Co-operation among Central Banks

-:- "

^-

ECONOMIC AND

SOCIAL COUNCIL

1.-

^{' \}

ECONOhIC cOrvIJIUSSION FOR AFRICA Conference of Governors of African Central Banks

Addis Ababa,

15-22

Fo~ry

1966

, ^•

Distr.

LDlITED

E/CN.14/.il1JIA/6 16 November 1965 ORIGINAL~ :eNGLISH

CO-oPERATION AMONG CENTRAL BANKS

M65-443

I

E/eN .14/ MIA/ 6

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j if !!!fiiIji11 ..._. - . - - - _ . _ - - -...· ...u _

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TABLE OF CONTENTS

Paragraphs

•

Introduction

The ::Ban;: for In terna tional So ttlomen t •.

The Federal Reserve System in tho USA Monet'uy Co-operation in Contral Amorica Latin American Monetary Co-oporation The Bank Deutscher Lnndor

Tho CFA Franc System

Monetary Co-operation in the CMEA Conolusion

1 -

5

6 25

26 41

42 - 51

52 - 58

59 -

68 69 - 75 76 - 83 84 - 87

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_",;; ~_""?-><,,^..,...,.i..-_rl~~I<IIII!M"_Ji',"'iK_^...1...·.r_'_ _,....- - - " " '...- - - ,..., ...- - - -

E!CN.14!NJIA!Q

Introduction

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i.

The purpose o~ this paper is to bring into clear relie~ the emergent 'principieso~ contr~l ^banking C1~d monetary co-operation as unfo~ded ^by.the

known instances of such co-operC1tion in recent times. An incidental purpose is to indicate the forms such ·co~·oper(1'tionmight tb:ke with the Af'fican' ....

Cen,tralBanks scokingto promote co-operl1tion amoil g themsolvo's. Bt1.sicblly, ., this paper draws upon the oxporienceGofsuch co-operation among central banks

of independent countries but reference is also made to the US Foderal R6sorve . SysteID':and the former Bl1nk Deutscher LtLndbrin Western Germany which, on

account of the degree of autonomy in monetary ml1tters accorded to their

.jC;9n.S.tityq~;r .elements, essentially amounts to co-ordina tionof .' '·co-o.pcra tion of E!;uoh.--indcpendcnt regione"l or ,1re;::' or nation~r,l contr!l1.br~nks•.

2. While the point is gonerally accepted today i t needs to be Eltressed, howovor, ,tha tAfrican development requires a widening or offn;<5dmont·

df

,i-fho existing national frontiers to provide ;J,doqun, to minimumm",rkois for efficient n.nd economic industrial production. Thi~, in turn, presupposes a higll degroe

. ^, ..

of monetary, fiscal and gener",l ecbnomi'c:co-oper;i;ion n.mongcoU:ntri~s"in^the rogi6n. It also presupposes soundpolibios and healthy monetary and f{nancial regimes in the separate countries themrDlves. Formal or informal co-oporation among the centralb:'1nks of these countries could help to promoto such regimes and a c6mmon monetary structure elinlina ting, ^<:18 i t would, the possibili ty of discrepancies in Gxchange rates 'and di~drgencfos ⁱⁿ th~ applicatio~ ^{of mone-}

,,'

ti1ry policies would gb

a

,lon'gwa.yi'n :fcwili t::1- ting tho efforts towards integ- ration.

3.

The most important outstanding example of central ban~irg qo?opora~ton at the regional level is thi1 t of th0 Bel-nk for Intorn:l tional Settlements._{',_ • "I . ~ ,,. ~.' . •} The ovolution of this r:J,l1k must bo ." mD~ttGr of common knowlodge to, central. bunkers

,'\;

cilro:':-,dy. Nevertheless, a brief tre'], tmont is given to i t hero. in this paper.

Tho paper also deo,ls with the experience of monetary co-opor0-tion in Contral Americci,

illustrriti~g

(J,mong others tho

oper'1tio~

and functions of ,tho Central American Clearing House, and with the attempts at promoting monetary co~

operation in the whole of Latin Americ~ which,emann.tes primarily from tho Economic Commission for Latin America (BCLA) and tho L'1tinAmcricanCeX!~:r:ofor

E/CN.14/~/6 Page 2·

Monetary Studios (CELLA). Thore iSl,lso .~ brief description of the ins- ti~nces ofmonotary co-operation in Africa (CFA Franc Zone) and iri East'orn Europe .. (tho Cm-lliCON Bank).·

..

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4.

On tho other hand, the subject of co-ordini1tion or co-operation of Contral Banks under ~ federal systc~ is dolineatod in the briof di~cussion

of the Federal Reservo System of tho USA and tho formor Ba.nk l?outschor Ltinder in Western Gormany, whioh has now beo~ roplaced by tho Dqutsohe Bu~~osbank.

In some rospocts the Francophon,o :wost and Contral African bCl.nks ,arq similar to those •

. 5..

E:xporienoe showstha t co-operation. cnn be looso and.. irifo:rma.l or it can bo formal_. and_. .i.-ns;titutionD.lized Ct.lthough .the formor alwnys leiJ.ds ,to 'tho latter._{..~. '. . .} Tho pD.per then conoludos with some observations or guidolines as to tho prin- oiples whioh must bo observed if C1n adequ:1te, effective, and useful oo~-oporation

is to bo institutionalized.

Tho Bank for Intorn·,tional Sottlements .. '"

6. The history of this Institution is too well-known to central ~nd internatioL 2.1 ba.nkors. Hore suffices i t to say _tha.t~~e negotiations on tho reparations owed by Germa.ny Qftor the First World War morely creatod the oocasion for the_{~: !} oontrn.l b[mkers of the o.dv:lnced oountries of tho world to form"..lizo o:p a, moro per- ma,nent basis th6 co-operation which had boen going on botwoon thorn on an ad hoc_. " - . - : . - - - - and tomporQ.ryba.sis over since the 18th century if not bo:t:ore. .Thus,-, in tho English financial crisis of 1763 when tho rosorves of' tho B'.mk of Englc.nd foll from a normal of ~ 88million to about 1780,000, it was the transfer of somo

~5 million from the roserves of the Bank of Fra,ncc to tho Bank of _Engl~rid among others whioh s,:1ved tho le,tt6r' from complete a,nd u ttercollapso. Indood, "there had boon occ:J-sion when contrcHbC1nks find i t usofu:t to co....opera to 'With 'one [;.n- other to facili tato interni-J,tional settlomonts but 'this ha.d happoned oril'y in exceptional circumstances. After the First l{orld WC'.,r, and ospcci"lly during . tho currency stabilization of the puriod 1922-1930, the prinoipal' cbntral banks

froquontly joinod forcos for tho purpbse of grn.nting special ' stC1biliza.tion credits' either in conncxionwith the reconstruction work undertaken by'the Financial Commi tioe of the 1eague of IT:,,tions or ind0Pond~ntly^{of 'those} ~chemes.

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~/CN\~^14/AlI.A/6 Page' 3 .

Naturally, the monctarand. political authorities became interested in

.

^',."

the,· idea

or

^{sub ti:tB~ing~}fpr such a.d hoc and temporary a$.l?ociation.

". a more pormanent syst~m

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co~o,:pcration. "1nd this idea took practical shape in the nogotiations. Over German rcpp,rations."_{. ,.. '" . . . . .}

7.

