NEO-CLASSICAL central banking theory is based on the assumption that there are, essentially, two instruments which a central bank may use to implement monetary policy. The first is control over the central bank’s own assets, primarily its security holdings or rediscounts. The second is control of the cash reserve ratios of the deposit money banks. Recently, a number of countries have resorted to more direct instruments of control. Publicly announced “ceilings” have become parts of monetary policy, supplementing discount and reserve policies. However, these new instruments have been developed pragmatically, to meet the institutional requirements of particular countries. As yet, there has been relatively little discussion of their appropriate place in the armory of central banking policy, or of the problems associated with their use. A recent modern text on monetary economics was able to dismiss all direct central banking controls with the statement that “there is relatively little that can be said about them in general terms.”1 By now, they are a sufficiently widespread aspect of central bank control to deserve discussion.


NEO-CLASSICAL central banking theory is based on the assumption that there are, essentially, two instruments which a central bank may use to implement monetary policy. The first is control over the central bank’s own assets, primarily its security holdings or rediscounts. The second is control of the cash reserve ratios of the deposit money banks. Recently, a number of countries have resorted to more direct instruments of control. Publicly announced “ceilings” have become parts of monetary policy, supplementing discount and reserve policies. However, these new instruments have been developed pragmatically, to meet the institutional requirements of particular countries. As yet, there has been relatively little discussion of their appropriate place in the armory of central banking policy, or of the problems associated with their use. A recent modern text on monetary economics was able to dismiss all direct central banking controls with the statement that “there is relatively little that can be said about them in general terms.”1 By now, they are a sufficiently widespread aspect of central bank control to deserve discussion.

NEO-CLASSICAL central banking theory is based on the assumption that there are, essentially, two instruments which a central bank may use to implement monetary policy. The first is control over the central bank’s own assets, primarily its security holdings or rediscounts. The second is control of the cash reserve ratios of the deposit money banks. Recently, a number of countries have resorted to more direct instruments of control. Publicly announced “ceilings” have become parts of monetary policy, supplementing discount and reserve policies. However, these new instruments have been developed pragmatically, to meet the institutional requirements of particular countries. As yet, there has been relatively little discussion of their appropriate place in the armory of central banking policy, or of the problems associated with their use. A recent modern text on monetary economics was able to dismiss all direct central banking controls with the statement that “there is relatively little that can be said about them in general terms.”1 By now, they are a sufficiently widespread aspect of central bank control to deserve discussion.

British writers, on the whole, have envisaged the central bank as implementing monetary policy through its lending operations. Thus, Hawtrey maintained that “the central bank, in virtue of its function as the lender of last resort, is the source of currency. It regulates the supply of currency by regulating its lending. By restricting its lending it causes the other banks to restrict their lending, and so it compresses the consumers’ income and outlay. By relaxing its lending it causes the other banks to lend more liberally, and so it enlarges the consumers’ income and outlay.”2 In this view, the central bank’s lending policy was largely implemented, not by quantitative controls over total loans, but by the price of such loans. The central instrument used for the implementation of policy was the bank’s discount rate. The Macmillan Committee crystallized this opinion in the statement that “there can be no doubt, in our judgment, that ‘bank rate policy’ is an absolute necessity for the sound management of a monetary system, and that it is a most delicate and beautiful instrument for this purpose.”3 This view of the proper role for a central bank was the product of a peculiar environment. The central bank was seen as making its discount rate effective through open market operations. From the early nineteenth century, the Bank of England had followed a policy of relating the value of its security holdings to its policy objectives. At first it followed rather inflexible “rules,” but as the century progressed its open market policy became more discriminating. In part, the increasing discretion exercised by the Bank was made possible by the development of the London capital market. Effective open market operations can be carried out only in well-developed domestic capital markets.4 In countries where the capital markets have not reached maturity, the central bank must try to influence the various elements of the community’s liquidity by more direct actions. It should be emphasized that well-developed capital markets, in the sense assumed above, have evolved in only a few countries. Even in countries as advanced as France, Germany, and Japan, the central banks have found it convenient to use ceilings on rediscounts for individual banks to make monetary policy more effective.5

U.S. writers have envisaged the typical central bank as also using variable minimum reserve requirements as an instrument of monetary control.6 The use of this instrument is predicated on the view that “a given amount of member bank reserves … can be made to do more or less bank credit and monetary work according to the level of reserve percentages.”7 The usefulness of the variable reserve instrument is dependent on “a given amount of member bank reserves” doing “more or less bank credit and monetary work”; thus, it is presupposed that a change in available reserves will lead to commensurate changes in bank credit and money. This presupposition will hold only in countries where the “free” reserve ratio, i.e., the ratio of reserves in excess of the minimum requirement, is stable. In several countries, particularly the less developed ones, this ratio is fairly unstable.8 It may even be argued that a monetary environment in which minimum reserve requirements may be changed is likely to be one where the actual ratio is more unstable than if the requirements are not subject to change. Hence, if the reserve ratio is likely to be unstable, changes in minimum reserve requirements are likely to be a less than fully satisfactory instrument for monetary control. That is, in many of the less developed countries, it may be desirable to supplement minimum reserve requirements with more direct instruments of control.

Furthermore, most discussions of monetary controls are based on the implicit assumption that monetary policy may be implemented in an essentially stable environment. Open market operations and changes in reserve requirements are usually envisaged as instruments that can influence the basic tendencies which the authorities wish to stimulate, but which cannot reverse extreme pressure on the economy. The Radcliffe Committee expressed the traditional view when it stated that “when all has been said on the possibility of monetary action and of its likely efficacy, our conclusion is that monetary measures cannot alone be relied upon to keep in nice balance an economy subject to major strains from both without and within.”9 Hence, when an economy is threatened with serious inflationary pressures—and “even the threat of such a development is to be regarded as an ‘emergency’,”10—“a combination of controls of capital issues, bank advances and consumer credit [is] most likely to serve this purpose” (of stemming inflationary pressures).11 That is, when an economy is faced with a danger of severe inflation, some system of monetary ceilings may be necessary to maintain or restore monetary stability. In the discussion which follows, it will be presumed that monetary ceilings are usually adopted as instruments to stem inflation; these ceilings will be judged primarily as instruments used as part of an anti-inflation policy.

One of the controls most commonly exercised by central banks over deposit-money banks is a system of ceilings over certain monetary totals. In some cases, these ceilings are direct limitations on certain assets of the deposit-money banks. More frequently, they are predetermined limits on assets of the central banks themselves.12 Frequently, the assets so limited are the central bank’s loans to, or rediscounts for, individual deposit-money banks. In many countries, the ceilings accepted by the central bank are part of a general system of limits accepted by the government as parts of a general policy.13

Aggregates Subject to Ceilings14


Individual central banks have introduced a variety of specific ceilings. In some countries, the choice of aggregates subjected to ceilings reflects national institutional convenience; in others, the choice has been essentially accidental. The absence of any real discussion of this problem has made it necessary for national authorities to move in an essentially pragmatic way. Any general discussion of the subject must recognize that individual choices may well be compromises between theoretically desirable targets and administratively acceptable instruments. Thus, in general, it might be suggested that a ceiling on money is the best theoretical target. However, it will be argued here that, in terms of instruments, the most generally useful ceilings in a community where direct limitations are imposed on government expenditure are those which limit central bank credit to the rest of the monetary system.

