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January 22, 1$L|1.



Statutory provisions regarding ownership and management

"The State has in several countries manifested a strong
tendency in recent years to claim a larger extent of parti­
cipation in the ownership and administration of the central
MIn Denmark and Hew Zealand the former privately-owned
central banks were converted into entirely State-owned central
banks in 1936. In Paraguay a privately owned commercial bank,
the Bank of the Republic of Paraguay, was converted into a
State-owned central bank in 1936. In Italy the central bank,
whose capital was owned entirely by private shareholders, was
transformed into an ^institution under public law’ in 1936*
when the old capital and part of the reserves were repaid to
the private shareholders and the new capital was subscribed by
‘public law1 banks and credit institutions, savings banks,
insurance companies and provident societies; and as the State
already had a large share in the ownership and control of many
of these institutions, it acquired an indirect participation
in the ownership and administration of the Bank of Italy. In
the same year the Government of Canada took steps to- acquire a
controlling interest in the capital of the Bank of Canada; and
the process of conversion into a State-owned institution was
completed in 193§ when the Government paid out all the private
"Tilth regard to administration, in New Zealand the State
now has the power to appoint all the directors of the Reserve
Bank, whereas formerly it was to nominate only three out of the
seven directors (exclusive of the Governor, Deputy-Governor and
Secretary of the Treasury); and the Secretary of the Treasury
is now a member of the Board with voting power, which he did not
have prior to 1936. In addition, it was laid down in the new
law that the Reserve Bank 'is to give effect as far as may be
to the monetary policy of the government as communicated to it
from time to time by the Minister of Finance*. In Canada the
State now has the right to appoint all the directors (exclusive
of the Governor and Deputy-Governor), as compared with three
out of the nine under the original statute. In Denmark the
Chairman of the Board of three Governors is now to be nominated


by the King, and eight of the 25 directors ere to be elected by
the Riksdag from among its ovm members, two by the Minister of
Trade, Industry and Shipping, and the remaining 15 by the Board
of directors, whereas formerly all the directors, except two
who were appointed by the Minister of Trade, were elected by
the General Keeting of private shareholders, and the Board of
Directors appointed two or three out of the four or five managers
of the Bank.
"Furthermore, while in the United States, Germany, France
and Greece no change was made in the ownership of the capital,
the State acquired a bigger share in the administration and
control of the central ban!:.
"in Germany the provision in the Bank Law of 1921*, that ’the
Reichsbank is a bank independent of Government control* was re­
pealed by an amending law in 1937» and the Reichsbank-Direktorium
was placed directly under the Fuhrer and Chancellor. Under the
law of I92 4 the President of the Reichsbank was appointed by the
General Council of the Bank with the countersignature of the
Reichspresident, and when the General Council was eliminated it
was provided that the President of the Reichsbank was to be
appointed by the Reichspresident on the advice of the Direktorium
(Management Board), and the other members of the Direktorium by
the Reichspresident on the nomination of the President of the
Reichsbank; but 'under the 1937 amendment the President and other
members of the Direktorium are to be appointed by the Fuhrer and
to be directly responsible to him.
"In France, v i e e formerly the General Council of the Bank
of France consisted of 15 regents elected by the 200 largest
shareholders, the composition of the Council was radically
changed in 1936, and provision was made for a large measure of
direct and indirect State participation in appointments to the
Council. In the first place, nine out of the 20 members of the
Council are to represent ’the collective interests of the nation’,
three representing the Ministries of Finance, National Sconomy
and Colonies, while the other six are ex officio members holding
specified position in State financial institutions. In addition,
six members are to be appointed by the I£inister of Finance from
a list of three names submitted by each of six commercial, in­
dustrial, agricultural and labour organisations, while three are
to be nominated or elected by the National Economic Council, the
Central Committee of the savings banks, and the staff of the
Bank of France, leaving only two to be elected by the General
Meeting of shareholders.