The Bank came into existence on

17

May 1930,endowed with the .·two-fold fuhction namely:

(a) "to promote the co-opyration of. tho central banks and to provide

, '

additional facilities for inGerl).ational financial operations"

(Ar~icle

J

of Statutes);

(b) "to act "'Cf~ trustee or. agent in regard to international financial settlements ontrusted to it under agreements with the parties concerno

crt

(Arti cl e 3).

It was by virtue of this second function that, the Bani<; cam~''fto be

entrusted nth the technical'execution,of the Yqung Plan and.subsquently oth<;r·duties including its acting as~lt9.agent fqr the European Payments Union etc.

,,8. ThE; Bank's capi tal, which was originally fixed at 500 million gold franc~.(a gold franc which was then the monetary unit o:f'Swi tzerl<irid and the unit c;>ftenused in internationat'set:tl&rIien:t~bein~ ^{equal to} 0.2;903 grams 9,f fine gold or one-third the preSQ.' US doiLars) arid

di~ided

^into

t"i\TO hu,ndred thousand shares. These shares w'ere distribut3d iii oqUin

. ,

parts among five central banks and two banking ~oups representing Japanese and United Statesintorests. Only' 25% of this; capital has b?en;pdd.,.up~ namely 125 million gold francs equivalen·Cto 41 million pres "nt US dollars and in tho course of i is e~:lstence ihe;'menibership has evolyBd that today it covors all European Central

Bank~ eicapt

^Spain

and the State Bank of the

USSR~

^It

~as

optional to the Central Banks

. .

eithor to subshribe for the shares themselves or to offer them fop subscription by the public

in

their respective markets. The· gr8at

majority of the banks did and. now ownthree.,.quarters of the banks shares.

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II E!CN •14!AMA!6

Pabe

4

9.

In order to ensure that the Bank for International Sottlements shall always retain its character of Central Banks's bank, the Statutes

,.:'" .

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contain a special provision reserving th8 rifhts of representation and voting exclusively to the C-ntral Banks quite independently of th~

ownership of shares~

10. The Hague Agre.3ment tobether with its own constituent charter

guarante.'s tho. Bank for J:ntGrn~tionalSettlem3nts the privilege that its prop:'rty and assets and all dGposi ts B.nd other funds entrustec, to it rwil1 _.at211 times be immune from any measure of 8xpropriation, requisi-

~ion, seizure, confiscation,prohibition or restriction of gold or

currency export or import and any other similar device. In its relations with the Federal Reserve System and the United States Treasury, the Bank

,. ' ~ .

.for International S~ttlements enjoys the same status asa Central~ank and is thus

abl~

^{to 9uy}

g~ld

f;om or sell gold to the'US Treasury. The Federal Reserve Syste~ maintains a' correspond~nt-bankrelationshiP with it through the Federal Reserve Bank of New York.

11. The Bank for International Settlements is administered by a'B~ard

of Directors consisting.£! officio, of the Govornors of the founding Central Banks (Be+giu!Jl't~.r~~a.~.d.,::_France9Italy and Germany) together with five other members appointed by.these Governors and of the same

~

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nationality as themselves plus three Governors elected among the Govern- ors of the other central banks (up to now 9 these havo boen the

'. Governors of tho Central Banks of the Notherlands, 'Sweden and Swi tzer- land, the countries possessing the; most important money and capital markets after those of thE;) founding Central ]ank~). ; This Board of Directors olocts ^2, president an,d appoints ⁽³ general manager.

12.' Structurally it has ^2. Banking dopartment which undertakes banking op,;rations; a Monetary and~~donomic dopartment which does research and prepares tho annual report and a general secretariq,t wr.ich p8rforms the administrativG tasks. It has a small internatio~al staff of highly qualified men who are selected on the basis of their individual

qualifications and not as representatives of particular countrios. The

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Bank has no direct contacts -i th the public. Its business is with' Central Banks which are its correspbndents and through _w~'lich its.' securities, gold and funds are kept.

1)._ The Board of Directors hold; re§ular monthly meetings. In these meetings they determine tho nature of the operations to be und~rtaken

bythe.Bank 1iJithintho provisions of its Statutes. In,this connexion, tho. Statutes clearly stipulate that the operations of the Bank must

c~nform ,nth the monetary policy of the C8ntral Banks of the countries involved. Before carrying out an operation on any market or in any currency the Bank must give all the Contral Banks directly 90ncerned an opportunity to dissent.

14.

One of'the first tasks of the BIS was to co-operate in the carrying out of the Young Plan. Here its duty was to rec8ivo and distribute the r0paration paymonts provided for in the Ra[;ue Acr:::'ement. It acted also as aeent in connexion 1id th the i:suo of the Gorman government inter";"

ndional fivo-and-a-halfpci' cent loan of 1930 (The Young Loan). "

-The financial crisis '<i'll.ich brok3 out in Europo in.1931 lod to the Hoover Moratorium and the machin3r;y of the Young Plan was brought -to a stand- still on 1 July 1931. As the Bank had 8.1so boenentrustcd ,dth the task of prov:iding diroct help to the Reichsbank to cnsur'e t,he regular flow of, th,e reparation payments? the :goover Moratorium found the Bank with' a total investment in Germany to the tune of

444

million gold france.

These Were reducod to about 300 million by the :::md of 1932 and have remained almost unch nged over since. Jc final settlomentof these' investments' should take:: plac8 in 1966 under an arrangement concluded in '1953

b~t'wGen

the Bank and the Fodoral Republic of Germany.

15. Als()b~foreVorld,~ti'ar II tho BIS took an activ~ part in the

granti!lg of omergenc;Y' credits to C,ntral Banks. It was concerned itself with .the granting of emergency credits to the National Banks- of Hungary?

,. '^{; "'},',\,. -. ~'"

Austria? Yugoslavia and the Reichsbank while a temporary advance was

. ,

~'lso mo.de to the Bank of :tanZi,g.

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:S/CN • 14/AIliLA/6 Pago 6 "

16. Roger -'~uboin whos0 connexion wi th tho Bank has been co-ext GnsiV8

with'the latter's existence tells us that Hin, tho first year of the B:mk's existence when'tho monots.ry aut,io:ii ties in a great numbdr of countries still hold,fairl~- largo reserves of :foreign oxchange 'in addi- tion to thc~r gold reservos~ thQ original intention W2.S9~by central.izing at the BIS part of the foroign GXGh::lnf::,8 holdings of the Central banks, to ona,ole payments to 'OF, made by"m;;;ans of transfors in tho books of the Bank. as, Ii ttle recourse as possi'012 being had to the markets in order to, avoid upsett:ine., ~hcir equilibrium. It was indeod hoped that, it would De pos~i'Ole to cre,~te,what was called a 'foreignexctJ,ange clearing system' ,and to that end attempts '\IITere made to unify' the rates quoted for operations in the diffcront curroncios. Tho disruption of the monotary system in 1931 'cut sho:t all theso ondoavours. Even if a more stable order haeC survived it would vGr§'likely hav8 been n::;,cossary to apply those ini tial idoa~ with a-greater degree of r'ealistic fle:d bi- iity than was cit first plannedH•

17. In the difficult monetary period follovd.ng tho 1931 crisis~ 1-rith the wave of d,waluations this invol_, VG~l ~ ,the BIS arranged for the grant-

' ,

in,g of credits of a comm:.:;rcial type. ~9-Contrc,l Banks while carrying out

, .'^~., " .- .. '

for them operations of purphB.s8~ sale :lnd oxchant;e of gold.