Many other specific aggregates might be considered as subject to administrative limitations. The problems associated with ceilings may be considered in a discussion of the following aggregates, which might be considered as subject to ceilings.

  • (1) Money

    • a. Total

    • b. Currency in circulation

    • c. Deposit-money

  • (2) Assets of the deposit-money banks

    • a. Total assets

    • b. Claims on specific sectors

    • c. Specific types of assets

  • (3) Central bank assets

    • a. Total assets

    • b. Domestic assets

    • c. Rediscounts for deposit-money banks

  • (4) Government finance

    • a. The deficit

    • b. Total expenditure



If it be accepted (1) that the aim of monetary policy is to stabilize15 money expenditure, and (2) that if the total of money is stabilized the level of money expenditures is likely to be stabilized, it would follow that a limit on money itself would appear to be the most effective of the financial ceilings which might be adopted. However, there appear to be four aspects of such a general instrument which are likely to make it an ineffective tool for monetary policy. These aspects are apt to be particularly significant in the circumstances which are likely to make the adoption of rigid ceilings an appropriate part of monetary policy. Hence, only a few countries have actually established specific ceilings on money as official fixed parameters for economic policy.16

In the first place, if a ceiling is to be imposed on money, “money” must be rather arbitrarily defined. If dramatic changes take place in the community’s desires to hold financial assets, the significance of any specifically defined money composite may likewise change. Thus there may be shifts—which are of little economic significance—between demand deposits and time deposits, or between both of these assets and other financial assets.

Secondly, and of more economic significance, a ceiling on money is probably too inflexible. In the less developed countries, inflation is likely to lead to a flight away from money and into assets not denominated in fixed units of domestic currency. Foreign exchange is likely to be the asset providing the greatest liquidity protection, comparable to money in a stable environment. Hence, inflation will be marked by a decline in the country’s international reserves. If steps are taken to curb inflation, members of the community may be expected to wish to increase their holdings of domestic money. This increase can be achieved by repatriating their accumulations of foreign exchange. Hence, the country’s reserves of foreign exchange may be expected to rise.17 Under such circumstances, the inflow of reserves would have to be offset if the money ceiling were to be respected. If international reserves come to form a large part of the assets of the monetary system, this inflow could involve drastic restrictions of domestic credit at a time when the community was willing to hold more money. A stabilization program must be restrictive if it is to be effective, but there are limits to restrictive policies beyond which they cease to be stabilizing and become depressive.

In addition to these rather specific problems, a general argument may be advanced against the adoption of over-all ceilings on money. One of the problems to be faced, with regard to any administrative arrangement, is the facility with which it may be enforced. The more specific and detailed a target, the easier is its achievement; the more general a target, the more difficult its achievement. An over-all ceiling on money is, in terms of the targets discussed here, a very broad objective. Hence, it is likely to be more difficult to achieve than some of the more detailed targets, which will be discussed subsequently. Alternatively, it may be suggested that stabilization of the total of money approximates to a target, i.e., one of the “variables for which we care,” meaning “with respect to which we want to achieve particular values.” The achievement of this stabilization target may call for ceiling instruments, i.e., variables “for which we do not care,” in the sense that they “are those variables which we manipulate in order to achieve our targets.”18

Finally, there is a purely administrative question. A general ceiling on money might well require administrative rulings limiting the total liabilities of various monetary institutions. That is, under easily conceivable conditions, banks might be required to refuse deposits tendered to them. This situation would not be conducive to monetary stability.


One of the earliest attempts to apply monetary ceilings was the imposition of a ceiling on the Bank of England’s fiduciary issue, inherent in the Bank Act of 1844. In modern times, this aspect of British banking legislation has been marked more by its periodic revision than by its stability. In principle, a ceiling on currency in circulation is subject to the same criticisms that apply to ceilings on money. In addition, shifts between currency and demand deposits alter the influence of a currency ceiling, in a manner similar to the alterations of the effects of a money ceiling created by a shift between money and time deposits.


It is possible to contemplate ceilings on current deposits with deposit-money banks. Such ceilings would be subject to the above criticisms of money and currency ceilings. In fact, there is no record of such a ceiling being imposed.


In brief, while at first sight a ceiling on money itself might appear to be, theoretically, the most desirable of all ceilings, its generality makes it less desirable than more detailed ceilings. Similar comments apply to ceilings on the components of money. Hence, attention should be directed toward more specific ceilings.

Assets of the deposit-money banks


Because an expansion of the banking system’s assets causes increases in the system’s liabilities, and hence in the financial assets of the rest of the community, a limit on the total assets of the banking system, or on some of them, will limit the liquidity of the rest of the economy. Under traditional central banking policy, such a limitation is imposed by requiring the banks to hold reserves in the form of claims on the central bank19 equal to a certain proportion of their liabilities, and by taking action to restrict the amount of central bank liabilities available as reserve money for the deposit-money banks. However, as indicated above, this instrument of control may not be adequate for the effective implementation of monetary policy. Therefore, in a number of countries an attempt has been made to make monetary policy effective through more direct intervention in the operations of the banking system, in the form of specific limitations on the assets which the deposit-money banks are allowed to acquire.

Aggregates subject to ceilings

Total assets. Ceilings on total assets of the deposit-money banks are conceivable. However, such limits might prove to be very severe. A limit on all the assets of these banks would involve a decline in the credit extended by banks, concurrent with any increase in the assets of the central bank that was not offset by a rise in currency in circulation. Any increase in central bank assets which led to a flow of reserve money to the deposit-money banks would have to be offset to the extent of the flow by a decrease in other assets of the deposit-money banks. Consequently, this instrument has not yet figured in any stabilization program. In a few countries,20 ceilings have been imposed on bank assets, other than cash reserves. Such ceilings have been conceived as limits on the credit created by the noncentral bank sectors of the monetary system.

Claims on specific sectors. Ceilings on specific bank assets may be applied either to claims on certain sectors or to certain types of asset. These classifications may overlap. Thus, a ceiling on credit to the private sector may be broadly similar to a ceiling on loans.