-3"In Greece the Governor, Deputy-Governor and Sub-Governor
are now to be appointed by the Cabinet of Ministers on the
proposal of the Board of Directors, whereas prior to 1932 they
were elected by the General Meeting of shareholders subject to
the approval of the Government.
tIn Argentina, on the other hand, where prior to 1935
some central banking functions were performed by a State-owned
bank, the Bank of the Argentine Nation, the commercial banks now
have an equal share with the State in the capital of the new
Central Bank; and not only do the shareholding banks nominate
six of the 12 directors from among their own representatives, and
another four on the proposal of the Board of Directors and after
consultation between the Board and certain representative organ­
isations, but the President and Vice-President of the Bank are to
be designated by the Chief Executive of the Argentine Nation in
agreement with the Senate from among the three candidates for
each post elected by the meeting of shareholding banks.
"In China, also, where the Central Bank is a State-owned
institution, it was provided in the Monetary Reform Programme
announced by the Minister of Finance in November, 1935* that the
’Central Bank is to be reorganised as the Central
Reserve Bank of China and shall be owned principally by
banks and the general public, thus becoming an independent
institution, devoting itself chiefly to maintaining the
stability of the nation’s currency.*
"Owing to strong opposition from certain circles both
within and outside the Government, this part of the Monetary
Reform Programme was, however, not carried into effect.
"Moreover, in Salvador the capital of the Central Bank,
which was established in 1934» was not only subscribed by the
commercial banks and the public, but the Governor and DeputyGovernor are to be elected by the General Meeting of shareholders
subject to the approval of the Government.
"With these exceptions, a definite trend in the direction
of greater State participation in ownership and administration
of central banks is to be observed in recent changes in central
banking statutes. It is significant that such changes were
made in the statutes of two newly-established central banks,
the Reserve Bank of New Zealand and the Bank of Canada, within
two years from their inception, as well as in the statute of one
of the oldest central banks, the National Bank of Denmark.

"The Economic Intelligence Service of the League of Nations l/
has also seen fit to draw attention to the fact that ’in the
statutes as drawn up or amended in recent years, the State has
generally assumed a more important role both in respect of the
ownership and management of central banks’, and that
‘This tendency stands in contrast with that of the
pre-war period and early post-war years, in particular
when stress was laid on the desirability of preserving
or increasing the independence of central banks from the
even to the extent of inserting in the statutes of new or
reorganised central banks ‘a clause or a sentence emphasising
this independence either as regards ownership or management*."

"Central Banking" by H. H. DeKock,


320- 32J+.

Extension of monetary functions of central banks
Functions of Central Banks have been significantly extended

in several respects in recent years,

Open market operations

’TOxile genuine open-market operations are, and can be,
undertaken at present on a relatively large scale only by the
Bank of England and the Federal Reserve System of the United
States, owing to the existence of wide and active markets in
short-term and long-term Government securities in London and
I l w York respectively, the central banks of many other coun­
tries, old and new, have recently been exerting themselves to
establish some other form of open-market operations as a
supplement to discount-rate policy and as an instrument for
neutralising seasonal movements or movements of Government
funds or for insulating the internal credit structure from
sudden and temporary changes in the balance of payments.
"A number of the older central banks, however, could not
undertake open-market operations until they were specifically
empowered by amendments to their statutes to buy and sell
Government bonds, Treasury bills and similar securities for
their own account. This was done, for example, in Germany in
1933, Holland and Norway in 1936, Belgium in 1937* and J'rance
in 1938.


'Monetary Review 1937~38,» p« SI.


"A new development in connection with the statutory centrali­
sation of cash reservos is that of giving the central banking
authorities the power to decrease or increase the minimum cash
reserves to be kept with the central bank by the commercial banks.
It was first introduced in the United States in 1933*
"Hew Zealand followed suit in 1936 when the Governor of the
Reserve Bank, acting with the authority of the Minister of Finance,
was empowered to vary the percentages of balances to be maintained
by trading banks with the Reserve Bank, subject to such balances
not being at any time less than those provided for in the original
statute; and in Australia the Monetary and Banking Commission
recommended in 1937 that the Commonwealth Bank Board be empowered,
subject to the consent of the Treasurer, not only to require
trading banks to hold minimum balances with the Commonwealth
Bank for limited periods, but also to vary the reserve percentages
within the limit fixed by the consent of the Treasurer."



