Knowledge that Transforms

Svend Laursen, Lloyd A. Metzler, The Employment-Insulating Advantages of Flexible Exchanges: A Comment on Professors Laursen and Metzler: Reply, The Review of Economics and Statistics, Vol. 36, No. 2 (May, 1954), pp. 228-229

substantial effect on the economy. It must be granted that the point is correct and important. Nevertheless, having so often seen this position taken as a routine matter even in course lectures, I can only wonder if the contrary view is as widespread as Professor Copeland seems to believe. Still more is blamed on the hydraulic view. The Robertsonian lag in expenditure behind receipts is questioned regarding its verifiability (how can we tell the date of receipt of the dollar we are spending now?) and its realism (some of receipts may even be spent at once). But surely this is taking the period analysis too literally. None of us, least of all, I dire say, Professor Robertson, really believes that our system is characterized by neat distinguishable lags. Their use is a device employed with explicit or implicit apology to represent the plausible hypothesis that current consumer expenditures are to a considerable extent dependent on past receipts. The lag is the formalization and hence the exaggeration of a vague psychological connection. Moreover, it is in no way connected with any statement of the genus: today's expenditure employs the very coins, bills, and so forth, which were received yesterday as appears to be implied. It is not quite clear just how some of these points are related to the hydraulic analogy.2 More important, the author seems to take theoretical abstractions at face value and to attribute obliquity to positions of his which are in fact quite generally accepted. I suspect that this polemic material may therefore result primarily in drawing the reader's attention from the volume's main contribution. In sum, this book represents the inauguration of an important task. As such, we must welcome it and apologize for the review's undue emphasis on less important sections of the work which even on the dimmest interpretation distract rather than deduct from its value.

THE postwar instability of sterling has been produced part by the deficits of the independent sterling countries.' Until lately, these countries financed substantial import deficits from their own sterling balances and replenished their reserves without difficulty, mainly from an uninterrupted capital outflow from the United Kingdom and from enlarged export earnings during the post-Korean raw materials boom. Only recently have they faced a shortage of sterling exchange, resulting part from the reintroduction of monetary restraint the United Kingdom late I95I and early I952. The appearance of this shortage of sterling focuses attention upon the strategic role of monetary discipline, both Britain and the independent sterling countries, if the United Kingdom is to achieve for sterling a greater stability than has been attained since I945. Development of the sterling area. Before I9I4, many nations came to use sterling for financing foreign trade because of its universal acceptability. These nations tended to have close monetary and trading ties with Britain, selling much of their exports through British commercial houses; many were dependent upon the London market for capital; and virtually all major commercial banks kept balances and rediscounted bills London. With the end of hostilities I9I8, Britain tried to reestablish the international position of sterling. By I925, the pound had been restored to its prewar gold parity at the risk of internal deflation Britain. Capital lending was also resumed on a large scale, and Britain had a current-account surplus during the I920's. By I930, fact, Britain's total foreign assets were rebuilt almost to the prewar volume. although most of the new outflow had been invested within British Empire countries. Abandonment of the pound's gold parity September I93 I, and the resulting depreciation, altered sterling arrangements. Faced with the choice of following either sterling or gold, the British Commonwealth nations (except South Africa and Canada) decided to maintain stable rates with the pound. The introduction of Imperial Preference I932 strengthened the economic bonds of the Commonwealth. At the same time or shortly thereafter, a number of non-British countries were drawn into a close association with sterling by two practical facts: while prices I93I-32 were comparatively stable sterling, they continued to fall terms of gold; and the volume of Britain's imports was relatively well maintained during the depression. By the time war broke out August I939, however, most of the non-British countries had decided to loosen their ties with a pound that had fallen from $4.68 to $4.03 during the preceding twelve months. During the I930's, the sterling bloc relied upon Britain to maintain exchange stability with the nonsterling currencies. Since sterling remained freely convertible until the war, though the London price of gold was no longer fixed, foreign exchange reserves held as sterling balances could be used to obtain dollar and other currencies at the holder's option. The World War II exchange control machinery, established first Britain September I939 and then other sterling countries, converted the sterling from a loose association of nations into a grouping with a formal structure of administrative regulations as well as some unwritten conventions. Control over foreign currency transactions, introduced for the first time the United Kingdom, provided that no payment could be made in favor of a person who is resident outside the sterling area without Treasury permission.2 *The conclusions of this paper represent the personal opinions of the author and do not reflect the views of the Federal Reserve Board. The writer is indebted to Mr. Arthur B. Hersey for suggestions. 'The important independent sterling countries are Australia, New Zealand, Eire, Pakistan, India, Ceylon, and, for transactions not settled directly with the nonsterling world, the Union of South Africa. IS.R. and 0. 1940, Nos. 1254 and I256, dated July I7, 1940. Under these regulations, the sterling was defined for the first time as an administrative entity as the

It is certainly true to say that the present situation is unfortunate -the situation with respect to the use of mathematics in economic science -and improvement may be obtained as a consequence of a clearer understanding of the functions of mathematics. I very much welcome the attempt made by Dr. Novick, although I am inclined to put things somewhat differently. To what extent there is between us only a difference in wording and to what extent one of substance, I do not quite see. Therefore let me give my own view in my own words. The functions of mathematical treatment in economic research may perhaps best be discussed on the basis of a breakdown into various elements of a complete piece of econometric research. Not all pieces of important economic analysis are by necessity also complete: sometimes certain elements are absent, as a consequence of the special features of the problem handled. I do not want to say therefore that every contribution to economic science should show all the elements to be enumerated; but the function of mathematics becomes clearer if we consider this complete set of elements.