In a number of countries, ceilings have been applied to the claims which the deposit-money banks may hold against specific sectors of the economy. In most of these countries, the ceilings have been applied to claims against the private sector (i.e., businesses and individuals).21 The deposit-money banks are usually the only source of credit extended by the monetary system to the private sector. Hence these ceilings are, in effect, ceilings on credit granted by the monetary system to the private sector. Arguments in favor of this sectoral ceiling are largely dependent on the inability of the authorities to implement other types of monetary policy. If the central authorities have large deficits financed by recourse to the central bank, or if net foreign receipts are substantial, a ceiling on claims of deposit-money banks against the private sector will prevent the expansion of credit to the private sector (and hence of money and other liabilities of the monetary system) which would have resulted from the increase in the cash reserves of the deposit-money banks.22 In principle, the same effect could be attained by a reduction of central bank assets, other than foreign assets, or by an increase in reserve requirements. If, for any reason, the central bank is unable to reduce its own assets, a ceiling on the claims of the deposit-money banks may be one of the few instruments available to the authorities in their attempts to bring some element of monetary stability into an essentially unstable situation. In most instances, such a ceiling must be regarded as a palliative which eases the symptoms of, but does not cure, a fundamentally unsound monetary condition.23

Types of assets. Ceilings on types of deposit-money bank assets usually apply to loans, or types of loans.24 These ceilings usually have the same effect as ceilings on claims of deposit-money banks on the private sector. On occasion, they are designed to exempt certain parts of private sector borrowing from the restriction imposed on the private sector generally, or to apply the restriction only to particular classes of business or individuals. In these cases, they have the same effect as a mixture of general ceilings on credit to the private sector discussed above, and limits on specific types of credit, discussed below.

Specific loan categories. It has frequently been thought that an inflationary expansion of credit is characterized by an excessive expansion of lending to particular borrowers or of lending for particular purposes. For this reason, ceilings have sometimes been imposed on specific categories of loans.25 Insofar as these ceilings effectively curtail the use of credit for purposes which are considered undesirable, they may relieve some of the evils of inflation. However, insofar as they are not associated with other restrictions on monetary expansion, they may be expected to have little effect on the total volume of credit, and hence on the general pressure toward inflation. The basic reason for this ineffectiveness is that even in countries that are not highly developed, “there is an underlying unity in the market for loanable funds.”26 If one type of lending is cut back, lenders will turn to other borrowers. If one source of borrowing is restricted, borrowers will obtain the funds they desire from other sources, or will change the stated purpose of their borrowing. The conclusion of the Federal Reserve Board, after its experience with limits on particular types of bank lending, is illuminating in this connection:

“… The general history of other attempts to restrain inflationary credit expansion through regulation of the amount of funds that may be loaned on particular transactions or through imposition of ceilings on particular categories of credit, either in this country or abroad, has not been such as to engender great faith in their efficacy. Reasons why these methods have usually failed in effectiveness include, among others, the fluidity of the credit market, availability of alternative sources of funds, the ability to substitute collateral, and the difficulty—amounting in many credit areas almost to impossibility—of drafting and administering regulations which will accomplish their anti-inflationary objective. …”27

In countries where the members of the entrepreneurial sector are traditionally engaged in a variety of activities, these arguments will hold with greater force than in countries where there is more specialization of activity by individual entrepreneurs.

There is one case where a selective ceiling on bank loans may approximate to a general ceiling. The banks in some countries may make a predominant part of their loans for one particular purpose or to one specialized group of borrowers. In such cases, a limit on this specific type of borrowing may greatly inhibit total lending by the banks.


Experience with ceilings on the assets of deposit-money banks suggests that, while they may have a restraining influence at a time of incipient inflation, they are not a completely satisfactory instrument of monetary policy. It should be admitted that, in practice, a ceiling on bank assets may be easier to impose, and to explain to the public, than a more general, and perhaps theoretically more desirable, limitation. A ceiling on assets of the banks may be more easily understood, and therefore more readily accepted, by prospective bank borrowers. However, it does not follow that such a ceiling is the most useful type of instrument. Other ceilings may be equally comprehensible, and also superior.

One very important reservation must be made regarding the desirability of imposing ceilings on assets of deposit-money banks. One of the attributes of traditional monetary policy, and of its implementation through central bank policy, is its generality. To maintain that monetary policy has general effects is not to deny that it may have directional effects.28 However, one of the aspects of the nondiscriminatory pressures which central banks normally exert is that such pressures impinge equally on all economic units in similar liquidity positions. Given the over-all restraints on economic activities deriving from monetary policy, each economic unit is free to adjust its own position. In particular, each unit is free to compete with every other unit in a similar position. Generalized monetary policy does not impede inter-unit competition and adjustments. Any ceilings on assets of deposit-money banks are likely to depart from this generality. It is almost inevitable that ceilings must be imposed on the assets of individual institutions. Any adjustments of these ceilings will almost certainly be subject to institutional rigidities. In all likelihood, a system of ceilings is more likely to freeze the status quo than to encourage competitive adjustment. It follows that, irrespective of other arguments relating to specific ceilings, any ceiling on deposit-money bank assets is likely to encourage rigidity rather than flexibility in the economy. This rigidity may be particularly serious if it develops at a time when general economic policy is being altered and the encouragement of certain structural adaptations in the economy is desired.

Central bank assets


If it be accepted that the rigidity created by a set of direct ceilings on assets of deposit-money banks weakens the usefulness of these ceilings as instruments of monetary policy, it follows that the instrument of monetary policy should be of a more indirect character. However, if it be granted that in many countries central banks cannot implement policies effectively by the neo-classical methods of altering discount rates and engaging in open market operations, or by changing reserve requirements, then central banks must adopt techniques which will effectively create the desired reserve bases. One of these techniques is the setting of targets for certain of their own assets or liabilities. In cases where over-all stabilization policies are adopted, these targets may become ceilings beyond which the central bank will not expand. In this way, monetary policy may be fitted into over-all government policy.

It has been argued that “the essence of central banking is discretionary control of the monetary system.”29 Yet it can also be maintained that this discretionary control is limited by the requirement that the central bank’s monetary policy must be consistent with other aspects of governmental economic policy. This point was made most colorfully by Governor Norman: “I look upon the Bank as having the unique right to offer advice and to press such advice even to the point of nagging; but always of course subject to the supreme authority of the government.”30 It follows from these arguments that, if monetary policy is to be implemented through ceilings or similar actions, limits must also be imposed on government financing requirements.

The constitutions of a number of central banks impose limitations on their assets.31 Several constitutions limit the total of claims on the government which may be held by the central bank.32 Most of the stabilization programs adopted recently place limits on the financing of the deposit-money banks by the central bank. Sometimes, the ceiling relates to rediscounts only. In other cases, it is recognized that the central bank may make funds available to the deposit-money banks in forms other than rediscounts (e.g., by buying securities from the private sectors of the economy). Consequently, certain of the ceilings are broad limitations on the loans and investments of the central bank. To the extent that the government does not increase its borrowing from the central bank, a ceiling on rediscounts, or on rediscounts plus other assets acquired from the private sector, is equivalent to a ceiling on the sum of the central bank’s domestic and foreign assets. For this reason, it is, in many respects, subject to the consideration discussed above.

Role of foreign assets

General. The targets of central bank policy are frequently part of a policy that is intended by the authorities to introduce an element of stability into an otherwise unstable climate. Certain specific problems may arise, as a result of the change in the financial climate accompanying the stabilization. These special problems warrant consideration.

