 per cent in 1952, it leveled off around 8 per cent, and in 1954 it averaged 7.85 per cent, against 7.12 per cent in 1951.

Long-Term Trend

The general expectation is that the long-term trend of interest rates in underdeveloped countries, at least in the organized markets, should be downward.24 Generally speaking, in these countries the banking systems and with them the money markets are likely to develop at a faster rate than the other sectors of the economy. The long-term supply of loanable funds therefore tends to increase more rapidly than the long-term demand. Where, for one reason or another, the growth of banking has been restricted or the banking system subjected by law to many restrictions, including controls on interest rates and of the purposes for which loans may be granted (as in a number of countries in Latin America), the long-term trend of interest rates may, however, not be downward.

In some countries in Asia, a comparison between interest rates before and after the great depression (1929–34) and the rates prevailing today show in fact a definite downward trend. This is true especially in Burma, Ceylon, and India. In Burma the level of the Chettiar current rate in the thirties was lower than in the twenties and also lower than the rates prevailing about the turn of the century (Chart 5). In India, judging by the bank rate of the Presidency Bank of Bengal, there was up to 1920 no apparent change in the long-term trend of interest rates. The effect of the great depression and the emergence of cheap money policy during and immediately after the war have caused interest rates at present to be lower than in the past, in spite of the reversal of the cheap money policy since 1951. Thus, during the period 1928–34 the call money rate in Bombay averaged 3.47 per cent per annum and the government bond yield was 5.09 per cent per annum. Subsequently, both rates declined. the 1948–54 averages being 1.36 per cent and 3.46 per cent per annum, respectively.

Long-term data for Latin America are not available. But judging from the generally inflationary conditions prevailing there and also from limited information on Brazil and Chile, it seems that the long-term trend of interest rates has not been downward. In Chile, the weighted average, rate of interest on loans granted by commercial banks was 8.67 per cent during 1929–34. The average was lower during the depression, but in the war and postwar years it has again been high. During 1949–54 it averaged as much as 11.67 per cent. In Brazil, the government bond yield on 5 per cent bonds and obligations averaged 6.33 per cent during 1929–34 but was 7.05 per cent during 1949–53. In Argentina, however, government bond yields in recent years have been much lower than they were two or three decades ago. During 1929–34 they averaged 6.44 per cent, while in 1949–53 they were only 3.26 per cent.

Apart from any movement in the interest rate on loans against a specific type of collateral, the weighted average rate will tend to fall as the economy develops and business units hold larger quantities of financial assets, such as government bonds, which are more attractive to bankers as collateral. The loans against such collateral will tend to grow in importance at the expense of loans granted against less attractive collateral, such as land and houses. Since the rate on the former type of collateral is lower than on the latter type, the weighted average rate will fall.

The average level of interest rates in the organized money markets of underdeveloped countries can thus be lowered by encouraging the development of the banking system. Closer connections between these markets and world money markets, such as London, would also help in reducing interest rates. Statutory control of interest rates, though necessary at times, usually does not lead to a lowering of the effective rate; all it ensures is that the nominal rate is within the law as ways and means are found to circumvent the law through higher minimum deposit requirements, better types of collateral, etc. Where banking development is slow, governments may consider lending money at low rates of interest in competition with private lending and thus attempt to bring down interest rates. Government lending is already of some significance in some underdeveloped countries, such as Burma, Japan, and Pakistan in Asia, and Mexico in Latin America. The solution of the problem of high interest rates, however, is not simple. Where government lending is financed by the printing press and not from budgetary surpluses, there is a great likelihood of inflation and of a cyclical rise of interest rates. However, if government lending is financed by tax receipts and borrowing from the public (i.e., genuine savings), and if the quantity of such lending is significant, then in the long run interest rates must fall.

Conclusion

The interest rate structure and lending practices in the organized money markets of the underdeveloped countries conform fairly closely to those prevailing in developed countries. This is to be expected because the organized money markets in underdeveloped countries are dominated by commercial banks which have been modeled upon the commercial banking practices of developed countries.

The control exercised by the central banks in the underdeveloped countries over the money markets is rather loose, especially when the instrument of control is the “bank rate.” The “bank rate,” however, is not as ineffective as might be expected considering the small amount of central bank lending to commercial banks. A change in “bank rate” is indicative of the policy which the central bank wishes to follow; and because of its additional powers of selective credit control, it has to a certain extent succeeded in determining the cost and availability of commercial bank credit in the organized money market.

The sterling area countries and others linked financially with the money markets of more developed countries have had lower rates of interest in their organized money markets than the underdeveloped countries of Latin America and the Middle East. With access to the world financial markets, local commercial banks have borrowed cheaply by rediscounting foreign trade bills of exchange and thus have been able to charge lower rates of interest on their advances and overdrafts.

The long-term trend of interest rates in underdeveloped countries is downward, though in some countries—especially in Latin America where there has been inflation for many decades—interest rates have not fallen. It can be expected that, with further development of banking and economic growth, the rate of interest in the organized money markets will fall. The establishment of central banks in many countries, especially in Asia, after the war, should also in the long run reduce the cost of credit and make it more readily available.

Seasonal fluctuations in interest rates in underdeveloped countries have their origin in the seasonality in the marketing of the major export crops. With the development of central banks and the abandonment of rigid exchange standards which had tied the volume of currency to the amount of foreign exchange available, the amplitude of fluctuations in interest rates has generally been reduced. Cyclical fluctuations in rates have been found in a number of underdeveloped countries, and probably also occur elsewhere, although the relevant statistical data are defective. The amplitude of such fluctuations may be expected to be reduced as each country is able to follow an “insulated” monetary policy facilitated by the development of strong central banks.