"Central Banking" by M. E. DeEock
pp. 336-337, 338-339.

Loss of functions and control to governments
In spite of these developments, however J it cannot be doubted

that in recent years governments have increased their share in the
formulation and administration of monetary and financial policies at
the expense of central banks.

In a way this is merely a reflection of the obvious need for
unified control over all monetary, financial end fiscal policies when
such policies become of increasing importance.

But such unified control

might logically be seated either in the central bank or in the govern­

That the tendency has definitely been a shift from central

banks to governments is due to at least two factors.

During the last depression the strictly monetary policies

of central banks were recognized to be of smaller importance than the

-6 -

fiscal policies of the Treasury.

If any coordinating had to be done,

it was quite natural that the Treasury should do it rather than the
central bank.

This is merely a particular application of the general

principle of the dog wagging its tail rather than vice versa.



explanation does nicely for the United States where deficit policies
loomed large and the government through the sale of its securities be­
came dominant in the whole credit situation.

But a similar trend is

perceptible in the countries "where active fiscal policy did not play such
a role.

An additional explanation is needed.

It may be in fact that

governments rather than central banks are the actual centers of authority
either democratically elected or dictatorially established.

It is

natural that powers come to be exercised by them rather than by the
central banks, who are slower to respond to changes in political
authority, and are therefore side-stepped in the formulation of policies
and the exercise of functions.

Their vague inheritance of semi­

independence thus actually is a millstone around their necks.


Assuring the role of central banks through making them responsible
public institutions

Commenting on the forces that motivate the actions of the Bank
of England, the London Economist said:

"Yet there is the danger that the City may become a law
to itself, and that the Bank may unconsciously acquire powers
which more properly belong to the Government} and may even
judge questions from the standpoint of the" city "as distinct
from the nation. . .If the Bank is to retain its independence
and its unofficial leadership in financial and monetary matters,
it is necessary to lay down several guiding conditions," l/


Economist, AugUst 10, 1935


which include a control and leadership that is entirely disinterested, and
a far greater degree of publicity regarding the actions of the Bank.
Regarding the constitution of the Bank, the Economist has the
following to say l/

"In theory, the Bank is a private institution, charged i r t
certain duties, both statutory and unwritten, but controlled by
its shareholders, who in theory elect the Governor, DeputyGovernor and Court of Directors, and are also ultimately respon­
sible for the appointment and retirement of the Bank1s staff.
In practice, certain changes have taken place during recent years.
The Governor is no longer elected for only two years, for the
present Governor has held office since 1920. The present DeputyGovernor has risen from the staff of the Bank, thereby carrying
into effect Bagehot’s suggestion that the Deputy-G-overnor should
correspond to the permanent head of a Government department.
The directors of the Bank no longer represent exclusively ’City’
interests, and two of the directors are now fulltime and fullypaid employees of the Bank. The Governor has also recruited a
personal staff of technical advisers, and of these two have come
to the Bank from the Treasury. Finally, it is inconceivable that
the Governor could continue to hold office in opposition to the
wishes of the Government of the day or that a new Governor could
be elected without the de facto approval of the Cabinet.
"The main need, therefore, is for a codification of what
has already become accepted practice. The exact legal owner­
ship of the Bank’s capital is comparatively unimportant. The
Bank has long ceased to make its profits a major consideration,
and the profits arising from the note issue already accrue by
statute to the Exchequer. A legal limitation of the Bank’s
profits at approximately their present level would please public
opinion and would involve little real change. There is little
to be gained or lost by transferring to the State the ownership
of the Bank’s capital, which may reasonably be left as it stands
at present. It is of greater importance to make it clear that
the Governor, not the Court, is in control of policy — as he
really is today — and that the Government has the final word in
his appointment, as in the case of any other important public
servant. Thus, in future, the election of the Governor — and
possibly the Deputy-Governor — should be made subject to the
approval of the Cabinet."

i/" Ausuvt ivr'iy^'.