The period of inflation preceding a monetary stabilization is typically marked by a decline in foreign reserves. One of the usual aims of a stabilization program is to rebuild the monetary system’s reserves. If the program is successful, as many have been,33 and if the central bank is to fulfill its traditional obligation of buying all the foreign exchange offered to it, a ceiling on total central bank assets would require that there be a decrease in the bank’s domestic assets concurrent with the rise in its foreign assets. Under normal conditions, the effects on the money supply of wide swings in foreign reserves are frequently offset by the monetary authorities without excessive strains on the economy.34 Any monetary expansion that is consequent on an increase in the central bank’s foreign assets may lead to an offsetting drain on these same assets. Therefore, insofar as possible, the monetary policy which is formulated should aim at absorbing the increase in reserves without any increase in the total assets of the monetary system. That is, if possible, the increase in foreign exchange reserves, contemporaneous with the stabilization program, should be offset by decreases in the domestic assets of the central bank. However, if the increase in foreign reserves is large, this offsetting may involve restrictions on credit to the deposit-money banks so drastic as to impose severe strains on the banking institutions.35 Hence, a ceiling which is intended, in principle, to be a ceiling on total central bank assets often takes the practical form of a ceiling on assets other than foreign assets, that is, a ceiling which is intended to be general, appears as a ceiling on domestic assets only. This conversion of a general ceiling into a partial ceiling may be most appropriate where the prestabilization period has been characterized by a flight, on the part of residents, from domestic currency into foreign currency. The ensuing reflux of funds, which may be expected with stabilization, should lead to an increase in private holdings of domestic financial assets. The expansion of these liabilities of the monetary system will not create inflationary pressures on the economy.

In practice, the limitation of a ceiling on central bank assets to one on domestic assets may introduce a desirable element of flexibility into a program which is dominated by the rigidity of ceilings. If the program is successful, and is associated with an inflow of reserves, a slight relaxation of monetary restraint may be in order. The increase in the cash reserves of the deposit-money banks, consequent on the rise in the central bank’s foreign reserves, will provide this relaxation. If the program fails to achieve one of its purposes, and there is a depletion of the country’s international reserves, a further tightening of restrictions may be required and stringency will be automatically imposed by the reduction of deposit bank cash. To make a relaxation, or a tightening, of monetary policy dependent upon one of the most significant indices of the success of the policy introduces an automaticity into its determination which may be highly desirable.

Government foreign borrowings. The preceding argument is based on the assumption that changes in reserves are the result of movements induced by relative costs, incomes, and other “economic” stimuli. However, in many cases where ceilings have been adopted, a large part of the increase in reserves has often represented the proceeds of general balance of payments loans. These may be called “loans in response to economic stimuli” only in the widest of meanings. Such an increase in foreign assets, and the consequent creation of domestic currency for expenditure on domestic resources, may have an unbalancing influence on the stabilization program. Under these conditions, there is good reason to consider the foreign exchange proceeds of such loans as part of the “domestic assets” that are subject to ceiling.36

Counterpart funds. The foregoing discussion of the treatment of the local currency counterpart of foreign borrowing by the government is closely related to the general question of the treatment of counterpart funds. As their name implies, counterpart funds are accounts that are credited with offsets to specific transactions which it is desired to segregate from other similar flows. The general problems that arise with regard to counterpart funds, and a description of two types of these funds, have been outlined elsewhere.37

The most common form of counterpart fund is the account established to receive the proceeds of U.S. foreign aid supplies, sold by recipient governments to residents of their countries. At the time of the sale of such goods and the deposit of the proceeds to a counterpart account, the transaction has a deflationary impact on the economy. Its subsequent use for expenditure by the government will have an inflationary impact on the economy similar to any other government expenditure.38

In the calculation of formulas for credit ceilings, it is frequently reasonable to treat the central bank’s credit to the government on a net basis: government deposits are deducted from the bank’s claims on the government when measuring the net recourse of the government to the central bank. If counterpart funds were regarded as part of the government’s deposits and included in the amounts deductible from central bank credit, the anti-inflationary impact of the counterpart fund policy would be neutralized. At the time of deposit to a counterpart account, the increase in the account would increase the amount of credit which the bank could extend, and would therefore permit a countervailing inflationary impact. At the time of a withdrawal from the counterpart fund, the reduction would increase the net amount of credit outstanding and so reduce the amount of expansion possible within the ceiling, with a consequent countervailing deflationary influence on the economy.

When establishing ceilings, the basic practice has been to recognize the counterpart accounts as essentially stabilizing influences, and to regard them as independent accounts, rather than government accounts to be offset against credit extended to the government, in order to measure the net expansion of central bank assets. However, in a number of cases where large counterpart accounts had accumulated, and their release for governmental expenditure has been imminent, these funds have been included in the ceiling formula as offsets to the central bank’s outstanding credit. Under these circumstances, the government is free to choose between borrowing from the central bank, within the limit of the ceiling, or making expenditures up to an equal amount by withdrawal from the counterpart account. If the withdrawals from the account are greater than the net credit expansion permitted under the ceiling formula, and if the ceiling is to be maintained, the central bank will have to reduce its credit to the deposit-money banks or other borrowers. Hence, if withdrawals from counterpart accounts are more likely than deposits to them, their inclusion, by lowering the ceiling, serves to offset the inflationary effects of their release just as their exclusion, if deposits are more likely than withdrawals, serves to make the deflationary effect of their growth effective.

Multiple currency accounts. On several occasions, the existence of multiple currency arrangements has raised a technical problem in the determination of a ceiling on central bank domestic assets. When a central bank buys and sells foreign exchange at a variety of rates, its accounts in terms of domestic currency may show a profit or loss even when its in-payments and out-payments in foreign currencies are balanced. If its in-payments and out-payments are not balanced, as is almost always the case, the determination of the domestic currency value of its foreign holdings is complex. Usually, the bank’s foreign accounts contain two groups of entries. The first records the transaction at a basic rate of exchange. The second records the profit or loss arising from the difference between this basic rate and the effective transactions values of the purchases and sales of exchange.39

The profit or loss on exchange may be considered as a part of the bank’s transactions in foreign exchange, or as a balance arising from the bank’s administration of a government tax/subsidy program. If the first view is taken, the exchange profit or loss account should be combined with the balance on transactions at the basic rate of exchange, to measure the domestic impact of foreign exchange transactions. If the latter view is taken, the net profit or loss should be combined with the bank’s claim on, or deposits due to, the government, to measure the monetary effects of a fiscal policy. If the exchange system yields a “profit” to the bank, and the resulting liability account is treated as a rise in foreign liabilities which offsets the equal rise in foreign exchange assets of the central bank, there is no effect on the restriction inherent in a given ceiling on the bank’s domestic assets. If the exchange profit is not segregated as a “foreign” liability, then the central bank’s net foreign assets do rise; this forces a reduction in domestic assets if the ceiling is on total central bank assets—clearly an unjustified restriction—but has no effect if the ceiling is on domestic assets.