18 • After' the Gndof World: "Iar II tho BI3 resulI1<;d its important· role despite the f8~t:tthat the Brat 00n ~voods Conferenc.(} O:C 1944 had recommended i t€f. lirluidation.

19. Tho monthly mootinGs of the Board of Directors wtich h8d bdbn suspended from the Autumn of 1939 'were resumed by late 1946. The first task th" BIS performed after the war was the reCOvGry of gold r serves of European Central Banks confiscatod or stolen during the war. A formal agreem~nt (3~ thi,s: mattqr 1N~sconcludedin Jr1ashington in May 1948.

, "20. ' The amount of deposits outrusted to theBIS bY"m8mbcr Contral Banks has st,adily increased since tho cud of the 1"ar. As of )1 March 1964, doposi ts of' Cantral Banks st~od at about 2.4 billiongbld francs while

":. ,~I .

deposi tors othor than Centrpcl Banks ..&c1'::C"kitiiuk£i'.d to the lJank deposits

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E/CN .14/AMA/.6 Page 7

of' ':,.>bout 180 million gold francs as comp2.red tQ1948 11lhEm totald.cpo.si.'~s

includinglohg~t0rmde'Posi ts 'wre.noarly 315 on the gold frEmcs. Gold operations also have. steadily increased over this p3riod.

21. In the autumn of 1947~ the BIS agrood'to act as agent for most of tho European Govornments participating in the Marshall'Plan for the purpose of the 6xGcution of the limited compensation agreement signed a.t that time.

22. In April 1948~ the Or@anization for European '8conomic Co-operation was formed and in September th8 BIS became the agent of this organization for the e~ecution of the "a6Toe~ents for intra-:European payments and compen,sations" "Thich wcr'3 directly linked with the distribution of

Marshall aid. In 1950~hese compensation schamas were supc::rsoded.'by;ihe establishment of the Sliropean Payments Uniong tho BIS became agoni

of

the OEECfor the technical operation of the European Payments Union Agreemont and was also entrust d with the task of acting as banker to the Union. In.November 1954~ tho BIS agreod to act as depository with regard to the proceeds of 3. loan of US 100 million granted by the Uni t0d States Government to th0 European Coal and Steel Community.

23. The .:BIS aiso acts as a centro of .monJtary and ::economic res8:1rch. Its annual roportsusually contain a g8~iral survey of the intornation&l economic ;;md mon'tary si tuation₅ particularly in Europe~ with sFecial sections devoted to such .tuchnical 81J.bjects 2,8. tho production and distri- bution of gold,foreign exchange _markets~ prico _mO'8mcnts~ etc. (in addition to its'profit cmd losS·

ac~ount

and balancJ

s~eet).

The research department of the BIS3.l:;;o preparos specific

2:i

hoc studios (e.g.

compilations on foreign exchange rogulations press revi.:;ws~ Gtc.)~ some of whicha:rc pUblis~ed and released. It also undertakes studios on behalf, of specific central.banks from time to time.

24; Al t>ou:gh the functions of' the BIS were 8stablishcd some tUne ago in its statutesj these functions' have not r;em~inG(' fix()d but are in t!:10 process

or

continuOus evolution. For _exarrtple~ not only is tho BIS the techni'cal agen't'of the :~M·~.but a repros:entative of this institution

E/CN • 14/AMA/6 Page 8

always attends its meetings? that is the meetings of the J\!IanagingBoard and regularly supplies it vi th inform2,tion and statistics on mon"tary reserves~ the balanc:-, of payments :::,nd other aspects of the member countrios' mon0t2~ry situation which is important for the over-all understanding of one another's problems. Gen8rally~ they have ovolved

in reci;mt years in the direcJion of mCiking the, BIS essentially a European insti tution in contrast to the IKF i:end the lBRD. However~ of all the functions performed inside Europe for European Central Banks, the most important is the regulc_r and continuous meetinf; of the Governors of

. ;t

Central Banks themselvGs. Invariably? the Govornors themsGlv(;s attend the regular monthly meetings and those personal contacts b~tweeh them, their al tcrniltes ~.nd a number of hl-gh officials whom they often' take with them to those meetings are inde~d of considerable value; The authori ties have round b;sr Gxperience thqt in order to barry out the ,- delicato tasks ontrusted to thGm~ they requiro n6waJays a thorough knowledge not only of their countries' monotary situation~ but also

ot

that of othar countri~Js. The relations whch are established through diplomatic channels or at official conforences cannot take the place of the direct personal contacts, the relationships bdween man and man and the closo understandin[; which Gxists b2twc~cn those who have to shoulder very much the samo responsibilities in their respective countr:l.es.

25.

Lastly~ it is instructive to recall th2t tho Bank of Intcrn2tional Settlements has been conducted on a puroly commercial basis and as such h's met with unqualified success. In tho 8,c-"rliest poriod of its existence (between 1931 and 1935)? tho not profit calculated after making co~tain allocations to reserves amounted to botween 13 ~nd 15 million gold francs annually. In the following years, 1935~39, the net profits settled down at about 9 'JRlillion gold france after which it dd6lirt0d considerably during the warporiod. After tho war~ there was a slight loss in 1945-46 but this wasimm:;diatel;r followed by a com- parable surplus in 1947 and·vnth tho rosumption of normql operations

thereafter the profits hav2'movod in this wise. Gross profits have,varied

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E/CN • 14/AMA/6 Page 9 . ,

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between 5 million gold fre.ncs and 17.5 million gold franos in the

interv8ning years; c·~nd net profits likeWiso h,,~ve been as high as' 9.2 million gold francs •

The Fedpral Reserve SY$tem in. the USA

26. The Federal Heserve System performs in the U.3A the, same basic

funotions as Centr-aIBanks in other countries. In the light of dr.n~;rican

exPerience it was dcsignod to IDeGtt1:le peculia.rities of tpe bEmking

, system'of ·that country. B?call.seof th,a '.vide _~:x:pense and variedpharacter of the country,' the Federal RGscrve ActFr:5?vi~ed a number of regi,on~~

Central Banks. For this purpos~the GDu~try w~s divided into 120

d:Lsi;ricts in each of which a T'ederal Reserve Bank was established.

27.

AgairC the nature of the'Foderal Reserve 3ys~em must be well known to'central bankors all over the world. Suffices~trtof?ay that although the Federal Resorve Banks are public in$titutions~ their stock is held by the Ih8niber banles. Each member bank Wal=i required as a cond.ition of membership to purchase stock of tho _F8de~~1 Reserve .Banks in its

'istrict in an amount equal to" 6 per Cent of i ts,c:'jpital, ~"nd. surplus.

One-half was paid,in and thoromainder subjoct to call. The stock antitl§~ tho, member .bankJ? to vote :n tho sloction of 6 out of 9 members of the Board of Directors of a.Reserve Bank and to receive dividends fixed 'by law at€). POl' yent cumu.lativc on the; po.id-in stock

, 28. 'The Presidents of the Resc:;rve Banks are chason by the Directors but subject to th1 approval by the Board of Governors of the Fedoral Reserve System. Thero is n S<.N8n member B02.rd, appoint.:' by the President of the United" States and having extensive powers of control over, the 12 Federal Reserv8 Banks c,nd the member httnks. The credit-control is sharodinp2:.rt b;)r the 12 Fe60ral Reservp ,Banksfl-nd another bod~r;the

• <'

; FederECl Open Market Commi ttoe which consists 0112 members including the 'sev8n members of tho <Board. of Governors . nd five repro1i3entatives elected

by the Federal Reserve Banks.

