"Implications of the growth of non-banking financial intermediaries for monetary policy"

Abstract

Recent literature on monetary policy has paid particular attention to the role of non-banking financial intermediaries as a factor influencing the effectiveness of the existing instruments of monetary control. It is argued that the rapid growth of non-banking financial intermediaries has undermined the effectiveness of the traditional instruments of monetary policy. Thus, Gurley and Shaw contend that "a monetary authority which is tempted to stay within the bounds of its traditional controls ... may find itself more and more out of touch with credit developments in critical growth areas where lending by non-bank substitutions is predominant." J.G. Gurley and E.S. Shaw: "Financial Aspects of Economic Development", The American Economic Review, Sept., 1955 p.537. (Hereafter referred to as "Aspects.") Thorn regards this threat to the effectiveness of monetary policy as arising "not so much in their long run secular growth as in their ability in the short run to expand credit, immune from direct central bank control." R.S. Thorn: "Nonbank Financial Intermediaries, Credit Expansion, and Monetary Policy", I.M.F. Staff Papers, Nov. 1958 p.369. The Bulletin of the Institute of International Finance, however, alluded the threat to the "sweeping changes" in the money and capital market in which "institutional investors play a much more important role than ever before" and other factors which make "evident that the methods employed by the Federal Reserve authorities during the 1920's and the 1930's are not suitable at the present time, when the money and capital markets and general economic conditions are so different from those formerly prevailing." Quoted by E.A. Birnbaum in "The Growth of Financial Intermediaries as a Factor in the Effectiveness of Monetary Policy," I.M.F. Staff Papers, (p.385) Nov. 1958, from: "A New Approach to Credit Control" (Bulletin No. 196, April 23, 1956, The School of Business of New York University, Institute of International Finance, pp 6-7) In the same vein, David and Charlotte Alhadeff argue that the increasing importance of non-banking financial intermediaries (for short, N.F.I.) has raised serious questions not only for monetary control, but also for savings-investment process, for the allocation of resources, for the operation of the money market, and for the validity of the monetary theory. D.A. Alhadeff and Charlotte P. Alhadefft: "The Struggle for Commerical Bank Savings", Quarterly Journal of Economics, Feb. 1958. Such American discussion is not without empirical support, as is clear from a study of the findings of a statistical investigation of the financial institutions in the American economy since 1900 by Goldsmith. R. Goldsmith: "Financial Intermediaries in the American Economy since 1900" National Bureau of Economic Research, New York, 1958