If the exchange profit is netted against the bank’s claims on the government, it eases the impact of the ceiling. If the exchange system yields a “loss,” similar alternative treatments of the resulting asset (or negative liability) account would have the reverse effect. In most multiple currency systems, these entries usually lead to “profit” accounts. However, one effect of a stabilization program may be to convert the “exchange differences” from “profit” entries to “loss” entries. Most effective programs permit the stabilization and unification of the exchange rate. The elimination, or reduction, of the multiplicity of rates leads to the disappearance of the exchange profits. However, because of the recent history of inflation, the new unified rate is likely to be depreciated in comparison with earlier official rates. This depreciation can well lead the central bank to experience “losses” on forward exchange contracts agreed in the past.40

Government finance

Any program which limits certain elements in the monetary structure but imposes no controls on the financing of the government by the central bank can be rendered ineffective by government deficits. In many countries the central bank is the only, or the major, source of financing for the government. This is recognized in many central bank laws. On occasion, a limit has been imposed on the aggregate amount of claims on the official sector which the central bank may hold. Sometimes, the central bank is prohibited from financing more than a certain proportion of annual expenditure.41 These and similar restrictions are built-in limitations established by drafters of central bank constitutions, trying to create an institutional framework which will prove conducive to monetary stability.

In principle, the comments made above on ceilings on central bank credit to the deposit-money banks are also applicable to similar ceilings on credit to the government. If concurrent ceilings are applied to both types of credit, there is then an effective ceiling on the domestic assets of the central bank.

However, it must be recognized that a central bank will, in the last analysis, be impotent in the face of sufficiently urgent government demands. In any country, financial policy must be, in part at least, a combination of monetary and fiscal policies. One need not agree fully with the Radcliffe Report in its view that “monetary action and [government] debt management … are one and indivisible”42 to accept the view that it is essential that there be unity of purpose in both aspects of financial policy. Hence, if a central bank is using direct controls to implement monetary policy, it is essential that these controls be matched by similar controls in respect of fiscal policy.

Administrative controls over fiscal policy may be achieved by the imposition of direct ceilings on government transactions, as well as on the financing of the government. A direct ceiling on government expenditure achieves much the same results as a ceiling on credit to the government, unless revenues change. If revenues fall, it is a less stringent limitation; if they rise, it is more stringent.

However, there are several subsidiary aspects to a ceiling on expenditure. If the government’s access to credit from the monetary system is restricted, but the government does not adequately restrict its expenditure, the consequent deficits must be financed from some source. Unless additional stringent restrictions are imposed, these deficits will create market pressure and an inflationary strain on the economy. Such pressures have arisen most frequently in those countries where the government has been able to postpone payment of its bills, and hence to continue exercising a demand on domestic resources. In these cases, contractors accumulating receivables from the government, acquire assets which may be considered as reasonably desirable loan collateral, yet they must obtain financing to meet their current costs if they are not to become insolvent. The accumulation of arrears on government account increases the demand of the private sector for loans from the banks at a time when the banking system is being required to restrict its credit to the private sector. Any action that increases the strain on the financial system must make the implementation of a stabilization program more difficult. Thus, practical reasons support the view that a ceiling on government expenditure is preferable to a ceiling on bank credit to the government. On the other hand, it must be recognized that in many countries the unsatisfactory state of government accounting records and controls over disbursements makes the implementation of a ceiling on government expenditure difficult. This problem is especially acute in those countries where a large part of government expenditure represents transfers to cover the deficits of autonomous agencies. In those countries, a ceiling on government borrowing from the central bank may be the most enforceable of ceilings. It may also be argued that the government’s deficit, and hence its borrowing, is a more reasonable measure of the pressure toward inflation arising from fiscal policy. If this be so, a ceiling on government borrowing may be a more reasonable control than a ceiling on total expenditure.43

Administration of Ceilings

The implementation of monetary policy through the use of direct controls raises a number of problems. The inflexibility of a rigid formula for determining the total, or the expansion, of bank credit in any period may be undesirable. The formula which may appear to be most appropriate on theoretical grounds may, at times, have unwanted results or may become unrealistic and may, therefore, have to be abandoned. A tradition of disregarding ceilings, even if the reasons for such action are valid, may establish precedents which eventually encourage violating them for insufficient motives. On the other hand, ceilings are frequently imposed as part of a change in monetary policy, the first effects of which may be apparently strong restrictions on the actions of many influential members of the community. The announcement of fixed ceilings as part of a complete stabilization program may make their implementation easier than would be possible if the same results were attempted by quieter and more traditional methods of determining monetary policy. The announcement of fixed ceilings often makes it easier for the authorities to employ self-discipline and to refrain from a succession of compromising modifications. Such a program may enhance their ability to resist political pressures, and to foster the public’s willingness to tolerate politically unpopular measures because the government is publicly committed to them.

Under less favorable circumstances, the rigidity of ceilings may appear to be undesirable. In such cases, a statement of intent to follow a suitable tight credit regime, as part of the stabilization program, may seem to be preferable to fixing ceilings. It may appear more practical to adopt money and credit targets which, in terms of flexibility and discretion for the authorities, constitute a compromise between a rigid ceiling and a statement of general principles.

Some central bankers lay great stress on moral suasion, or the “hint from headquarters,” as an instrument of monetary policy. In this respect, the United Kingdom’s experience is enlightening. The Bank of England Reports for each of the fiscal years 1947/48, 1949/50, 1950/51, 1951/52, 1954/55, and 1956/57 referred both to discussions with the banks regarding limitations on their loans and to increases in their loans. The Reports for the years 1952/53, 1955/56, and 1957/58 referred to similar discussions and to decreases in outstanding loans. These last three years were ones when other aspects of monetary policy were determined by a desire for contraction, as indicated by the raising of the bank rate. The other years were ones in which the alternative instruments were either neutral in their effects, or were exerting expansionary pressures, as indicated by a stable or lowered bank rate. When active policy and the exhortations of the Bank were directed to the same end, there was effective monetary restraint. When active policy and the Bank’s persuasion were not directly consistent, loans increased. The logic which might explain this conclusion was perhaps expressed best by the Bank of England in one of its papers to the Radcliffe Committee:

Monetary measures will, in the long run, only be effective if Government policy as a whole is directed to keeping the money supply under control and the public are persuaded that this objective will be achieved.44

Another exponent of the use of moral suasion in the implementation of central bank policy has referred to it in the following terms:

… there are times when cooperation [i.e., by deposit-money banks] … is a very useful supplement to the powers [i.e., of the central bank] and perhaps for a time means the indirect powers do not have to be used quite so strenuously.45

The Governor of the Netherlands Bank perhaps put the problem most succinctly:

If the bankers are always lending money at 5 per cent, and want to get loans down, it is very difficult to get that over to their customers.46

In other words, if monetary policy permits an expansion of loans, persuasion will not stop loans from rising. The Chairman of the Board of Governors of the Federal Reserve System emphasized the subsidiary role of moral suasion when he said:

… If a voluntary program is to be of real effectiveness, it must be used in conjunction with other restrictive credit policies of both a general and selective character.47

That is, moral suasion may be regarded as a supplement to, but not as an alternative to, more direct policy decisions. Where credit ceilings may be considered to be appropriate instruments of monetary policy, i.e., when strong action is called for, moral suasion may not be regarded as an alternative to ceilings. An atmosphere in which there is cooperation between the central bank and the deposit-money banks (as well as other financial institutions and the rest of the community) will be conducive, and perhaps essential, to the success of firm monetary policy. However, the success of the policy will be primarily dependent on its firmness. If ceilings are to be effective, they must be embodied in enforceable regulations. They cannot be made effective by gentle persuasion.