E/CN .14/AlVIA/6 Page 10

29. 'lfhile the F3deral Re'scrve Bank is ^3. regional system its crsdi,t controlaetivitios :has recently been increasingly contralize.dand" in tho conduct of creidt and'onetary policy? it operates virtually as a single Central Bank. Each of the 12 Federal Reserve Banks is required by law to publish a relIance f!beet" Their holdirigs ofgold"ccrtifi'cate,_.

.

a~d governriLO-nt socuri ties are, h01,'TGvGr, contro112d as' a sinblesystem account over which the individual reserve banks have no indcpondent' discretionary authority. Contrariwise, in the extension of F!Meral

res~rve

cfedit thrcugh loans and

discount~,

the district resorve banks

, .

.

do oporate regionally and independently of each other under the regulations of the Board of Governors.

3~. Thore are strict and elaborate regulations governing tho keeping of accounts, their audit :nd presentation which tend to streamline. tho ontire system. There are also strict regulations governing the conduct of affairs and tho officers of these roservo banks,with penalties attached to 'creliction of duties and infraction of the regulations.

There is also "an elaborate inspectorate to ensure that these r~[ulations

are brought into full effGct and so' on.

31. The Federal Resorve Banks do not Dold at the present time any gold but instead hold gold certificates. l'h'~ emergency18ws of 1933 and the Gold Reserve Act of 1934 required the surrender of all gold to the United Stat os Treasury and provided for the substitution of gold

cortifictes for actual gold as logal rosorvc of the 12 Reserve Banks.

By an Act of June 194y·thc"amount of told c rtificates required to be hold by each :F'oo.oral Reserve Bank W.S reducod to 25 porcent o,f. its note and

35

percent of itseposits liabilities (,:-.gainst the,previous 40 and

35

per cent respectively).

32. It is precisely tho requirement of maintaining a givoncoverage of gold certificate against notesan0 deposits which shows tho decentralized and regional character of thoFGderal'i\esorv~3ystem. Gold certificates are acquir3d or lost by the Fec1oJ."al Reserve Banks in tho 'process of inter-district trade a.nd clearint:, operations just as foreign ::xchange is acquired or lost by foreign nations in international trade and

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dttJllu~of lP 1 t ..MINl '-.air tilWI T L • •~

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payments. Incid~ntaliy~ from the very first the Federal ResorveSystem was linked

u~Jtwi

^{th a}

cleafiri~~ystem' as

well for which purpose the gold

setti~~ent

fund consisting of

a

milliori goldd6Ilars was oI'ginally created.

33.

In a sense there exists inter-district 'alance of payments problems and given districts could in principJe:los~, and hwe in fact, lo~t

gold certificates to the benefits, of other districts. If and to the extent that this occurs~ thccorrectiv8s.&re. ;to 'b\3 found in the l:i,.mi ted autonomy'th~i each FedaralReserve Bank IposSesses i~md which enablesi t to m~intaiha higher or lower'discount rate or· to adopt more stringent measures of monetary dis¢ipline than those prevailing in the country as a whole." In extreme cases correctives can be found by way of inter- district loans~ with surplus districts lending assistance to dE!'ficit districts,c:.nd/or by a redistribution of Federal governmont expenditure in favo.ur of th:.:. deficit districts. Howe:verⁱ₁ it is to be rioted that the effect .of the system is that tho rOSourC6S of the' who18 country will be placed at the disposal of anyone district which is in difficulty in extreme cases.

34.

The Reserve Banks are authorized to discount certain types of'loan paper offered by momber banks and to make advances to member banks against .... jt4Qir promissory notes secured by Governmont s8curi ties or· other approved

.' . y . . •

by collateral. Unlike many Central Banks¹ the Reserve Banks do not do ordinctry businoss:'Tich tho cneral public or ^":rith non-membet' banks.

:35.

United States governmont securities constitute the largest sinble afJscJt? other than gold certificates ^.OJ the Reserve B...nks. The aut'l.ori ty of Reserve Banks to acquire socuritios is fairly broad. Although

formerly they held substantial amounts of bankers' acceptances, in the practipe the sec~rities ;~ld by tho Reserve Banks are confined

today to obligations pf the United Stp,tes Government. This 'pQrt·ioularly is a post Second "orld:';,r phenomenon which has boen founditobe

E!Gn·14!AMA!6

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advantageous in the can Grol of the monc:tary situation ion pa~ticula,rly

control of inflation •. Ordinarily, securities can be purchased in the

"open market^{II ,} which means. the purchase9figqverWA:~nt;~l3curities

._

^....

^_,

^...."._....-

....

^{', ...".,.-.}

^__

^...~..-

already outstanding from dealers rather than directly from ba~k~ and .0thi3r investor~.

36~. Purchases arid : sales 'of government securities are for system account ~nd ared:tredt~d.bit he :rederal OpenMarketCbmmittee, the actual

transacti~ns

be:lng'exocutc:'d by' the Fecleral Reserve Bank of New

. .

York as its agent. Th6:'C6mmi ttee has very broad discretion.,i ts policy bein:.:; guided only bf _tli~ provision that Open Market policy "shall be governed with a view toaccomodatiric commerce and business and with regard to tl1eir bearing upon tho g6rteral credit ,situation of·the

•

.

.

•

country". "''":

37.

The principal liabilities of the Federal Reserve Banks consist of

Fcder~l Reserve notes and deposits. Federal notes are the principal form of hand. to hand ,currency in use except for silver certificates issued by the Treasury and minor coin, the note issue function has been assumed by the Federal Reservo Banks. The amount of Federal Reserve notes outstandin.-. responds so<~sonally und cyclically _toth~ demEnd for currency.

38. The issuance of ?eo.eral Reservo Notes. is enshrouded in a y1lriet.y ...f highly technical· and involved requirements •.. H01rTOVer, the no~e issued by each Federal, Reserve Bank has a mark (from A-N) designating the issuing bank. As indicatod the Federal Reserve Note is protected· by a res€:,rve of gold certificate of at loast

25

per cent .'The remaining covera.ge beinG providod by gov')r~~cnt sGcuri ties and ^lI

e

ligible" paper

,\. : .', , . ! .'.,'

acquired by the. Reserve Banks in the course of their op-erations.

. .

39~

The deposit liabilities of the.Reserve Banks consist primarilY: of the legal reserve balances of lI\ember ban:Cs. In addition the Reserve

.111 J 11

s/eN,.14/AiMA!6 Page 13 "

Banks serVe as deposi tory of thd)'iovc"rnrri6~'t,"a:ctc:C::'a:s'depc~sifo-;j'df:;~':"":"

foreign centra:lbanks₉the Fe'Jet'al<Res81'veBanks' 'i:mdc:maccept deposi-ts

of nOn''''lnBmb'~'rbahks'., ~,:,'^{l ' '}

, : -, " " -, -!-~

40. The Board ~tGovernofs of the -ederalReserve System is itself ~~~

a Bank bu(is an i~stitution'at the

.- -I . ' , :"- ' . ' ' .

