Knowledge that Transforms

The purpose of this paper is to survey monetary policy as it unfolded from the beginning of 1973 to the spring of 1974. This is, on the whole, a relatively uncomplicated period to discuss since there was, I would judge, rather less controversy about the aims and appropriateness of monetary policy over most of this period than is often the case. In brief, monetary policy focused primarily on producing a moderate degree of restraint, one that would relieve the excess demand pressures clearly evident during at least the first part of the period. The aim in doing so was to create a climate in which inflation could gradually be brought under control. This objective suffered serious competition only briefly, when, during the early stages of the oil boycott, the potential of that situation for creating economic weakness was still very unclear.

Rita Rodriguez's paper examines the factors involved in the decisions of foreign exchange management. It consists of four major parts: a) the concept and definition of foreign exchange risk, b) the finance function and foreign exchange management, c) management's attitudes towards foreign exchange risk, and d) the effect of differences in management's attitudes towards foreign exchange risk on the monetary system. The conclusions and results of the paper are drawn from surveys and interviews with over 50 multinational corporations in the United States.

Dr. Severn and Professor Laurence present an analysis of the relationships between direct investment, research and development (R & D), and profitability. Early in the paper it is stated that the goal is to provide an explanation for the assumed high internal rate of return on investment abroad. Later it is restated that the paper studies “the profitability of the firm as a whole, rather than its reported profit on foreign assets alone.” Consequently, no evidence is presented of a high return on investment abroad. Indeed, the references to rates of return in the first few pages should be preceded by the word “expected” because these are ex ante returns, whereas the returns analyzed elsewhere in the paper are ex post returns.

Professor Mendelson's interesting paper reaches one conclusion with which I have no quarrel. Under his “most likely” future scenario, he argues for the need for the individual investor in the stock market to enhance the external equity capital-raising abilities of corporations. However, on the way to that conclusion, he dispenses a number of inconsistencies and confusing points.

The current operating procedure of the Federal Reserve, as described by Richard Davis and interpreted by me, entails picking long-term growth rates (meaning six months and longer) for monetary aggregates, while simultaneously specifying short-run conditions for the federal funds rates and monetary aggregates which are felt to be consistent with long-term goals. But, he also states, because of “shorter term developments, ” that the specified shorter term growth rates for monetary aggregates might not be equivalent to the desired long-term growth rate. This operating procedure disturbs me for two reasons. First, there is evidence demonstrating that different growth rates in the money stock which last as long as six months result in different levels of economic activity; thus six months should be the maximum control period not the minimum. Secondly, I don't see what meaning a long-term growth path for monetary aggregates can have if the Federal Reserve lets “shorter term” development define the short-term growth paths for money in a way which is inconsistent with the longer term goals.

Selection of funding levels for research and development (R & D) projects is a major problem facing the firm. Models for selecting funding levels have frequently been formulated under the assumptions that the projects can be evaluated independently (Aldrich [1], Hess [4], Lucas [6]) or that the projects are interrelated only in terms of requirements for specialized input resources (Asher [2]). In fact, the projects of a given firm are likely to be highly interdependent, either in the sense that progress on one project eases work on another (research interdependency) or in the sense that completion of one project alters the market situation of another (output interdependency). While Weingartner [8] discusses these interdependencies, he does so under the assumption that the project funding level is fixed.

The financial management area has come a long way since Fred Weston in 1954 (Journal of Finance) called for more research in and application of financial theory. Now, Neuberger and Hammond advance investment theory by empirical studies in an area which has received little direct attention. Their researching of new issues' price behavior provides application of observed facts to substantiate policy recommendations framed within a certain investment psychology structure.

J. Fred Weston, Comment: Regulatory Reform for the Deposit Financial Institutions--Retrospect and Prospects, The Journal of Financial and Quantitative Analysis, Vol. 9, No. 5, 1974 Proceedings (Nov., 1974), pp. 831-833

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