The enforceability of any program of monetary restraint is also a significant consideration in the formulation of a specific program. If it be granted that the control of the volume of money, or of some similar total, is an appropriate target for monetary policy, it might seem that any ceilings program should set limits on money itself, or on elements closely related to money (e.g., deposit-money bank accounts). However, aside from the other consideration outlined here, the relative ease of enforcing a program leads to the conclusion that ceilings should be placed on accounts most directly under the control of the authorities. It may be presumed that, once the authorities, i.e., the government itself, and the central bank have decided to adopt a program of monetary restraint, they will wish to see it implemented successfully. On the other hand, irrespective of their interest in the general good, individual members of the community wish to see their own access to money maximized. In particular, irrespective of individual bankers’ views regarding the desirability of controlling inflation, each bank wishes to expand its own business as far as this is safely possible. Any individual bank, and hence the entire banking system, will be under profit inducements to evade any system of ceilings.48 Bank accounts are complex, and banking practices are subject to adjustment. To envisage a simple case, a ceiling on deposit-money bank loans, and perhaps on assets, could, in effect, be evaded if the banks adopted a recognized practice of holding checks presented for collection for a period before debiting them to customers’ accounts, and if the customers were willing to accept a somewhat higher level of bank charges. It is true that an adequate system of bank examination might reduce the possibilities for such evasions. However, in most cases, bank examinations are infrequent and, correctly, directed toward ends other than the administration of ceilings. Hence, the enforcement of ceilings imposed on institutions other than the central authorities raises problems which are not present in the acceptance of ceilings by the authorities themselves.

This argument carries the implication that all the authorities willingly accept certain ceilings. If one of them is unwilling to accept a ceiling, similar problems of enforcement arise. Thus if the central bank wishes to evade a government-determined ceiling, or if the government treasury does not willingly accept an expenditure ceiling, similar problems of maintaining monetary stability will arise.

If the active monetary policy which may be called for is implemented by the imposition of ceilings, problems of combining flexibility with firmness may have to be faced. The first element of flexibility which may be required arises from seasonal variations in the community’s demand for money and credit. If ceilings are not subject to seasonal adjustment, there is a danger that the scope which they provide will be fully utilized when demand for credit, or the need for money, is seasonally low, and that the subsequent pressures of demand to meet seasonal requirements will become so great that the ceiling will have to be either abandoned or raised to accommodate “necessary” loan demands. A succession of such “necessary” raising of ceilings might then follow with each seasonal rise in credit needs. Thus, seasonal adjustments are likely to be necessary elements of any program based on the use of quantitative ceilings. However, there may be difficulty in determining sufficiently reliable seasonal patterns for monetary developments. For instance, in agricultural countries variations in the weather may shift the crop year in relation to the calendar year; therefore, no standard seasonal pattern of financing of staple crops by the monetary system may be derivable. In order to insulate the central bank from political pressures, the criteria by which seasonal variations are to be determined ought, perhaps, to be specified in advance. But if no more than a range of variation within which seasonal adjustments may be made is specified, public confidence in the authorities’ determination to enforce them may be weakened. The announcement of a range of ceilings for seasonal purposes should probably be accompanied by a clear statement that, whatever happens in the interim, the ceiling adopted for a given period will not be higher than the ceiling in effect twelve months earlier, or that it will be raised by no more than a predetermined amount.

Changes in fundamental economic conditions must also be expected. Changed economic conditions will lead to community reactions which, insofar as possible, should be anticipated. These community reactions are likely to be of two consistent types. A movement toward a less inflationary economy is likely to lead to a liquidation of stocks of commodities whose acquisition had appeared profitable only because price increases had been expected. At the same time, those groups who save in forms which are denominated in money terms (i.e., money, time deposits, life insurance, bank or government bonds) will wish to save more in the form of financial claims and, hence, will reduce their own consumption plus demands for commodities to hoard. Ceilings on central bank assets or on rediscounts should accommodate such adjustments. Repayment of bank debt, used to finance former excessive inventory holdings, itself provides the opportunity for extending equal amounts of credit to any other previously rationed borrowers who still want to borrow. The shift from demand deposits and currency to time and savings deposits and bank bonds permits a net expansion of credit without increased rediscounting by the central bank (if the reserve ratios associated with demand deposits are higher). These margins for shifts of credit to new borrowers and for increased lending are probably ample for the financing of any emergency anti-inflationary government program which may be desirable.


Under normal conditions, monetary policy must be a rather sensitive instrument intended to “lean against the wind” rather than drive into the teeth of a gale. Under these circumstances, arbitrary action and fixed instruments of policy are likely to deprive the system of the flexibility essential to ensure that, when leaning into the wind, one neither gets blown off his feet nor falls down when the force of the wind decreases slightly. However, when the wind velocity reaches gale strength it may be futile to attempt to lean into it. In such situations, firm and inflexible policies may be essential to permit progress: under normal circumstances, a monetary policy based on inflexible ceilings is likely to be unduly rigid; when faced with a severe inflation, imminent or actual, ceilings may be an essential element, signifying that monetary policy has the necessary determination and inflexibility. Ceilings have their place. But their place must be recognized. A sledge hammer is useless for driving finishing nails. A tack hammer is useless for driving spikes.

Certain conclusions may be drawn from this review regarding the choice between alternative types of ceiling. No inflexible rules may be laid down. Each historic circumstance is different. Broadly, it would appear that the greatest concentration of control should lie in the hands of the central bank. Hence, a monetary policy designed to control inflation should be centered on control of central bank credit in an atmosphere where the government is not imposing excessive strains on the bank. This prescription, in most cases, will probably lead to a combination of measures. One ceiling would apply to government expenditures or borrowing, thereby limiting the fiscal pressures imposed on the economy. Another would limit central bank credit to the rest of the monetary system.

Diverses formes de plafonds monétaires en vue d’assurer la stabilité


La théorie néo-classique du système de banque centrale envisageait une banque ayant pour but de maintenir une quasi stabilité monétaire à l’aide d’interventions dans un marché de capitaux très développé. Dans ces conditions, les instruments traditionnels, à savoir les opérations d’open market, et les variations des réserves obligatoires sont probablement suffisants. Par contre ils ne suffiront sans doute pas à contenir une inflation active, en particulier dans les pays où il n’existe pas de marché de capitaux très développé. Pour enrayer une hausse rapide des prix, les autorités monétaires peuvent se trouver dans l’obligation d’imposer directement des limites quantitatives à certaines opérations du système monétaire.