12 "contral'! banks which is at once

. ^,

'(.>

-~ .'",'

top or rather the centre.

of

the

t . :':: ..:- ,,',:,:

dem09ratically appointed and with a st.r-ong repr~sentati.onat;itsh",ad from tlL F e0eral govQrnment and

" ' • ' "~','. .; - J '_;:'

havinK,the:functiono~cO-Qrdina ting the ~2 "pentral"banks and ,direet- ing·th.oIl1 s.otha,tnot,or;tlY discreticmary control of the monetary

sywtemics.se,ctl,:I,'E;!dbut Ellsothat this is ,done in such a, way El$::,to ' promoto the interests of the whole of the United States.

41.,.:TheFederaIReservGSystem.is~therefore~² good example not only of:,c.o-'operation but also of co...,ordination of nunLrous individual centr,al banks which arethemselvescentrally'control10d~particularlyin

matters of the note issue? leaving a certain degree of discreti~on in ' the",hands of theindividual. ban¹-:s,o ,The Federal ReserV8 System is .an :;ideal arrangement for a ver.y wide expanse o,f tED;'ritory ,which is '

I>ar"lllellod up into 2uton9mous orscmi-c.utonomous unit8, '- USAo;:r Indi,';l' for, ,example. It permits of, making due ,allowance forth€,), pecular,iti8;8 of state, district or regional conditions⁰ It enables these consti-': '", tuent territorial units to have some flexihj.:lity in mondary and 'credict, poli9y wi th.rospE3ct to but consistent 1;-li th ths,t centrally 3.c.reed upon

. .::',., , ..': '-

al??for, example, at the level

pf

tho Board of Governor of the Federal"n:, Reserve Syst.eIIl~It is9 thereforey a b,oodexample fOr s:uch eouYltries

to. erable ,them ,to work out a system _o~ co-:,,:o:peration or co-ordinati,pn Of their individua.l monetary systems which.willbe at Onye in the_{;.., . ' " . '.' .. ..,,-', ': .:~" '.}

: '-' " ,. .^,.' ,.,

interests ·of the indiyidual cQuntrios Bond the . .interests of ,the whole ...

'-,.'.~'

:- ' .

•

E/ CN .14/AlIA! 6 lJage 14

Monetary Co-operation in Central America

42. The bases of Central American integration were formally laid in 1951 with the signing of the General Treaty on Central American Economic

Integration v,hich is the instrument now guiding the formation of an economic union in the area. The development of concrete machinery for monetary integra,tion wa~, howeYer~ coui3iderably slower, despite the fact that as long ago as 1958 the Central American Central Banks had cop~i.dered

organ1Z1ng a system ,of multilateral settlements. But it was not until the beginning of 1961, by virtue of the treaties signed in

hana~ua

ⁱⁿ

1960, that a real impetus was given to th~ establishment of aCentral American "Common Market through the establishment of a mul tilateralcc>m':'"

pensation system~

43~ .This gave accelerated strength to the process of Central American integration. While in fact between 1951 and 1958 in ter-'-cen tral American trade increased at an averai:::.e annual rate of lO;~, since 1958 the-a.nnual increase has averaged 25}'v.

44.

The Cen tral American Clearing House started operations on 1 October 1961, with the participation of the Central Banks of Guatemala, :81 Savador

., .

and Rohduras • The Central Bank of hicaragua became a member in May 1962 and the Central Bank of Costa Rica joined in June 1963. This institution was i teelf the direct result of the annual -meetings of the Central Banks' which began as ^faT back as 1952.

45.

In general, the structure and operative principles of the Central American Clearin~ House are based on the well known practices of bankers clearing houses allover the world. That is to say, each member bank's debit or credit transactions are multilaterally compensated through its accounts in a common fund. Multilateral compensation between theC~ntral American central banks does, hovlever~ assume the existence of sillall

automatic credits to reduce the necessity of too frequent recourse to cash settlements for credits received. A more detailed treatment of the techniques of operation of eACH is to be fOill1d in a previous BCA document E/CN.14/STC/APU/3 which is circulated at this meeting.

•

. ^.

E/CN

o14/A.1itA/6

Page

15 .

46_t The Central, American ClearingHouse has adopted itsownurii:i of ;', a9.Qounttoregister all operations in the-el.trr-ehCies of the riiellibe-rcentral banks • .:lJ;'his unit ..Qf, account is the "Central AmericanPeso^u "th-ei.1

,arity

^of

w~Jchlhas h.~~Ilfixed.,a~ :the equivalent of one United States doTlar'rThe Centrc;lAmerican Peso, is important fo+. b09k-keeping purposes-6hly, ai-rice_{.' " . , . "~,,'. .. .' '.".} the compensab;I..e documentsaA4. corresponding accounts opel'atedbyeach- of the member can tral ?aJ:1b~Cl\C~".exp~~se9-':inthenational currenci~sof'the

. Central Ame:rican c u r r e n c i e s . "

" ::,.; d ", . " . . " . - . , ',-".- . ..'

' , ; :

47 •.

Although efforts atbo-6per:~tionbetween Central American central banks have SO far been coneen~rated on the development oftheCmultilateral . Ilayments _sYst~m an,d the co-ordilfationof exchange policieg'r;qonsideration

h1ls also been., given, since the·middle of_{. L,.I} ..•. , -. . ' .. 1962, to plans'.tUiten,ded:'t6':'-:';'

est~blish th~,;bases of an extenE!~ve Central Amerioan monetary union..The

organizati9n,':~f

these efforts has gained momentum recently and

:ha.s'be~

enco:UJ;.'af~~.bYcr~heCentral Ameri~an ,Economic Council, the supreme organ^U

"vi. ._{•.:.; .;.,}-\.t.e_{'.• '} General Treaty, of Cen traLAmerican Economic In tegra ti6ri •_{_,.,; •. '_' "I}

48.'

·(Jf) the"a:Chievements of the'EJ2~cutiveBoard

of

the Central American

Clear.ihg"Hous:e,'the establishment

,idf

the "Central'

.Ani~rican

Che9-uell, which may. in 'tiIll€ come to constitute tJ1eforEO-runner of' a single currency in Central .Am~ri'tia,; isw(jfi-th mentionihg'~ The'central American cheque is conceived as a uniform bankin", cheque, of. ,red.:a.cedcgst, .Epcpre.ssectin.the national currency of ~he issuer and payable at par in the nationa.~ c~rency

of the payer. Even though the Central American Cheque would,not exqlude the use of other tradi tionalinstruments (like the cashier'

s'~heq~e

^a.z,:td·

the certified personal chequ~),

it

is hoped that its introduction in

multilater~l

payments ma;

h~;e favourabl~

psychological effects

an~'con­

tribute to:-spreading the use of Central American cur~encies in the monetary transactions of the region.

49.

The idea of establishing in Central America a _~ider and more

1

permanent monetary organization than the present clearing mechanism,

. ", :", : . i, , , " . . , . ' 1",~' ^{. ' ',! • "}

began to be discussed in the Clearing House itself as early as 1962. A

. 1 -:-~.

oommittee of eXperts has been set up to study previous cases and to formulate the draft of the legal instrument which should give s~a;p.&',t.o.

the proposed Central

Ame~ican

Monetary Union. .

E/CN.14/MiA!6 Page 16

5°0 'rb;e.

Monetary Union would assume the responsibilities at "pre's ent slloulq.erEl4, by the CentJ;'al Ameri.canClear:i!ng>House, but its actiori'wawld be ,~uchw,ideJ:'. In the first place, non automatic oredits could be:;

negotiated through the Union to correot:."the imbalances resulting

frout

I'"

, the struoture of"inte.r~Central American trade, which does not necessarily cQrrespondtb the over-all balance of payments position of ea'ch of' the participating countries. Secondly, the NonetarY Unionw'buld be ibie to arranbe extensive over-all credits in support of the baUmbe of payments,

SU as to offset temporary maladjustments of member c01,ll'ltrieso

, , " ( ,

53. •..

