Knowledge that Transforms

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

CONTEMPORARY governments appear to J have embraced too easily three incompatible goals; full employment, prices, and an inflexible exchange rate. More sensible policies could be pursued if one or possibly two of these goals were abandoned. Clearly, the least fundamental of the three is the foreign exchange rate, and if it could be shown that a flexible rate is not all that damaging, the step would be made much easier. The central arguments against a variable rate are that it would discourage trade and lending, and that it would encourage noxious speculation. The force of both these objections is lessened if the market can be satisfactorily stabilized. A simple procedure for the market will be discussed in this note. Since this problem of flexible rates was first discussed in the thirties, notably by Professor Harris, a great deal of experience has accumulated to show how extraordinarily effective feed-back control methods are for a great variety of mechanisms. If it could be shown that there exist reasonably simple and successful exchange rate stabilization policies, then a more rational discussion of policy alternatives should be possible. I shall assume a free foreign exchange market with complete convertibility, the exchange rate being set and maintained by a monetary authority which makes up any deficit and absorbs any surplus in foreign exchange at the announced rate. The aim is to stabilize this market in the sense that the rate may bend but will not break. Yet there is a fundamental ambiguity in the meaning of which we encounter in the question of stabilizing the market. Technically, by degree of we mean the rapidity of approach to equilibrium (defined here as equality of supply and demand). Thus with a given amount of disturbance, the more a market is the closer it will tend to be to its equilibrium. However, for a market with shifting supply and demand curves, the equilibrium price will hop about, so that the more stable, in this sense, a market is the more agitated its price will be. This contradicts our commonsense notion of stability and, what is much more important, is normally undesirable. In fact we want the market, as dominated by the authorities, to be markedly sluggish, to be stable in the popular sense and not very stable in the technical sense. More specifically, I assume that ideal behavior for the exchange rate is to be insensitive to short-run fluctuations in supply and demand. Thus the authorities are to try to equate supply and demand but only in the long run, not in the short run. They are to use the behavior of the market itself as a guide to altering the rate to accomplish this purpose. Consequently they will be acting on sound feed-back principles; technically they will be simulating a zeroing servo, that is one that aims to reduce to zero the difference between supply and demand. They will never quite accomplish their object, of course, since new disturbances are always disrupting their course. Given these aims the authorities are to alter the exchange rate continually in the light of two criteria, (1) the difference between actual and desired holdings of foreign exchange, and (2) the current payments gap. They must so weight their reactions that the former outweighs the latter, which it will naturally tend to do since it is the cumulated current payments gap. If they always alter the rate so as to push actual foreign exchange back towards the desired level, they will, in the long run, tend to maintain the level of foreign exchange constant and hence equate supply and demand. A more sophisticated approach could take the desired level of foreign exchange, m*, as variable, say, with the average domestic demand for foreign exchange. Purely for simplicity I shall treat m* as a constant. Our basic control routine for the exchange rate p, is then

IT becomes immediately apparent in analyzing any national economy that some resources are scarce only in the economic sense, but also in the more popular interpretation of that word. Because of international trade these shortages frequently impose no great hardship on the not nation; for example, the absence of tea and coffee plantations in the United States does prevent Americans from consuming prodigious quantities of these beverages. However, in the event of an hostility these resource scarcities can create a serious problem, especially if they happen to include some of the so-called strategic materials. It is with these materials, which are both vital to the country's defense and in short domestic supply, that this paper is concerned. Some of the more publicized scarce resources which have been regarded as critical by the United States include: tin, uranium, manganese, rubber, quinine, diamonds, and possibly plants manufacturing heavy machinery and precision instruments.' The very heterogeneity of this group augurs strongly against finding a single solution or even a unique mode of attack to the problem of how best to assure an adequate supply of these resources under all political conditions. Nevertheless, while the details of any possible solution may vary enormously with the individual material, almost without exception the available policy measures can be fitted into one of the following categories: 1. Importation under all conditions 2. Subsidized domestic production and research 3. Stockpiling 4. Conservation 5. Substitution

The Problem This study is concerned with the incidence of governmental economic stabilization policies on the levels of output in selected industries. The specific problem under investigation is the following: What are the relative impacts of monetary and fiscal actions on the structure of output in selected industries? The study is concerned with some micro-economic aspects of economic stabilization policies, i.e., how these policies affect the equilibrium levels of output of some selected final goods. The importance of the problem under consideration is pointed out in the report of the Commission on Money and Credit (CMC).' In discussing the considerations of policy mix, the Commission states:

A RECENT article on this subject by R. W. Campbell and myself 1 was received with considerable interest both in the West and in the East. Unfortunately, however, rather more attention was paid to our somewhat crude extrapolation to 1960 than to the main body of the work which was concerned with determining the level of industrial output in 1955 in terms of physical production ratios with 1954 dollar weights. In this present study we propose to extend this comparison to 1958 and 1960. Here, as in our previous study, a dollar value of output for each non-engineering group is determined in terms of the 1954 United States Census of Manfactures concept of value for a corresponding United States industry, taken in proportion to the U.S.S.R./ U.S. physical production ratio. This ratio is based on the output data or best available estimates for the principal product, or group of products, of the given industry. This is usually done on a four-digit level of the 1954 United States Census of Manufactures classification, according to the formula: VA = United States VA times physical production United States physical production The resulting Soviet values added for individual industries were summed for each major industry group and non-engineering as a whole and expressed in terms of per cent of the corresponding United States value totals for 1954. Finally, these ratios were recalculated in terms of United States output in 1955, 1958, and 1960 by means of the Federal Reserve Indexes. In the first article, we classified the results for non-engineering industries into three categories, according to their reliability. Due to additional research, we were able to increase the equivalent of our first category of reliability from 66% to 73 % and to reduce the third category from just under 10% to 1'2%. In spite of this, the overall changes from our original 1955 results are comparatively small. As we have stated in the previous article, the engineering outputs of the two countries do not lend themselves to a direct comparison on the basis of physical production ratios due to heterogeneity of the product mixes, lack of sufficiently comprehensive data, as well as an absence of information about military production. Consequently, the following indirect methods were used.2

PpT HE purpose of this study is to add to our empirical knowledge concerning the relationship between imports of materials and the level of economic activity and prices, as well as to make some quantitative estimates of the magnitude of the influence which these factors have in determining the volume and origin of this country's imports of materials.1 While most of the empirical work that has appeared in this area up to now has of necessity had to rely on pre-war data, a long enough time period has now elapsed since the end of World War II to permit the use of data from the postwar period in a statistical analysis.2 This study makes use of the unit value and quantity indexes of imports first computed by John H. Adler, Eugene R. Schlesinger, and Evelyn Van Westerborg in 1932.3 These indexes were computed for the years 1923 through 1950. Since that time Adler, now with the International Bank for Reconstruction and Development, and Charles G. Goor, also with the International Bank, have revised the indexes for 1949-50 and have carried them forward through 1953. As part of the present study, the indexes for total imports of materials and for imports of materials from seven geographic or political regions have been carried forward through 1960. The seven regions are: European Payments Union Countries, Other European Countries, Total Europe, Canada, Latin America, Overseas Sterling Area, and the Rest of the World. These indexes are given in Appendix B. The indexes were computed according to the Fisher Ideal index number formula and originally the years 1935-39 were used as the base period. However, after World War II it was found that the original sample of commodities no longer gave the desired coverage, and therefore additional commodities were added to the sample and the indexes were chained starting in 1949. For the period 1923-46, import data for computing the indexes was taken from the annual volumes of Foreign Commerce and Navigation of the United States, published by the Bureau of Foreign and Domestic Commerce. For the years 1947-60, the data was taken from the Bureau of the Census, Calendar Year Reports No. FT 110, United States Imports of Merchandise for Consumption. As is indicated by the use of regional indexes, this study attempts not only to analyze the demand for total imports of materials, but also the demand for imports of materials from various regions. Two of the more important reasons for the regional emphasis should be noted. First, even within the economic classification of materials the composition of imports from the various regions differs greatly. Given these differences in the composition of imports, there is ample reason why the level of United States industrial production and relative prices might affect the volume of imports coming from the various regions quite differently. A second reason for doing a study based on imports from various regions is the effect which a change in the volume of U.S. imports has on the exporting countries. The United States purchases a large share of the materials exports of various Latin American countries and Canada. Certain East European countries and some of the countries that were formerly colonies of West

ONE of the most important developments in public finance in the post-World War II period has been the great growth of state and local government debt. From a level of $15,900,000,000 in fiscal 1946, state and local government gross debt outstanding has more than quadrupled, to $69,800,000,000 in fiscal 1960.' This study is concerned with the factors affecting the volume and timing of state and local government new debt issues.2 An attempt is made here to develop comprehensive econometric models explaining post-war state government and local government new debt patterns. While in most studies of municipal debt no distinction is made between state governments and local governments, respectively, in the present study it was found that such a distinction is crucial to an adequate comprehension of the factors affecting the new debt issues. Therefore, the next two sections are devoted to separate analyses of state debt and local debt.

T HE international transactions of the United States are larger in volume and variety than those of any other country, and the United States dollar is more widely used than any other currency. The international financial position of the United States defies simple summary, and the status of the dollar cannot be appraised by striking a single sum or balance across any set of numbers. But these familiar observations do not diminish the importance of the statisticians' efforts to devise an efficient summary. Although no one number can say very much, some summary statistics are better than others, and a proliferation of rival constructions may merely confuse a complex situtation. The balance-of-payments statistics of the United States are more complete and detailed than those of most other countries. But the Commerce Department declines to identify a surplus or deficit in the United States payments data. Instead, it spatters its tables with a dozen separate balances covering different subsets of numbers. Five of these balances, arrayed in Table 1, purport to be comprehensive, and each has been cited by one expert or another as the most appropriate measure of the