*

Mr. U Tun Wai, Assistant Chief of the Finance Division, was educated at the University of Rangoon, the University of Bombay, and the Yale Graduate School. Formerly Lecturer in Economics at the University of Rangoon and economist in the secretariat of the Economic Commission for Asia and the Far East, he is the author of Burma’s Currency and Credit.

1

See Economic Commission for Asia and the Far East, Economic Survey of Asia and the Far East, 1950 (New York, 1951), pp. 468–69. The percentages of total short-term loanable funds supplied by commercial banks in 1950 are estimated to be 72 per cent in Burma, 78 per cent in India, 73 per cent in Japan, 94 per cent in Malaya (1949), 79 per cent in Pakistan, 95 per cent in the Philippines, and 91 per cent in Thailand (1947).

2

The case of Malaya is deceptive as it is really only Singapore that has a fairly large money market. In the Federation of Malaya, money markets are very small.

3

Strictly speaking, Japan is not an underdeveloped country. But neither is it as developed as the United Kingdom, the United States, or Western Europe (judging by per capita income). Japan is included in this study partly because of its recent growth and partly because many of its problems are similar to those of the underdeveloped countries of Asia and Latin America.

4

In most countries there are no discount houses supplying funds at call to commercial banks.

5

For example, in India the Imperial Bank of India’s call loan rate since 1952–53 has been 3¾ per cent on loans below 500,000 rupees and 3½ per cent on loans of 500,000 rupees or more.

6

There are, however, important exceptions. The rates in Bombay are only a shade higher than in London, and at times certain rates have even been lower. From 1948 through 1953, the government bond yield in India was lower than in the United Kingdom. The reason was that in India the open market operations of the Reserve Bank of India kept the government bond yield artificially low while in the United Kingdom it was allowed to rise.

7

Especially for a comparison between interest rates in underdeveloped countries, government bond yields are not the most suitable indicator, because different monetary policies and the support of the government bond markets by the central banks may influence government bond yields without necessarily influencing other rates. Furthermore, bond yields are also influenced by the financial position of governments in underdeveloped countries. However, the general level of bond yields, when compared over a long period, can be informative.

8

In 1954, the central bank rates in Asia ranged between 1.5 per cent (the Philippines) and 7 per cent (Thailand); in Latin America, they ranged between 2 per cent (Honduras and Venezuela) and 10 per cent (Ecuador). For data by countries, see Table 3.

9

The amount of government securities held by commercial banks before the war was negligible; but with the postwar growth of bank holdings (central and commercial) of government securities, this has become an important weapon of control in a number of underdeveloped countries, such as Ceylon and India.

10

The rates offered by the larger commercial banks on fixed deposits was raised by about ¼ per cent in August 1952, by another ¼ per cent in April 1953, and again by ½ per cent in June 1953.

11

Even in October 1953, when central bank loans to commercial banks were at the maximum of Rs 4.7 million, they were equivalent to only 7 per cent of the balances kept by commercial banks with the central bank, and 2.3 per cent of commercial banks’ loans and investments in the private sector.

12

Even without the increase in the central bank rate, the market rate would have risen, but probably by a smaller amount.

13

The long-term interest rates as indicated by government bond yields in the two centers are not so closely related as short-term rates because each market has its own central bank policy with regard to the price at which it will support government bonds to enable governments to borrow cheaply.

14

The percentages were even higher for the earlier postwar years. In 1947, the export percentage was 82 and the import percentage 71. (Central Bank of the Philippines, Annual Report, 1949 (Manila, 1950).) Unfortunately data are not available for prewar years or for years later than 1949.

15

Chettiars came from Madras to Burma (as to other Southeast Asian countries) to serve as bankers, organized on eastern lines, mainly for financing agriculture.

16

See U Tun Wai, Burma’s Currency and Credit (Calcutta, 1953), p. 47.

17

The depression had destroyed the ability of the agriculturists to repay loans to the Chettiars. Insofar as land had been the chief collateral and mortgages were foreclosed, the Chettiars became owners of land.

18

Until the establishment of the Imperial Bank of India in 1921 there were three Presidency Banks—the Bank of Bengal established in 1806, the Bank of Bombay in 1840, and the Bank of Madras in 1843. Although these banks had the right of note issue until 1862, were partly owned by the Government until 1876, and acted as bankers to the Government, they were basically commercial banks. They did, however, also play an important role in the development and regulation of the commercial banking system until 1921 when they were amalgamated to form the Imperial Bank of India.

19

See League of Nations, Commercial Banks, 1929–34 (Geneva, 1935), pp. l–liv for further details.

20

Another factor in India was the large scale dishoarding of gold by the peasant population and the resulting export of gold, which increased the money supply and the cash liquidity of the banking system.

21

The first group of countries also depreciated their currencies with reference to gold, but most of their important trading partners also depreciated their currencies. In the second group of countries, depreciation was generally much more than that of their main trading partners; by the end of 1934 the currencies of Brazil and Bolivia had depreciated by about 60 per cent, of Ecuador by 75 per cent, of Mexico by 67 per cent, and of Argentina by 65 per cent, while the United Kingdom and the United States depreciated their currencies by only 40 per cent.

22

Until 1936, the average yield on government bonds was higher than the commercial bank discount rate on 60-day commercial paper.

23

See Economic Commission for Asia and the Far East, Economic Survey of Asia and the Far East, 1951 (New York, 1952), pp. 191–97.

24

This may be delayed if underdeveloped countries attempt to implement overambitious development programs and thus create a long inflationary period. The monetary authorities may then have to maintain or raise interest rates to control inflation.