Knowledge that Transforms

I appreciate the preceding comments. Beyond pointing out that careful reading of my note will show that I did not pretend to explain fully Argentina's postwar rate of capital formation, I would like to remark briefly on three matters. First, I seem to have been misunderstood. Since I did not mean to imply that the proportion of private saving, in the national income declined. I merely stated that, while certain conditions favored the use of savings for purposes other than fixed capital formation, it is also probable that the investment equivalent of the propensity to save declined. This could occur while the propensity to save out of current income remained constant or even increased. I based my conclusion on the rise in the share of wages in the national income1 and on a change in the price structure favoring lower income consumers in particular. Second, I do not think that conclusions regarding the marginal efficiency of capital can be drawn from the information given by Schwartz. His calculations, based solely on the capitalization of companies registered with the Buenos Aires stock exchange, suggest that the profitability of some companies increased. Yet, it may well have declined for the economy as a whole. Indeed, prices on the Buenos Aires stock exchange, after rising sharply until 1948, fell and, notwithstanding the violent inflation, had not reattained their 1948 level by 1958.2 Nor can pressure to import machinery be taken as evidence that the marginal efficiency of capital in general was high. Actually, imports of capital goodsbut not of raw material and intermediate partsaveraged less in the 1950's (1950-1958) than during 1935-1939 and 19461949, and investors had to be satisfied to a greater extent than they may have wished with locally produced capital goods.3 Third, Schwartz suggests that the investment consumption goods price ratio declined after 1949. This is correct, but the ratio by no means returned to the prewar level. Furthermore, following the 1955 and subsequent devaluations, import and investment prices rose substantially in relation to domestic and consumption prices respectively.4 In Table 1 of the note which is the subject of this discussion, I merely showed two averages one for 1946-1949, the other for 1950-1958-of the relationship between investment and consumption goods prices. I felt that this was enough to point out the new price relationships established during the 1940's and essentially maintained during the 1950's. In my judgment, the movement of the indices is of such magnitude that, notwithstanding the limitations inherent in them, they point to a substantial change in the price relationships between economic sectors. Interestingly, recent studies tend to confirm this conclusion. In 1960 and 1962, investment prices were higher in relation to consumption prices in Argentina than in other Latin American countries.5 I feel that such developments merit attention because of the effects they may have, not only on resource allocation, but on saving and capital formation in general. * The writer is a member of the United Nations Secretariat. Neither the opinions expressed here nor in the original article-written before he joined the United Nationsnecessarily reflect those of that organization. 1 Schwartz's point concerning social security taxes is correct. However, data excluding social security taxes also show an increase in the wage share for all sectors for the years 1946 to 1955 inclusive, for which the data are available to me. See United Nations, Economic Commission for Latin America, El Desarrollo Econo'mico de la Argentina, Anexo (mimeographed, 1958), 190, 191. 2 Bolsa de Comercio de Buenos Aires, Anuario Estadistico. 'R. Hayn, Inflaci6n, Formaci6n de Capital y Balance de Pagos de la Argentina, 1940-1958, Revista de Economia y Estadistica (Cordoba, Argentina, 1962), No. 2 (esp. Table 4). 'Ibid., (esp. Table 9). 5See footnote 1 in the note under discussion and United Nations, Economic Commission for Latin America, A Measurement of Price Levels and the Purchasing Power of Currencies in Latin America, 1960-1962 (mimeographed, March, 1963).

THEORIES of monetary and financial markets are generally concerned with the behavior of broad aggregates. As yet, economists have not successfully blended the rich variety of institutional details that make up the financial markets with the theory of relative prices. Perhaps as a result of our procedures and the state of knowledge, our policy recommendations are often suggestions for pervasive changes in institutional arrangements. Many of our perennial policy debates are concerned with issues such as whether or not the Federal Reserve should be replaced by an immutable rule or whether banks should be prevented from independently creating money

T HE crisis will no doubt be surmounted. dollar will be saved. Its parity will be successfully maintained, and world will be spared that ultimate and unmentionable calamity whose consequences are more dreaded for never being described. The world monetary system will stay afloat, and its captains on both sides of Atlantic will congratulate themselves on their seamanship in weathering storm. But storm is in good part their own making. And if financial ship has weathered it, it has done so only by jettisoning much of valuable cargo it was supposed to deliver. Currency parities have been maintained, but full employment has not been. The economic growth of half advanced noncommunist world has been hobbled, to detriment of world trade in general and exports of developing countries in particular. Currencies have become technically more convertible but important and probably irreversible restrictions and discriminations on trade and capital movements have been introduced. Some government transactions of highest priority for foreign policy of United States and West have been curtailed. Others have been tied to a degree that impairs their efficiency and gives aid and comfort to bizarre principle that practices which are disreputably illiberal when applied to private international transactions are acceptable when government money is involved. These are costs. Were, and are, all these hardships necessary? To what end have they been incurred? They have been incurred in order to slow down and end accumulations of obligations in hands of European central banks. It is fair to ask, therefore, whether these accumulations necessarily involved risks and costs serious enough for countries concerned and for world at large to justify heavy costs of stopping them. Which is easier? Which is less disruptive and less costly, now and in long run? To stop private or public transactions that lead one central bank to acquire another's currency? Or to compensate these transactions by official lending in opposite direction? I do not suggest that answer is always in favor of compensatory finance. But issue always needs to be faced, and especially in present case. Several courses were open to European countries whose central banks had to purchase dollars in their exchange markets in recent years. (a) They could have built up their holdings quietly and gladly, as they did before 1959. (b) By exercising their right to buy gold at United States Treasury, they could have forced devaluation of or suspension of gold payments. (c) They could have taken various measures to correct and reverse chronic European payments surpluses. (d) By occasional withdrawals of gold and by constant complaints they could have brought tremendous pressure for discipline upon United States without forcing a change in parity. European central banks and governments chose fourth course, with token admixtures of third. They have made world opinion, and American opinion, believe there is no other choice. Almost everyone agrees that pressure of balance of payments deficit upon United States is inescapable arithmetic rather than deliberate policy of foreign governments. Yet for almost ten years previously, United States deficits were no problem. Clearly it is a change in human attitude and public policy, not inexorable circumstance, which has compelled us to take corrective actions. It is true that concern of financial officials about the dollar was only an echoand a subdued echo at that of fears, hopes, anxieties, and speculations that arose in private financial circles in late 1950's. But financial officials do not have to follow private exchange markets; they can lead instead. By an equivocal attitude toward private suspicions of dollar, European officials kept pressure on United States. Never did they