Abstract

On the Reform of the Instrumentarium of the German Bundesbank

The credit volume of the commercial banks continued to rise steeply in the Federal Republic of Germany even when the Bundesbank steered a stricter and persistent contractive course in past periods of restrictive policy, especially in the first half of 1973. "This induced the Bundesbank to submit at the end of last year a proposal for extending its range of instruments, which is subjected to a critical analysis in the foregoing contribution. This contribution is divided into three parts. In the first section the mechanics of money-creation are ventilated as the theoretical foundation, the second part deals with the changes in the central bank’s instrumentarium proposed by the Bundesbank, while in the third part these proposals are critically analysed. 1. In national economies organized on a market-economy basis, as a rule the banking system has a two-level structure. The central bank makes the legal tender available; the commercial banks provide the economy with credit. Since the credits granted by the commercial banks are partly called for in central bank money, by way of its own creation of money - provided it has adequate mastery of the process - the central bank can control the entire supply of money and credit. Money creation by the central bank is based on three components: the foreign-trade, fiscal and refinancing components. In this connection a central bank’s possibilities for exerting influence are limited as a rule to the refinancing component. Whereas a proposal of the Board of Experts for the Assessment of Overall Economic Trends aims at improving the possible influence on the refinancing component by intensified application of open-market policy, the Bundesbank’s proposal is directed not towards improved control of the creation of central bank money, but towards the use made of central bank money. The reform proposals put forward by the Bundesbank can therefore be classified according to whether gaps in the present instrumentation are to be closed or whether intensified intervention is to be made possible. The extension of minimum reserve requirements to transactions or institutions not hitherto affected serves to close gaps. It is intended to achieve greater effectiveness of the instrumentarium by raising the maximum rates for present liabilities reserves, by introducing a reserve for asset growth, and by providing for possible imposition of credit ceilings. 3. The instruments are examined in the light of three criteria, namely the systematics of monetary policy instruments, efficiency, and compatibility with the market economy system. The study reaches the conclusion that the Bundesbank’s proposed improvement of the instrumentarium ‚does permit a more efficient monetary policy than hitherto, but must be judged critically with regard to its regulatory characteristics, since it permits the possibility of selective investment control. This finding leads to the fundamental question of whether it is possible within the framework of present relations between central bank and commercial banks to eliminate the undesiredly high elasticity of the credit supply in any way other than by measures which go beyond purely quantitative effects. This gives cause to consider the question with which the article closes (with a reference to the preceding contribution by Rudolf Stucken) of whether the relationship between the central bank and the credit banks should not be subjected to a fundamental reappraisal