ITFALLS encountered in the use of Soviet statistics have been the subject of numerous articles on the Soviet Union. At the same time, however, there has been a considerable amount of agreement that data obtained from official pronouncements and statistical publications have meaning and significance.1 At least it is widely held that the Russians do not engage in outright falsification. Some additional evidence concerning the reliability of Soviet statistical data is contained in a recently released docu-

ATT EMPTS by economists and statisticians to deal with the problem of the best method for mathematical formulation of the laws of economic behavior from statistical data go back at least as far as Ragnar earlier contributions.' According to Jacob Marschak, however, Frisch did not take full account of the random disturbances (shocks) in the economic relations, nor of the simultaneous character of these relations. 2 In addition to this, Frisch's hypotheses on random disturbances (errors) in variables were not specified in probability terms. 3 These shortcomings have been corrected, over the years, by Koopmans,4 Wald,' Mann,' and Haavelmo.7 Out of this body of contributions has grown the Cowles Commission's simultaneous-equation approach as a method for mathematical formulation of the laws of economic behavior from statistical data, and in I947 two papers were published making a practical application of this method to the marginal propensity to consume ' and to the demand for food.' simultaneous-equation approach draws attention, among other things, to what might be called the inconsistency bias inherent in the single-equation, least-squares method of estimating the parameters (constants) of a functional relationship between two (or more) variables-where the so-called independent variable (or variables) is not completely independent of the dependent variable.10 In this particular respect, the principal purpose of these articles has been to demonstrate that the reduced-form, simultaneous-equation method of estimating parameters is superior superior in the sense that it leads to estimates for the parameters of these functional relationships which are consistent with the estimates for the parameters of the other relationships embraced by the entire system of equations encompassed by the model. Apparently the inconsistency bias of the single-equation, least-squares method can lead to results widely divergent from those of the reduced-form, simultaneous-equation method. rLna possible significance of this to economicmodel building-whether for purposes of 1 Correlation and Scatter in Variables, Nordi7 Journal, Vol. I, I929, Pitfalls in the Construction of Demand and Supply Curves, Veroffentlichungen der Frankfurter Gesellschaft fur Konjunkturforschuing, Neue Folge, Heft 5, Leipzig, I933; and others. For a more complete list see Inference in Dynamic Economic Models, ed. Tjalling C. Koopmans (New York, I950), pp. 423-28. 2 Inference in Dynamic Economic Models, p. 4 of the Introduction by Marschak. 3Idem. 'Tjalling C. Koopmans, Linear Regression Analysis of Time Series (Haarlem, 1937). 5 Abraham Wald, The Fitting of Straight Lines If Both Variables Are Subject to Error, Annals of Mathematical Statistics, September, I940. 'H. B. Mann and A. Wald, On the Treatment of Linear Stochastic Difference Equations, Econometrica, ii (July-October 1943). 7Trygve Haavelmo, The Implications of a System of Simultaneous Equations, Econometrica, iI (January I943); The Probability Approach in Econometrics, Econometrica, Supplement, 12 (July I944). 'Trvgve Haavelmo, Methods of Measuring the Marginal Propensity to Consume, Journal of the American Association, XLII (March 1947). ' M. A. Girshick and Trygve Haavelmo, Statistical Analysis of the Demand for Food: Examples of Simultaneouls Estimation of Structural Equations, Economofetrica, I5 (April 1947). 10 From the statistician's viewpoint this is terribly imprecise phraseology, but it is not easy to phrase precisely without falling into the very terminology and modes of expression this paper seeks to avoid. Essentially -and this is much of the essence of this paperwhat is meant by the so-called independent variable not being completely independent of the dependent variable is that the dependent variable is neither functionally nor stochastically independent of the independent variable. Chart i, for example, illustrates the assumed stochastic behavior of consumption as a function of income: consumption is functionally dependent upon income, but stochastically independent of it in the sense that its random fluctuations about the functional relationship do not affect income. Chart iI, on the other hand, is illustrative of both functional and stochastic dependence: consumption is functionally dependent upon income, but stochastic dependence also exists in the sense that random fluctuations about the functional relationship do affect income. It is the fact that stochastic independence between consumption and income cannot logically be assumed, where both are assumed to be jointly determined by a third variable (as is the case in the model here under discussion), that leads to a biased estimate of the functional relationship between consumption and income using the single-equation, least-squares method