The process of Ce.n.tralAmerican integration has shown clear1y·that

the" developmen t of the qo.iMl6n,market· gives rise to' numerous and; in tridate financial problemswhichit'iY-::Lll be possible to solve in the future Oh1.y by means ofa more cQ,heJtent al1iFvigorous effort at^r monetary integration.

There is, for example,.a laQ.k of adequate machinery to promote thefiriancing of:i.ptra-regional trade" the mobilization of capital within the area,'the economic organization Q;fthe region's trade with the rest of the "ioto:tldand so on. Tfuile not belittling the importance of the lUul tilateral compen~

sation system, it is clear by now that i t is in the field o:f ];)olicyco.~

,. . .

ordination that the fruits of Central American monetary

an4

f~ancial

iJitee:;rati'c;n: will be felt in the most solid and permanent form.

Latin American Monetary Co-oE,5:lra tion

.. ,

52. These have been persistent efforts by'the Economic' Commission for

Latin America

tEciA) , ttle

:Latin

Am~rican

^{Center for}

M~netary Studi~~:

,"(" ^(CEIILLA),

and by the Latin American Free Trad.e Area (LAFTA), to promote monetary .and banking co'-opera:tion in the interest of regional economic integration.

53.

One of the most 0utstandine; achievement of Central banking co-op~::ration

in latin America is the creation of the Latip American Center for llJlonwtary Studies, located in Mexico City and supported by contributions from the Central

'Banksthemselves~Its

main function; is, 'of

course~

^ofTa

p~ely

research nature,

i.e.

the collection ~d ^ready di~semination am0rl~ ^member Cen tral:Bariks of economic, monetary and financial information on Latin American cbuntries.CEMLA has done in this respect an excellent job, providing, d's i t does, a whole array

of pUblic~'tions'

supplying up-to-date

•

E/ CN .14/!AlvIA/6 Page 17

l , ' .I"

information and statistical data. Loreover~thebiann'ual meeting of

CElVILA provides an ex§.el1ent forum where Central Bankers from the s1.J..b-region can meat and informally .discuss tlleir p:roblems.

54. Another positiv.easpect of Latin American monetary co-operation is the bi~u~l meeting of CeiiJ.tt-al Bank technicians of the AmericancontinElht for which Cru'1LA was recently requested to act as permanent secreta~iat. The meeting covers the whole American continent including~ .there.fore?the USA. and Canada; but has sa far• ,I . ., ~roved to be an almost exclusively Latin American forum where only Latin American problems are studied and debated •. '.;'.-.; , " , - , , . ,':-; , .

55,.' Apart from this, several attempts have been made with. a view to es- tablishing a payments c>r'clearint, system covering the whole L.at;in American

sub-region or at least. the countries which are members of the Latin American Free Trade, Area. A.lively debate is still inp:rogress over the various proposals which have been canvassed in this connection.

56. AfurthlZr attempt at promoting monetary eo~0:perationarn01J.gLatin

American countries was. again rnadeat the meeting.ofCentpalBank technicians hel:din Rio in November 1963. At: that time CEJ.\'lLA, supported.by a certain number of Latin American countries and by outside experts,strongly SUP'1"'

ported a scheme for the establishlI1ent of an institution patterned on the e,eneral lines of the ::Bank for Interrla tional Settlements in Basel. In .this c0l1,nexion it has been advocated that a possible latin American BIS con- sidera tion should be tsiven to having it act as a co-ordinating mechanism

al1l0pg the Central Banks. and. also acting as an en ti ty for financing latin

American trade playing an. important role in promoting a bankers' acceptance market in the Region. The matter is still being e.amined in latin America:,;

by a Wor~ing Party.

57. The Directors of Central Banks from countries belonging to the Latin American Free Trade Area have recently agreed on what appears to be a multilateral compensation and reciprocal credit arrangement which would use the US dollar as a currency. Deposits and payments would be made in the Federal Reserve Bank of New York with the Central Bank of Feru acting as agent. Full details of tllis arrangement have not yet been published but it would appear that the intention is to invite participation of

- - - _ ,...,_.__.""<lIl,~_..,.,.,..._._.•__, "'-''M'iWiI....

_4_----*1--

•

E/ CN⁰ l4/ANA/6 Page 18

other Latin American countries not belonging to. th,e.f~ee trade area,and to seek ways of collaborating with the Central Am.erican Cornmon Market.

58.

In addition to these efforts by the Central Banks of Latin America there is considerable procressbeing made in the field of co-operation at the level of Corr.mercial Banks. There are now regular annual meetings of these CommBrc;';~al I3anl\:s also in the region.

59~ Another interesting historic~l example of such banking co-operation is the former Bank Deutscher L1=lnder of vlest _Ger~any which was superseded in

1957

by the more centralized present Deutscher Bundesbank. This is certainly an example of central monetary or rather· central banking ins- titutions leaving some margin of autonomy at the periphery or with its constituent elements in contrast to the more centralized Deut~cher Bun-' desbank of today.

60. . The German central banking system was reorganized in the years 1946-1948 .... As a result, the former bank of issue, Reichsbank~ which like ali other European Central Banks was a centrally directedinstitu- 'hoh ceased opera tioYlS and the new ort;aniza. t'ion was given a two-tier structure. For each of the original eleven "Jest German LlIDder~ a Land

•Central' Ba:dk was formed as a corporation under pUblic law'.

61. In their respec~ive business areas, these Land Central Banks operated as the "Bpnk of Banks" and as fiscal ae:,ents for their respective govern- ments. They too took over the premises, facilities and official staff of the former Reichsbank~ as well as a substantial part of its assets and liabilities together with the liabilities of the giro system of those branches. The activity of each Land Central Bank was confined to the area of its land.

62. The central institution of the Land Central Banks was the Bank Deutscher L1=lnder located in :li'ran.kfurt-am-I'Iain and created by law in

I'larch 1948. The Bank Deutscher Ulnder was set up with capital of 100 million Deutschmark subscribed by the Land Central Banks.

II . , " PI

E/CN.14/Al'UV6 Page 19

,

.

C\~}. ~11~o,~1tJ~:~._1cwq.,Cerr~r:al Banks.form~d ,¥t,p:rincipl,e>~~e:pE¥1dent ent~ties."i_,neverthe,less,t}N'L 9;ysi;~m wasstrq~1g1;y;, anchqred:in "tp.e :jJ:3an,k.

Ieutsc~~r LMnde:r. Its Board of Directors cOllsis ting 9f<~ePresidents

• of the Land Central Banks and President of the Board of. nanae;erspf. the' - ' . ' " ,.. " . " . , . "'::: ': . • • • . . •" , j ' . , .. -c·.-.L • _. i.·.. _", , ' ' . " .•' . _ .. ' , _ _ ,,_

Bank lThutscherLl:l.nder, lawfully decided the commonpan.k-ingpolicy and en'sur~d tha'{ 'to the maximum extent possible thi's policy was followed in thediffe:t'ent'·LUrid€r.In order to .carryou:tthBse duties the ,BOard of'

Dir~c~9-rs,h<;tq,tod,ep;Lde all questions relatihg. to discountpol;Lcyand".

the det~;rrnd.-na:t;ioll9{r;tax;i..mum reserve requirements , t o draw up direc:tives

f~f.~~~ng to,():PlPlil. _mark~t policy and. credit operations"and to make 'ldl

impQ:t't~.~,dec9~s·:i.ons.in con:nexion 'Wi thcred.·;i. tandlhonet'ary po-Ticy.