Alors que les autorités peuvent souhaiter d’arrêter l’augmentation de la masse monétaire, une limitation dans ce domaine doit être considérée comme un objectif plutôt que comme un moyen. Il est probable que l’imposition de restrictions directes à l’activité des banques de dépôts sera peu pratique et difficile à mettre en œuvre. La solution la plus efficace consistera sans doute à limiter les avoirs totaux de la Banque Centrale, ou ses avoirs intérieurs (déduction faite d’une partie au moins de l’excédent dû aux variations des avoirs extérieurs, de manière à assurer une certaine souplesse dans l’application de cette politique).

Etant donné le rôle joué par le Gouvernement comme demandeur de crédit à la Banque Centrale, celle-ci ne pourra limiter l’ensemble de ses crédits à un plafond déterminé que dans la mesure où une limite rigoureuse sera imposée aux dépenses ou aux emprunts de l’Etat. Si de telles limites sont observées, il est possible d’imposer un plafond maximum aux avoirs intérieurs de la Banque Centrale en limitant les prêts de cette dernière aux banques de dépôts.

Il existe un certain nombre de problèmes qui se posent nécessairement lorsqu’on prévoit la marge de variation d’un type de plafond quelconque, que l’on fixe, voire mesure le niveau de celui-ci. A certains égards, le plus essentiel est celui qui consiste à tenir compte des variations saisonnières. Les prêts et dons étrangers, destinés à faciliter la solution des problèmes de balance des paiements d’un pays, créent des difficultés lorsqu’il s’agit de déterminer le niveau approprié d’un plafond quelconque. L’existence des fonds de contrepartie et l’accumulation des profits ou pertes qui découlent du jeu des systèmes de taux de change multiples, soulèvent des problèmes comptables en ce qui concerne la mesure de la limite appropriée du plafond.

Diversas formas de topes monetarios para fines de estabilización


La teoría neoclásica sobre banca central contempla un banco central que opera en un mercado de valores altamente desarrollado para fines de mantener la estabilidad monetaria. En tales circunstancias es probable que resulten adecuados los instrumentos tradicionales de control monetario consistentes en operaciones de mercado abierto y variación de las reservas obligatorias. Sin embargo, es probable que estos instrumentos no se presten eficazmente para detener un activo proceso inflacionario y que sean particularmente ineficaces en aquellos países en donde no existe un mercado de valores muy desarrollado. Para poder reprimir el alza acelerada de los precios, las autoridades monetarias tendrán posiblemente que imponer límites cuantitativos a ciertas operaciones del sistema monetario.

Aunque las autoridades quisieran tal vez impedir el aumento del medio circulante, la limitación de éste debe más bien considerarse como un objetivo de política que como un instrumento de operación. Es probable que la imposición de límites directos sobre las actividades de los bancos de depósitos monetarios ocasione efectos engorrosos y que su applicación sea difícil. La forma más efectiva de tope monetario es probablemente el límite que se impone a los activos totales del banco central, o a sus haberes internos (de manera que al excluir al menos una parte de cualquier exceso ocasionado por fluctuaciones en los haberes extranjeros se imprima cierta flexibilidad a la política).

En vista de la importancia del gobierno como beneficiario del crédito del banco central, es probable que éste sólo pueda mantener un límite máximo efectivo sobre sus créditos si se restringen firmemente los gastos o la obtención de préstamos por el gobierno. Si se respeta esta restricción, se puede mantener un límite total sobre los activos internos del banco central si se impone un límite a los préstamos que éste otorgue a los bancos de depósitos monetarios.

Varios son los problemas que se presentan para la determinación del margen de variación del nivel de un tope monetario cualquiera, para la fijación de ese nivel, y aun para su medición. Entre estos problemas el más fundamental es, hasta cierto punto, aquél a que da lugar la variación estacional de ese nivel. Los préstamos y donaciones extranjeras destinados a aminorar los problemas de balanza de pagos de un país causan dificultades para determinar el nivel apropiado de un tope cualquiera, y el establecimiento de fondos de contrapartida y la acumulación de ganancias y pérdidas derivadas de la aplicación de sistemas de tipos de cambio múltiples originan problemas contables en el cálculo de un límite adecuado del tope.


Mr. Dorrance, Chief of the Finance Division, has been a lecturer at the London School of Economics and a member of the staff of the Bank of Canada.

Mr. White, economist in the Finance Division, received his undergraduate and graduate training at Harvard University. He has contributed articles to a number of economic journals.


Day, A.C.L., and Sterie T. Beza, Money and Income (New York, 1960), p. 176.


R. G. Hawtrey, The Art of Central Banking (London, 1933), p. 279.


Committee on Finance and Industry, Report (Cmd. 3897, London, 1931), p. 97.


For a discussion of this point, see G. S. Dorrance, “The Bank of Canada,” in R. S. Sayers, ed., Banking in the British Commonwealth (Oxford, 1952), pp. 121–24.


See notes to Discount Rates, in International Monetary Fund, International Financial Statistics: Supplement to 1962/63 Issues, pages for France and Japan.


Discussion of minimum reserve requirements has not been limited to U.S. writers. Keynes, for example, discussed them in his A Treatise on Money (London, 1930), Vol. II, pp. 76–77 and 260–61.


Ralph A. Young, “Tools and Processes of Monetary Policy,” in The American Assembly, United States Monetary Policy (New York, 1958), p. 28.


See Joachim Ahrensdorf and S. Kanesathasan, “Variations in the Money Multiplier and Their Implications for Central Banking,” Staff Papers, Vol. VIII (1960–61), pp. 126–49.


Committee on the Working of the Monetary System, Report (Cmnd. 827, London, 1959), p. 183. This Committee is referred to hereafter as the “Radcliffe Committee” and its Report as the “Radcliffe Report.”


Ibid., p. 186.


Ibid., p. 187.


Thus, in Guatemala the Monetary Board is required: “To regulate the rediscount and credit services of the Bank of Guatemala, and determine the general conditions and limits of the various operations of the Bank. …” Ley Orgánico del Banco de Guatemala, Art. 30 (i); English translation from International Monetary Fund, Central Banking Legislation, Hans Aufricht, compiler (Washington, 1961), p. 768. Emphasis added by present authors.


In Argentina, the economic stabilization programs of 1958–59 and 1959–60 involved specific limits on the total domestic assets of the Central Bank, and on certain specific assets, as part of a general program that also placed limits on the government deficit, commitments regarding foreign exchange policy, and other publicly announced decisions. (For a discussion of these stabilization programs, see Banco Central de la República Argentina, Memoria Anual, 1958, Apendice, and Memoria Anual, 1959, Chap. I.)


