Abstract

Swiss Experience with Credit Ceilings

In Switzerland the instrument of credit restriction was applied on a voluntary basis, except for the period from 1964 to 1966. Since such voluntary action magnifies the weaknesses inherent in every measure to check economic activity, the Swiss examples can only indicate approximately the effectiveness of this instrument when applied autonomously. In principle, the efficiency of autonomously applied credit restriction should be greater than the efficacy of credit ceilings set on a voluntary basis. In this regard, however, allowance must be made for the general, empirically established fact that the inclination or compulsion to circumvent such restrictions grows disproportionately faster than the growing effectiveness of the cyclical policy checks. Hence, monetary authorities operating with credit restrictions are confronted with an alternative which is fatefully bound up with unconformable means: reduced efficiency or increased official controls. On the other hand, the Swiss examples demonstrate with all clarıty that, with the current state of trade cycle statistics and in a small country closely linked with the world economy, direct credit restrictions are not a precision instrument of cyclical policy. The reason lies partly in the inadequate transparency of the interrelationships between bank credit and the remaining monetary magnitudes, and partly in the fact that the setting of credit ceilings in accordance with the bookkeeping practice of continental banks is not based on the credit flow, but on the credit level. Hence the usability of credit restrictions for cyclical policy purposes depends to a decisive extent on the state of development of trade cycle statistics, especially monetary statistics. A thorough and regular analysıs of the relationships between bank credit on the one hand and net credit creation, liquidity preference and the domestic quantity of money on the other would be the primary prerequisite for enhancing the efficiency of credit restrictions. The problems are similar in the case of the secound source of uncertainty. Due to the fact that credit restrictions are oriented to the credit level instead of the credit flow, the volume of additional credits relevant for current economic activity is an unknown monetary quantity. If in one period, for example, old bank credits in the amount of 100 are repaid and simultaneously new bank credits are granted in the same amount, there is no change in the level of credits. But the monetary authorities have only vague ideas about the magnitude and temporal distribution of these fluctuations.