64.'r:"The

:Bol:i1-d

,of-D-J.1'ectol'S

vri'is,

by

l'avr,

tfuder the specific prohibit:i.e!:;::

ito'uelegat'eⁱ l1\s responsibilities on futldamental questions relaiithgto;"

currencY'and credit policy. Theresolu-tioris

adopt~d

^{by the}

Board'~re

carried out by the Direktorium del' Bank Deutscher LMnder(Board.of'.-Nicmagers), the]resi',ent, qf;t~~ ~o.ard;of~lanagers,beingresponsible to theBQCil,rd of Dinect.orsforthe execution· or all decisions rend~redby the latter as' well as-for the'!g-Emeral obnduct':of·bus:mess. The Land Centraf\-Banks were', bound to

adhere

to the resolut'i'ohspassedby the130ard of Directol'S ofth.eBanklliutscher Ul.nder' that is, r:Elsolutions practicallyr'endered by their ownprBsidehts<

65.

Oyer-all management of the Land

~ .:.'

Boards of Directors (VcTwaltungsrate eB~a-dr~sriea: 'tnb 'prJ.:t.L"~l!J.es governing

Central Banks, Has controlled by their del' Landeszentr?lbank-:....,i which c:Lls,o._{. .!.:- ' . , .} . -...;- ..' ,

the tasks of the Lan,~ :entral Bank:~

~.~.. ^' President, his?~I{]J:ty

in the by-l<;tws. . within the scope of the resolutions adopted

by'

the Board of Director$ of"

the Bank Deu.tscher L€lnder.

Th'~

affairs of the Land Central Banks were

'-"~-,.

conduc~ted by aBoard of T:anagers composed of th'e and the requisi te

numb~r

of memb.ers as Siipulated

66. The Land Central banking system was not subj ect to .direct i1;l'struotiohs by the government. The Bank Deutscher Hinder was merely bound "to give due cC:lnsideration to the

g~nyral:eco:nQmic

policy of the, Federal

gQ~ernment_.

and to suppor,t}uch policy, w.~

..

~,hiT1the;, ^f3cope of its tasks." "~$.'" j"nthe,'.'"

cas.e,.~~ the Bank Deutscher L1:lnder, the Land Gentral Banks were not sl.,toject:

; .!~'. :..' , J . - .- .- •

to direct instructions from the Land governm~tw..

••

•

E/cN

_.141.Al~/6

Page 20

61.

The functions of the Central Banking system were distributed in s'uch a way that normally the Bank Deutscher L1:!nder acted solely as the Bank"

of the Land Central Banks (with the exception of its financial rela tiona wiiJh the Federal administration), whereas the Land Central <Banks in turn acted 'as' Central Banks for the corilmercial banks located in their areas.

.

^/

•

68.·. Fi.nallY,. the Land Central Banking system is. farl)l()r.~·ceJ:1i;rali~~g.

than. the Federal Reserve system in the USA. The available instrumen:te of moneta.r.y policy, namely, .discount rate policy, changes inmininrtut1i.

reserverequirem.en ts and open market operations were controlled cen.trally by the Bank Deutscher L~nder, and the Land Central Banks were only en- trusted with the execution of the policy decisions taken by.the former.

Only in the ex~ension of its credit to local customers in their respective lands could the Land Banks exercise a certain d.egree of autonomy. .

The CFA Franc System

69~ All politically indepenuent CFA (Comrnunaute financiere africaine- . African Financial Community) countries in Africa belong to one of three:

monetary syst.ems. The countries of fc:..'mer Fren,ch West Africa (~~cludi.n.g Guinea and Mali ) and Togo share the common CJ!"A ;Franc issued by a:,~Ril.¥llqn Central Bank - :sanque Cent.:r:ale des Etats ,d~ 1.'Afrique de l'0~es;tL'::C;B9JM.0).

The four countries of the former French Equatorial Africa andq~mepoP.'l.1L ','

This institute now issues issue t'o:r"]\!i~;a.agascarandtlie Cornaro Islands.

also share a common CFA franc issued by a common Central Bank - Banque Centrale des Etats de I' Afrique Equatoriale et du Cameroun (BCEAEC

y:.

^Th("

Madagascar a new Insti tut d' Emission Malbache' (IEM) was establishediri '.,

. . .' ~ . > ' ~ . ' .. , ..:·,,!....::~J.I~;}..:.~J,:::·~:·,~

1962

to take Over the central banking functions hitherto exercised by t4e_{. . -} ,. \ ", - , L

Banque de Icfadagascar et (i.e Comore which sinoe

1921

had been the bank 0.1'

.'.:'f.~,)~

...

the lll'liiagasy franc which has the sanie fixed parity in relation to the

-.-~'. ~

French franc and the CFA. Essentially it is identical with the CFA and c;ltwas only in August 1963 that its name was changed.

o ,

70.

"Superficially this may appear to be a system of banking co-operation.

This is only superfioialo The BCEAO and the BCEAEC are not federal banks but singleCen tral Banks covering the aeV6n former countries

of French ~rest Africa'and the other coverillg the fourbb"tmtries of former'

•

E/CN •14/Af.CA/6 Page; 21

Equatorial Africa and thc Cameroons. Thoy arc similar to the Central Bank of Nigeria which covers tho four regions cf Nigeria, but unlike the Central Bank of Higeria which has its Board of Directors consisting entirely of W-igerians) the. two Central Banks of the CFA system in ~Jost

a,.nd Equatorial Africa consists as follows~ thomombcrship of the Board of Directors is dividedbotrrcen France and the constituent member countries represented and in the case of the BCEAOby a recent amendment France has six members on the Board of Directors and each of the sevenc0nstituent countries is repr-esented by two Directors. On the BCEALC the Board of Directors is divid.edequall;y between France and the other five c0nstituent members. That apart, unlike the Central Bank of Higeria which has its hoad.quarters located in Lagos, thc h?-;(1qu,:rtbrs of thusc banks is in

l~aris. This subjects these institutions more to the influence of French monetary and financial ideas and French intel-ests rather than to indigenous African ideas and interests.

71. Apart from their function of issuin& currency, the three Central Banks have other featUJ:es in common, namel;y ~

(A.) The Central Banks hold the external reserves of all the participa- tin; countries. These reserves ar-e held exclusively in the form of French francs. layments anG. receipts in foreign currency of each Central Bank a:ce settled throu6h an account - the so-called "Op(>r~tionsAccount "- with the French Treasurj. Further und.er an af,reement Viith each Central Bank, France guarantees unlimited conversi0n of GFA francs into French francs.

'lihis guarantee is mad.e efiecti7e b;y the French 'Ireasur;y providing auto- matic overdraft facilities to the Contral Bank should tho latter's

II, porations ACC0unt^II ShOll a net.)ati vo balance.

(b) All three Central Banks are authorized to extend short-term and Dodium-torm cledit to the priVette sector. This takes the form of the disc0unting and rediscounting of commercial bil.ls presented by cClllmercial banks and certain private enterprises. In general, short-and medium-term

credit is granted for periods of

6

to

9

months onlJ and medium-term credit for period.s of not more t, an 5 ;years. Incidentally, pl'acticall;y all the commeroial banKS in these tori tories are foreign banies.