This discussion is based on the chief balance sheet interrelations for the monetary system and its components, which may be summarized as follows:

article image
*, + Offsetting entries

Components of Money



The term “stabilize” is used here in a broad sense, to encompass growth consistent with rising output over time.


For example, the United Kingdom (see statement of the Chancellor of the Exchequer at the Annual Meeting of the International Monetary Fund, September 24, 1957, in its Summary Proceedings of the Twelfth Annual Meeting of the Board of Governors (Washington, 1957), p. 44.


Thus, in the 12 months following the institution of several stabilization programs, gross official foreign reserves as a percentage of total money in circulation increased as follows (dates indicate beginning of the 12-month period):

article image
(Source: International Monetary Fund, International Financial Statistics.)


See J. J. Polak, “International Coordination of Economic Policy,” Staff Papers, Vol. IX (1962), p. 151 and pp. 163–64, for a general discussion of these problems.


This “requirement” may be a customary ratio voluntarily adopted by the deposit-money banks as one of the desirable institutional parameters for the financial system.


Indonesia (see Bank Indonesia, Report for the Year 1958–1959, p. 105), Korea (see Bank of Korea, Annual Report, 1958, pp. 16–17), and France (see Banque de France, Compte Rendue des Opérations, 1958, p. 31).


E.g., Canada (see Bank of Canada, Annual Report, 1951, p. 9).


This was the problem which led to the Voluntary Credit Restraint Program in the United States.


For an exposition of this view, see the Reply by the Chairman of the Board of Governors of the Federal Reserve System on the Voluntary Credit Restraint Program, submitted to the Subcommittee on General Credit Control and Debt Management, in U.S. Congress, Joint Committee on the Economic Report, Monetary Policy and the Management of the Public Debt (Washington, 1952), p. 450.


E.g., Norway (see Norges Bank, Report and Accounts for the Year 1968, pp. 45–46), the United Kingdom (see Radcliffe Report, pp. 142–44), and the United States (see Federal Reserve Bulletin, March 1951, pp. 263–66, and subsequent issues).


E.g., in the Sudan (see Ministry of Finance and Economics, Economic Survey, 1957 (Khartoum, 1958), pp. 27–28).


Radcliffe Report, p. 108.


U.S. Congress, op. cit., p. 403.


See Radcliffe Report (p. 130) for a discussion of this point.


R. S. Sayers, Central Banking After Bagehot (Oxford, 1957), p. 1.


Ibid., p. 35, quoting from Royal Commission on Indian Currency and Finance, Minutes of Evidence, Vol. V (1926), Non-Parliamentary Question 14597.


These limitations are usually indirect, in that they impose a minimum limit on gold and foreign exchange holdings as a percentage of liabilities, and hence of assets. That is, they impose a maximum on the bank’s domestic assets, related to the level of foreign assets. For example, see the information relating to Burma, Cuba, the Dominican Republic, El Salvador, Indonesia, Mexico, Pakistan, Rhodesia and Nyasaland, and South Africa in Aufricht, op. cit., Table 6, pp. 998–1000.


For example, see the provisions in the central bank laws of Burma, Canada, Ceylon, Cuba, El Salvador, Guatemala, Honduras, Indonesia, the Philippines, and Rhodesia and Nyasaland, ibid. Attention might also be directed to the limitation in Belgium as described in National Bank of Belgium, Report, 1957, pp. 13–17; to the restrictions on holdings by the Banque Nationale du Congo of government obligations (see Décret-Loi du 24 février 1961, Art. 22); on National Bank of Ethiopia holdings (see Loi Organique de la Banque Nationale d’Ethiopie, Art. 24); on Central Reserve Bank of Peru holdings (see Ley Orgánica del Banco Central de Reserva del Peru, Art. 49); and on holdings by the Central Bank of Venezuela (see Ley de Banco Central, Art. 64).


See footnote 17.


Thus, between the end of December 1961 and May 1962, the foreign assets of the National Bank of Nicaragua increased by 106.8 million córdobas, an amount equal to almost one third of the money supply at the end of May. During the same period, the Bank’s credit to deposit-money banks was reduced by 129.3 million córdobas.


If the ceiling imposed on the assets of the Central Bank of Argentina—as part of the stabilization program inaugurated in December 1958—had been a ceiling on total assets rather than on domestic assets, if the increase in central bank credit to the government had been the same as that which actually took place, and if the expansion of foreign reserves had been the same as the increase that was in fact experienced, the Central Bank would have been forced both to call for the redemption of all its rediscounts for the commercial banks and to require the repayment of two thirds of its loans to the Industrial and Mortgage Banks (the foundation of the Argentine mortgage market). This is not an isolated example of the significance of changes in foreign assets as a source of change in central bank balance sheets. Thus, for instance, the increase in the foreign assets of the Deutsche Bundesbank in the second half of 1960 was equivalent to nearly half of the total domestic assets of the Bundesbank at the end of June 1960; see Graeme S. Dorrance and E. Brehmer, “Controls on Capital Inflow: Recent Experience of Germany and Switzerland,” Staff Papers, Vol. VIII (1960–61), pp. 433–34, for a discussion of the problems created by this capital flow.


Similar reasoning applies where leading commercial banks can obtain funds from abroad to expand their credit and to enlarge their business in the face of the official restriction of credit. E.g., Norway (International Monetary Fund, International Financial News Survey, Vol. XIV (1962), p. 190).


“National Currency Counterpart of Drawings on the Fund,” Staff Papers, Vol. VI (1957–58). pp. 171–79, and Alex N. McLeod, “Local Currency Proceeds of an Import Surplus,” Staff Papers, Vol. I (1950–51), pp. 114–22.


For a discussion of a similar problem arising from the adoption of an anti-inflationary instrument which in effect serves to postpone inflationary pressures, see Eugene A. Birnbaum and Moeen A. Qureshi, “Advance Deposit Requirements for Imports,” Staff Papers, Vol. VIII (1960–61), pp. 115–25.


For a discussion of the statistical treatment of this problem, see International Monetary Fund, International Financial Statistics, January 1960, pp. vi-vii, and the notes on the pages for Brazil in International Financial Statistics: Supplement to 1962/63 Issues.


The magnitude of these items may be significant. For example, in 1959 the accounts of the Central Bank of Argentina recording these items rose by the equivalent of 18 per cent of the total amount of money.


See footnote 32.


Radcliffe Report, p. 224.


It is significant that the International Financial Statistics is able to include data on government finance for only 38 of the 68 countries covered, and in a number of cases the data are seriously in arrears.


Radcliffe Committee, Principal Memoranda of Evidence, Vol. I, p. 36, par. 11.


Evidence of Governor Towers to Canadian House of Commons, Standing Committee on Banking and Commerce, March 23, 1954, pp. 79-80.


Radcliffe Committee, Minutes of Evidence, p. 811. Q. 11833.


U.S. Congress, op. cit., p. 450.


See International Monetary Fund, Annual Report, 1962, pp. 94–95, for a discussion of the experience in the Netherlands with a ceiling on deposit-money bank credit.