IN a recent article in this REVIEW 2 Mr. Robert V. Rosa refers to discussions of relation of bank supervision to by E. A. Goldenweiser, G. L. Bach, and a Subcommittee of Joint Committee on Economic Report. supervision is one of intangibles of control that has attracted considerable attention. . . Although none of writers would appear to believe that supervision can practicably serve as an active arm of and credit policy, Bach does rightly stress great importance of preventing bank supervision from going counter to in periods. 3 Bank supervisory has probably accentuated deflationary tendencies at times; and at other times relaxation of supervisory standards has tended to remove restraints on bank credit expansion. However, assumption of Bach, which seems to be prevalent, that in critical periods influence of bank supervision was directly counter to policy needs mnore scrutiny than has been given to it. This article is an examination of this assurmption period of late I920'S and I930's.' XVhether bank supervisory has been in conflict with depends in part on meaning attached to term monetary poticy. If is defined as government and central bank actions designed to influence rates of interest, or certain specific rates such as Federal Reserve discount rates, it can of course be said that supervisory during at least a portion of I929-33 period was in conflict with monetary policy. However, such a narrow interpretation of misses heart of problem of relation of to business activity and degree of full employment. Manipulation of or pressure on interest rates is not only method, and past decades has not been principal method, of influencing quantity of money or circulating medium, of which by far greater part now consists of obligations of banks in form of deposits. Under fractional reserve system as it developed in United States in nineteenth century, banks tended to expand their earning assets and deposits to limit permitted by reserves, as defined by law, available to them. This practice continued after establishment of Federal Reserve System, and in fact still continues. That is to say, Federal Reserve member banks do not as a general practice maintain more (reserves in of those required by law) than are needed use as clearing balances at Federal Reserve banks. special circumstances of period from I934 to I942, when this practice was interrupted or only partially followed and excess reserves were abnormally large, are discussed below. On June 30, I 9I7, legal of banks which were members of Federal Reserve System were fully concentrated in Federal Reserve banks. Since that date of member banks have consisted solely of deposit balances in Federal Reserve banks. aggregate amount of these balances depends on volume of assets held by Federal Reserve banks in of other liabilities, including capital accounts, of Federal Reserve banks. Consequently, since I9I7 most important influence on money supply-and during most of period since that date dominant influence is volume of assets held by Federal Reserve banks. It is not an exaggeration to say that has consisted primarily of asset acquisition and relinauishment Dolicies of Federal Reserve f' e opinions expressed in this article represent personal views only. 2 Robert V. Rosa, The Revival of Monetary Policy, this REVIEW, XXXIII (February 1951), 29-37. 'Ibid., p. 35. 'In Federal Reserve Policy-Making (New York, I950), which is work of Professor Bach to which Mr. Rosa refers, specific mention is made of I929-I933 period (p. 251). Reference is also made to cognizance for at least last decade or two of the cross-implications of banksupervisory and policies (p. 250

The paper shall be concerned with short run (cyclical) functional relationships as well as long run (secular) relationships between the variables. In fact, the fundamental difference between the cyclical and secular character of these relationships will be stressed. In general, though with some exceptions, which will be explained presently, these variables are related in constant proportions secularly, i.e., a graphic representation of the secular functional relationship would go through the origin. On the other hand, the cyclical relationship is not one of constant proportions, so that the cyclical function does not go through the origin; it would have a positive intercept. The main conclusions of this paper are as follows: i) Personal consumption expenditures are primarily a function of disposable personal income. Consumption is roughly the same proportion of deflated per capita disposable personal income in peak years.4 This is the secular relationship of consumption and income. Thus in Chart i, which presents the actual deflated per capita data, the line joining the origin with I929 comes much closer to the actual observations of I948-50 than the regression line calculated for the cyclical period I929-40. Presumably, if a serious depression were to develop from the secular peaks of 1948-50, the line of relationship would be the indicated broken line in Chart i, parallel to the interwar cyclical line relating consumption to income, but at a higher level. In other words, while the secular relationship is primarily characterized by constant proportions between consumption and disposable income, in the short run the ratio of consumption expenditures to income varies with the cycle, falling as income rises and rising with declining incomes. Thus, the fact that actual postwar personal consumption expenditures are in excess of those expected from prewar cyclical relationships with disposable income is primarily due to the upward secular drift of the consumption function. 2) This functional relationship between personal consumption expenditures and disposable personal income does not hold for periods of unprecedented disturbances in the economy associated with total war and the postwar transition to a peacetime market. Thus in Chart i, the years I946 and I947 are still considerably off the secular line of relationship. However, by 1948, the function appears to have resumed a mnore normal shape. The relative speed with which the functional relationship of consumption to income reasserted itself after the great shocks assoCiated with World WVar II is indeed ' This article represents part of a larger project on the consumption function which will examine in greater detail its short run aspects as well as the component parts of the aggregates. Appreciation is expressed for the aid of Professors Alvin H1. Hansen, G. H. Orcutt, and J. S. Duesenberry, of Harvard, none of whom, of course, is responsible for any errors that remain. The author is currently on leave from the U. S. Department of Commerce; the views expressed are his own. 2 The sources of the data used in this article are explained in a note at the end of the article. This article was written before the i95T National Income Supplement to the Survey of Current BEusiness was available. 8 J. R. Hicks, A Contribution to the Theory of the Trade Cycle (London, 1950), p. 33. 'For an early statement of the relative constancy of the ratio of consumption to income in peak years see A. H Hansen, Fiscal Policy and Business Cycles (New York, I941), p. 237