FOREIGN CENTRAL BANKING, 1946-1957: THE INSTRUMENTS AND EFFECTIVENESS OF MONETARY POLICY*

Abstract

BY 1957, ALMOST EVERY country in the free world had turned to monetary control to help safeguard and promote its economic health. Most central banks abroad, however, have had to operate in a setting greatly unlike that of the United States, since most foreign economies and financial systems are either less developed than ours or have developed along other patterns. The techniques of foreign central banks have thus often differed substantially from those of the Federal Reserve System. This study first describes the use of central banking techniques abroad during the postwar period, including the development of money markets through which so much of the implementation of monetary policy must be effected. It then attempts to evaluate the effectiveness both of the various creditcontrol tools and of over-all monetary policies outside the United States. Discount policy abroad has generally been more complex in structure and has often carried more weight in over-all monetary policy than it has in this country. While it has rarely been used to influence the availability of bank credit directly, discount-rate changes have had a powerful impact on interest rates, and the discount instrument has shown itself to be an important supplement to other measures. Open-market operations have only rarely been the primary credit-control tool abroad that they have become in the United States. The most serious obstacle to their use abroad has been the lack of broad money and capital markets, even among the more financially developed countries. A meaningful open-market policy has also frequently been frustrated by inflationary fiscal policies. Nevertheless, the foreign experience has shown that openmarket policy can be a most effective monetary-control instrument. While the enforcement of alterations in commercial bank cash-reserVe requirements is generally considered a much blunter instrument, such requirements have been established in a great many countries