<'/CN.14/AMA/6 Fag," 22

( c) Until recently there-uas no provision for extending direct central bank credit to the governmentl::> mainly because t.hcsegov~:rnmentsmet. their short.-term financial r'cquir'ements b;J obtaining acredi t from the. )!'rench Treasury. Und~r.the new Statutes of the LCEAO and Qr."the IEM, 4ouever, l)rovision is m~de for Central Bank credit to governments either b;y direct advances or b;y the discount. of Treasur;J bills held b_J commercial banks up to a limit of 10. per cent of the annual fiscal revenues of each gov;crnment.

(d) Each'eentral:Eanke::~rcisesl:lOnctary cvntrol "Ti thiil its respe'cti ve ten'i tory (covcrinb respectivel;ytheseven countries in Kest A.fric'a and the five countries of the Equatorial Africa and the Cameroon l)ribi1rily by fixing the discount and credit ceilings for each cCiuntryand'witHin each' c8~try for each bank and enterprise~ In :l;:1ditioil, the central banL:s are _empo'T~red to var;y' discouilt'rates.uncler its' new Statutes' the

DC~AC is eml~olfered to prescribe liqi.Lidatinb ratios for the comm8rcial ba:lks and to re'11..ire obligator;Jr o.e.posi ts I.d.ch these banks are to maintain with· the CentlalBank.!

(e) As alread_J indicatecLi the management of each of the two of 'Central Banks (BCEAO and. BCEA:.EC) is in the han<:Cs of a c.entlal Board of Directors arid in each count!'J there: is a ~~atic.'Lal lionetarJ' Commi ttoe 1:Jhich is to cc,rr;y out the policy of the bank in: each countrJ'; This Board consibts . of both French and 'African i'epresentatives in the proportions already . indicated. The Central' Board. of Directors d..ecides on ov,;r-all monetJ,ry

,policy 1vhich is iml.lemented b_J' the i:Jati·cmal fionetary Committees at the national level. The manaGement of the IEM is vestedina Board of

Diroctors·consisting of 50 por cent rrench representatives and 50 per cent llalD_tSasy ^:iepresentati ves.

72.'. The essence of the erA iranc s~u:,tem is therefore a high c;tei:;rGE; of centr'alization ire. monetary policyuhich unlike the 3ie,erian central

ballkin_b s;ystem - Hhich is comlJarablc to' the French Hest Africa' and French Equatorial banking systems - is largelj controlled or' L·.fluenced from .utside •. As a counterpart to the fr'ee convertibilit_J into French francs aSDuI'ed by the French 'Iireasury, the French authori tiesmaintaixLa con- ' siclcl.able dObTee of influence in the operation of the .s;ystem. In

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B/eN,14/AMA

/6

PagG 23

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,

c,particular the fixing of ceilings 'co credit expansion foJ:' each country and the allocation of foreig.n. exchange out of the common reserves is c, matter for annual bilatera,1 l18gotiativl1s behreen the interested African.

countries and the French autboritiss.

C. ' . J. .

73.

The vil:;\iblooutcome of these arralltJ Om81'lts is the maj.n tenance of ,a tightly knittedmonthly aTca ,There exchwce :..'atcs ale stable and inside uhich trade is> freely conducted and capi.tal can flo,,7 almost unimpeC.ad

across national boundaries" .An inciCcental disadvantage is that i t is. a ci.isincentive to the growth of in1itSencus financialinst.it1ltions and par,- tiClllarly to local. capt tal investmentinsti tEtions bro1,ing up to promote local· inv.:;si;ment opportunities. .Another disadvantab 8 of these provisions

(unlimited convertibili t;y a:1.d £'r'ee cap:L tal nl0vemenc) has been the tendency of the balance of pa;yments of rno~:.d; of the memb(;..r countries to move into deflci t.--Yfepeai:ed ovcrQrav-Ting of their llOperations AccoEu·ts^II _h~.',8 TGsul ted in an accummulation of negative b21ances - growing indebtedness on which intere~i;":i'~ charged and a liability af,a.inst their extern:'.'. assets "Thich

..

member countries must take into consieleratioll in the event of disengagement fr0rll the system', Thvs al thoui:sh cliseng-8e,ement of an;.\' countJ'Y f~['orll i~.e

s;ystem is a theoretical jJossj bilit;y in practice the scales are hoav'il;y weighted aGainst such Troves. :Because of the conven'~ion of association lrhibh all CFA countries enkr into ,lith the Lur01JecL.1. COIflE1cn Market the Free Trade aru), uhich characte:r-iZCG the CFA'frabc' zc.m.G hasi11 principle been extended to covel' FIEmC2Is p2,rtne2s~in the CorliIlcn Market. :But this . is Ltill :cestricted b;y the principle of j.mpol·t alloce:ti()n Irh:i.ch is still

adhered to between France and these cou:r..tries.

74.

It should be acicled that CFA fnu1c s;ysteo is 6(;rP~leted b J a series of' marketing alrant:,ements bJ' "hieh these countries bet preferential treatment in Franceal1d nov to a c·~n·tain extent in the ot¹wr European Common IVlarket countries for their basic a2,ricul tural products especially coffee, cocca, groundrlUts~ cotton) banaDas and other pr·cr.Lwts. iTevertheless, i t is probablo that this is more than compensated for b J the obligation

that these countries have to import from France at pr:i.ces hib"her than l'lorld market J:lrices. In a::.i.ciition CPA cmmtries nc::;j.n'l,lly rec8iv8 large

_ _ _ _ _ _ _ _ _ _..._ _... - ~ - - - - -..._ . .._U...lo'... 01<1. . ._ ...

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E/CN • 14/AMA/6 Page 24

amounts of public aid from France and to a smaller extent from the Overseas Development Fund of the I:;uropean Economic CommunitJi.

75.

Superficially this would appear to be a form of co-operation between banks in the various countries involved. 'I'o a certain extent there is co-operation. This is true particularly where it is signalized by the meetings of the Hinisters and Directors which usually take .tJlace in Paris.

ThiS, however, has a moral for monetary and banking co-operation that if these States can be induced to co-operate over banking and financial matters from outside their own territories in Africa, it is clear that there is a necessity and a possibility for them to co-operate over such matters pertaining to their own countries and their neighbours which·

invol ved their immediate interests inside Africa.·

Honetary co-operation in the CMEA (Council For Hutual Economic Ass:istan~e) countries.

76.

Co-operation among Central Banks in the ~lanned-economycountries of USSR and Eastern Eur'ope is a jJost-nar }jhenomenon. It began with the annual informal meetiness.of the Heads of the National Banks ,of these

•

•

countries. This has now been superseded by the establishment of the International Bank for bconomic Co-operation (IBEC) in

1964 -

a more formal arrangement inS1Jired b;y the conscious desire to get over the limi- tations of bilateral trade and to capture the advantages of multi-lateral trade and so promote higher levels of trade within the C~ffiA cow!tries.

77.

The structure of the Bank consists of a Council which is coeprisedof three delee:,ates fr'om each country. This has an organic relation with CMEA itself since the COl.:ncil is coincidental vIith the Eonetary and Financial Section of CblliA. The Chairmen of the sections into which C~mA is divided are drawn from different countries. The Chairman of tho Council of the Bank is at present the Polish Minister of Finance. This Council deals with general policy lJertaining to the matters within the competence of the Bank.