Western central banks serve social goals

It is well known that following the disasters of the Great Depression and the Second World War, governments in the UK, Europe, Japan and even the US asserted much greater control over central banks and the banking industries (Capie et al. 1999). Central banks became, once again, important institutions for financing and managing government debts accumulated during the war; and after the war, central banks also became important tools for rebuilding and restructuring national economies and providing for social needs, often under government's direction. Central banks utilised a variety of credit allocation techniques to accomplish these goals, and in most cases, these techniques were supported by capital and exchange controls on international capital movements (see, for example, Epstein and Schor 1992). The types of controls central banks used, the goals they were directed to and their degree of success, varied from country to country and time to time. No matter how successful, virtually all of these central banks had ended or severely limited their use of these controls by the mid 1980s. Under the neo-liberal play book, these controls, despite their long histories and many successes, were thrown in the dust bin of history.
DEVELOPED COUNTRY CENTRAL BANKS AS AGENTS OF DEVELOPMENT DURING THE 'GOLDEN AGE OF CAPITALISM': The great depression of the 1930s and then the Second World War was a watershed for central banks in the industrialised world. Virtually all were brought under more government control and were reoriented to facilitate government priorities. In the United States, the Fed was brought under tighter government control in the late 1930s and then, at the start of the Second World War was required to help the Treasury finance the war effort at relatively low interest rates. It remained under Treasury control until 1951, but even after that, was subject to significant government pressures to support the market for US government debt that had been accumulated during the war. In addition, the Humphrey-Hawkins full employment bill obligated the Federal Reserve to pursue polices to support high employment while controlling inflation. The era of Keynesian policies was at hand (Epstein and Schor 1990). The US government had a myriad of financial institutions, moreover, that supported national goals, notably housing (Dymski 1993; Wolfson 1993). The Savings and Loan banks, along with other government supported financial institutions, for example, supported housing. During this period, the Federal Reserve policy was quite sensitive to the needs of the housing market concerns and even tailored its monetary policy to avoid significantly harming it (Maisel 1973).
In Europe and England, central banks that had been independent before the war found themselves subject to state control after 1945 (Capie et al. 1999: 72). During the war, monetary policy was often implemented through direct controls while interest rates were held low and constant. Direct controls continued in the aftermath of the war with various credit allocation techniques (Capie et al. 1999: 25).
CREDIT ALLOCATION TECHNIQUES:  Credit controls are commonly defined as measures by which the authorities seek to modify the pattern and incidence of cost and availability of credit from what markets would generate on their own (Hodgman 1972: 137). Credit controls seek to influence credit allocation and interest rate structures.  In Europe credit controls have served a number of purposes: (1) to finance government debt at lower interest rates (2) to reduce the flow of credit to the private sector without raising domestic interest rates (3) to influence the allocation of real resources to priority uses and (4) to block channels of financial intermediation and thus to assist restrictive general monetary policy and (5) to strengthen popular acceptance of wage-price controls by holding down interest income.
European experiences with credit controls varied from country to country. In Germany, controls were used only briefly after the Second World War. In the Netherlands and the United Kingdom, extensive use was made of them, but they were always seen as temporary and short-run expedients. In the Netherlands, credit controls were used to support macroeconomic policy, rather than credit allocation. In the United Kingdom, the principle aim of controls was to facilitate low cost government debt. The government was concerned about the impacts of high interest rates on the bond market, on income distribution and on the balance of payments. A more limited aim of the quantitative ceilings was to guarantee a flow of short term credit at favorable interest rates to high priority activities such as ship building and the finance of exports and productive investment in manufacturing. Credit ceilings were put into place, and exemptions were sometimes made for priority sectors (Hodgman 1972: 144). Moreover, the Bank of England identified sectors for which credit should be limited, such as consumption and the financing of imports. In England, as elsewhere, these credit controls were accompanied by exchange and capital controls. France, Italy and Belgium were a different story. There, the principle of controlling credit flows and interest rates to serve national interests was widely accepted. France had, perhaps, among the most extensive and successful sets of controls, that were part of the government's overall approach to industrial policy.
The Bank of France was nationalised in 1945, and placed under the National Credit Council, the institution in charge of implementing the financial aspects of the government plan (Hodgman 1972: 147; Zysman 1987). The broad aim of credit policy in France was to contribute to the modernisation of the French economy and its ability to compete in international markets. To influence the volume and allocation of credit, the Bank of France used various methods (see Hodgman 1972: 148 and Zysman 1987, for descriptions). Variable 'asset based reserve requirements' were widely used. These require banks have to observe minimum reserve requirements based on the assets they hold, but the central bank varies these to promote lending to desired sectors. They do this by allowing lower required reserve rates on privileged assets. A second technique - ceilings on credit extension - has been used as well. The ceilings were used to reduce credit expansion without raising interest rates, and also to allocate credit: priority sectors were exempted from the ceilings. These included short-term export credits, medium-term loans for construction, and others. These ceilings applied to a large range of financial institutions, and were accompanied, as well, by capital and exchange controls as an important concomitant (Hodgman 1972: 148-149; Zysman 1987).
 A third tool was the scrutiny of individual credits made by banks. This allowed the Bank of France, for example, to approve loans for privileged purposes. Another approach to affecting the allocation of credit involved the use of rediscounting of bills at lower interest rates for priority purposes (ibid.: 151). Zysman (1987) has emphasized the role of these credit allocation techniques in helping to revive the French economy and help it adjust to structural challenges in the post war period. Italy and Belgium also used similar policies. In the case of Italy, a major goal was to help develop the southern part of the country (US House of Representatives 1972: 11). Oddly enough, there has not been a comprehensive statistical analysis of the effectiveness of these controls over a range of industrial countries. The studies that have been done report that the controls were effective. More broadly, the general consensus of analyses of these experiences is that they are most successful when the controls apply to a broad swath of the financial sector, to avoid arbitrage and avoidance, and when they are part of a coherent plan of economic promotion and development (Zysman 1987; Hodgman 1972; US Senate 1972; US House of Representatives 1981). These same lessons apply to developing countries as well, though they were not always applied.
THE NEO-LIBERAL ORDER: To be sure, not all of these efforts were successful. Yet most accounts suggest that some, if not many of them helped in reaching important social goals including rebuilding industry, supporting housing and financing the overhang of government debt acquired during the war while avoiding massive shifts in wealth toward rentiers. Still, by the 1990's many if not most of these programmes had been swept away. The increase in inflation, elimination of exchange and capital controls, and the breakdown of the Bretton Woods system all contributed to the dramatic changes in financial markets and policies. Still, rather than seeing this evolution to liberalised financial markets and central banking policy as a conjunctural change, economists and policy makers have identified the current confluence of policies and structures as somehow 'modern', even optimal, and therefore worthy of emulation throughout the globe.
Jamaluddin Ahmed PhD FCA, a former President of the Institute of Chartered Accountants of Bangladesh (2010) and General Secretary
of the Bangladesh Economic Association, is Chawirman, Emerging Credit Rating Limited.
[email protected]