FOREIGN RELATIONS, 19 4 2, VOLUME VI



from the central bank. The Cuban legislation seems hardly as radical
as our own emergency legislation which gave the President power to
order the Federal Reserve banks to buy $5 billion of Government
bonds. In any event too rigorous legal limitation on the ability of a
central bank to extend credit to a government merely results in a
change in the law when the need arises or the development of some
convenient subterfuge which permits the government to walk right
through such restraints. The Technical Mission very distinctly and
forcefully points out the dangers of over-borrowing by the govern-
ment. The various restraints and limitations suggested by the Mis-
sion are about all that can be reasonably expected in the circumstances,
keeping in mind the predominantly agricultural character of Cuba
and the lack of Cuban-owned financial institutions.
  (d) In all probability the Cuban central bank for sometime will
not be able to engage in important open market operations. Even
without a broad open market, however, the bank and the stabilization
fund should be able to function effectively and perform many useful
functions.
  (e) The mere fact that it may be abused would not seem adequate
reason for depriving the central bank of this necessary emergency
power.
  (f) There is no compelling reason for maintaining a 100 per cent
reserve behind money. The fiduciary issue of the Bank of England is a
case in point. The legal maximum of notes regarded as the fiduciary
issue has been raised again and again as Great Britain has become
more or less permanently adjusted to a larger monetary circulation.
The Mission's report is, as I understand it, based on the theory that
Cuba should in all probability in no event permit a deflation which
would reduce the monetary circulation below the quantity of peso
currency now outstanding. Based on this assumption it suggests that
no reserves be required for such currency but that reserves be required
only against increases in circulation above this amount. An approach
of this type is perhaps more widely acceptable to students of monetary
matters than the more archaic and conservative banking idea that all
currency should be backed 100 per cent by reserves.
  (7) The fact that the new central bank may occasion some increase
in Cuban taxation would appear to be a valid objection to the estab-
lishment of the central bank only if it is assumed that the central
bank would not benefit Cuba sufficiently to justify its cost. It is
clearly the assumption of the Technical Mission that this is not the
case, and I believe that the Department would agree with the Technical
Mission on this point.



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