Views and Comment
IN AN ADDRESS before the Indian Institute of Public Administration, New Delhi, India, in October last year, Mr. Pierre-Paul Schweitzer stressed the importance of monetary stability for economic growth. He said, “I make no apologies for my belief, which I hold very strongly, that monetary and financial stability is the essential prerequisite of sustained economic growth…. I should like to emphasize first of all that the Fund does not consider monetary stability and economic development to be alternatives at all—one is the precondition of the other. Inflation of any significant proportions is liable to frustrate a development effort.”
Economic growth and monetary stability was also the theme of the first of the lectures under the auspices of The Per Jacobsson Foundation delivered in Basle in November by Mr. Maurice Frère, former President of the Bank for International Settlements, and Mr. Rodrigo Gómez, Director General, Bank of Mexico. In the extracts quoted below, Mr. Frère discusses the importance of separating the monetary authority from the political authority, and Mr. Gómez describes the nature of some of the inflationary pressures that are exerted on monetary authorities, particularly those in developing countries.
Mr. Maurice Frère:
“To ensure a better defence against the various possibilities of inflation, it seems essential that the monetary authority should enjoy a large measure of independence vis-à-vis the political authority in spite of the wish that some people may have to subordinate the former to the latter….
“To guarantee the independence of the monetary authority, it is in my view essential that those exercising it should be appointed for a fairly long term of office and that it should only be possible to dismiss them in the course of their mandate by means of an exceptional procedure. It is also necessary—and this goes without saying—that as far as possible the expiry of their periods of office should not coincide with the expiry of political mandates….
“The independence of the monetary authority from the political authority is not enough in itself, however, to ensure a really effective defence against inflation. It is essential that this independence may be supplemented by legal provisions giving those responsible for monetary policy a secure foundation which will enable them to resist effectively any pressure that the government may be tempted to exert on them….
“It is essential above all that the legislation governing relations between the political and monetary authorities should set a very strict limit to the volume of advances that may be granted, in whatever form, by the central bank to the public treasury…. The considerations I have just presented have been inspired mainly by the experience of developed countries, such as the countries of Western Europe and the United States. I think that they are equally valid for countries in the course of development, even those which are as yet still in its early stages. It would be a profound and dangerous illusion for the governments of those countries to believe that, of the many problems facing them, that of maintaining monetary stability is of secondary importance and that it is still possible in the world of today to ensure such stability by strict exchange and price control under cover of which inflation can freely take its course.”
Mr. Rodrigo Gómez:
“Inflationary pressures on countries in process of development are much more persistent and strong than those exerted on developed countries. As is to be expected, the capacity to form voluntary savings as well as to pay taxes is much less, and methods used to collect the latter are less effective. On the other hand, financial needs are proportionately much greater.
“With the increase in social responsibilities in the modern state, the most difficult pressures for the monetary authorities to resist are those that come from the public sector…. It is understandable, because it is natural and human, that government officials in charge of solving urgent needs of the economy want to make as much progress as possible in their respective fields during their terms of office— even at the cost of hindering other departments of the administration or causing budgetary deficits that may induce inflation. This, as some outstanding statesmen have expressed it, amounts to a cruel tax levied on those segments of the population least able to endure it. Moreover, it is very difficult for Ministers of Finance to convince other ministers in the government that the most effective way to betray their noble cause is through uncontrolled spending, and that, in the long run, monetary stability—the product of disciplined spending—provides many more real resources to solve the problems of infrastructure, education, health, and economic activity in general….
“But the private sector also creates strong inflationary pressures which are turned mainly on the central bank. This is not only true of an important part of the industrial, agricultural and commercial sectors but also of the banking sector itself. Some private bankers believe that through the elimination or loosening of some legal reserve requirements or through unlimited rediscounts, the central bank, should provide the banking system with abundant, cheap and opportune credit for all economic activities…. And there are countless plans to establish banks for the granting of loans to specific economic activities….
“Every day new solutions are offered to real or imaginary problems. Some favor the suppressing of taxes, others the granting of subsidies, still others want both. At the same time, it is thought that public investment should be increased in order to keep up economic activity and raise the country’s productive capacity. In addition, there is constant pressure on the central bank of the country to back different types of low-interest loans on the grounds that entrepreneurs are not in a position to pay the high rates of interest prevailing on the market.”