Knowledge that Transforms

IN his speech Pro Roscio Cicero observes that Solon was right when he did not include any rule in the Athenian law for the punishment of patricide or matricide: the mention of such a possibility might give someone the idea. This was more or less the attitude of the older economics to the financing of government expenditure by the central bank. There might be differences of opinion as to when public expenditure should be covered by taxation, and when by loans on the open market; but of loans from the central bank there could be no question. That could only lead directly into the jaws of inflation. The second World War has, however, shown that, in certain prescribed circumstances, the financing of public expenditure by the central bank need not lead to any considerable rise in prices. As is well known, the Germans financed their occupation expenses by drawing on the central banks of the occupied countries. In some of these, particularly in Greece, this led to inflation on classical lines, but in others, e.g., Norway, Holland and Denmark, there was no very striking rise in prices. In Denmark and Norway, prices rose in practically the same degree as in unoccupied and neutral Sweden, which pursued a cautious and conservative financial policy. This raises, first, the question of what results followed this method of financing and the knowledge thereby acquired must be fitted into the theory of economics; and secondly, the question of what practical use can be made, in normal times also, of this method. It is the first question in particular which is to be discussed here.

mHE enormous growth of the public debt during World War II has been widely interpreted as a crippling restraint upon monetary policy. It has taken the exposure and experience of several years to demonstrate that this debt has, in fact, created a great new potential for monetary control. Although that potential has not yet been extensively utilized, the issues that have been raised as a limited application of the new power has been attempted are already coming under the scrutiny of scholarly analysis and of Congressional investigation. The process of discovery has, of course, been piecemeal; no one has yet produced a comprehensive formulation of the emerging possibilities; and in many quarters there has not yet been any real recognition or understanding of what has come about. Each of the three publications reviewed in the present paper deals with important segments of the new monetary doctrine that is slowly coalescing from the controversies aroused by Federal Reserve System policy over the past several years. Dr. Goldenweiser, uniquely suited for his task by more than a quarter century of participation in monetary policy formation at the highest levels, combines in very short space a clear, elementary, description of Federal Reserve functions, a succinct critical review of the principal actions taken by the System since its founding, and an outline of the measures he considers necessary to make adequate use of monetary control in its present environment.' Professor Bach's book, based largely upon his work for the Hoover Commission on governmental reorganization, is concerned more with the methods than with the substance of Federal Reserve policy-making.2 Although Bach sees less clearly than the others the new opportunities for monetary control, his description of System procedures fills a long-felt need, and his provocative suggestions for strengthening the control apparatus (while not altogether acceptable in the judgment of this reviewer) acquire added significance as the stature of monetary policy is enlarged. The Report of the Subcommittee on Monetary, Credit, and Fiscal Policies, prepared under the chairmanship of Senator Paul Douglas (and referred to henceforth in this review as the Douglas Report), represents the most penetrating Congressional investigation into monetary and banking questions that has been made since the founding of the Federal Reserve System.3 Taken with its two supporting documents, a digest of replies to questionnaires and a volume of hearings, the Douglas Report provides a range of new materials on both the mechanics and the substance of monetary control that could not possibly be catalogued in the space available here. Ignoring the valuable descriptive sections in the Bach and Goldenweiser books,4 as well as those contained in the Douglas Subcommittee documents, the present paper will be devoted to the principal issues for policy and organization that emerge from them. On the substantive side there are three key questions: (I) why is effective control over the money supply and the availability of credit necessary; (2) how is effectiveness in monetary and credit control to be achieved; and (3) what guides or criteria should determine the timing and direction of policy actions? Three further questions arise in considering the details of technique and administration: (4) what tools are needed, both general and selective, to implement the over-all requirements for effectiveness in monetary control; (5) how should the Federal Reserve System be organized internally to achieve the highest level of performance in policy-making and in administration; and (6) how should Federal Reserve policy be coordinated externally with the activities of other credit agencies, and with the broad economic program of the governmental administration? What follows is a brief