Abstract

Can Credit Theory Justify the Inclusion of the Insurance Business in Minimum Reserves Policy?

At the beginning of the nineteen-seventies, there was some discussion on supplementing the instruments of the German Bundesbank with minimum reserves on assets of the banking institutions. A departmental draft envisaged extension of such a minimum reserves requirement to all institutions covered by Sect. 1, Banking Act, that is, also insurance firms. This approach, which was motivated by stabilization policy considerations, was followed in autumn 1977 by one of a structural policy nature (investment control) at the party congress of the SPD in Hamburg. This article deals with the question of whether inclusion of the insurance business in minimum reserves policy would be justified in the light of its systematic make-up. The issue is whether the insurers take part in multiple credit formation and whether they contribute in restrictive phases towards increasing the circulation velocity of money. The article reaches the conclusion that the credit multiplier is not perceptibly greater than zero in the case of the insurance business, that the latter therefore does not participate in multiple credit formation, and that with respect to capital formation and credit-granting by insurers tangible relationships with cyclical influences are lacking and hence also any procyclical influence on the velocity of cirulation. The inclusion of the insurance business in minimum reserves policy would thus be inimical to the system.