Knowledge that Transforms

Great Lakes ports which showed a large gain2 between I958 and I959. That increase, amounting to 214 million tons, was probably caused by diversion from the Gulf and Atlantic coast ports, as well as by creation of some new trade. Since the export volume handled by North Atlantic ports declined by I4 million tons between the two years, only 10I5 per cent of that decline can be attributed to diversion caused by the Seaway. The drop of imports arriving through North Atlantic ports was also concentrated in a few commodities. A major decline was registered in the import of fuel oil and petroleum products. While the reasons for this cut are difficult to determine, they could not have been related to the since these products are not arriving in large quantities through Great Lakes ports. Second, there was a substantial decline in the volume of iron ore and manganese entering through Virginia and Maryland ports. While this is attributed mainly to the steel strike, it may have been partly due to diversion of source (i.e. the development of Canadian ore) made possible by the Seaway. In summary it can be concluded that only a small part of decline in traffic volume handled by North Atlantic ports in I959 was a result of inroads made by the St. Lawrence Seaway. This conclusion is based on commodity statistics reported by individual ports, but must be regarded essentially as an informed judgment. Furthermore, it relates only to the first season of the Seaway's operations and cannot be extrapolated into the future without important qualifications. On the one hand, the Seaway's traffic may grow in future seasons as facilities in the Middle West are improved and more experience is gathered. On the other hand, there are some indications that conditions may prove unfavorable to future expansion of the Seaway traffic. First, operations of the new waterway have been beset by labor disputes. Second, competition from railroads is being intensified. The fact that an eastbound ship plying the Seaway needs about i o days to get through the Great Lakes compared to a two-day railroad trip between the Middle West and the eastern seaboard certainly helps that competition. Finally, many Great Lakes ports are inadequate to service ships carrying full loads.3 All these factors will no doubt affect the future operation of the Seaway. 2 See U.S. Department of Commerce, United States Waterborne Foreign Commerce, A Review of I959 (Washington, I960), Table Q. ' For fuller discussion of these points see Struggling Seaway, Wall Street Journal, May 6, I960.

SINCE about I950 the Bureau of Labor Statistics has been publishing a monthly series showing the industrial distribution of the employed nonfarm labor force.' In addition to supplying current estimates on nonagricultural employment, the figures have been compiled from I9I9 and yield, therefore, a continuous forty-year series on the changing pattern of the industrial distribution of employment.2 major value of this series is in evaluating current employment trends, serving as an important supplement to the Census Bureau's monthly estimate of aggregate employment. BLS figures can also be used effectively to study the changing industrial pattern of employment.3 BLS estimates have several distinct advantages over the usual statistical series used to evaluate long-run changes in employment patterns. Typically such series rely exclusively upon decennial data, to the exclusion of either monthly or yearly figures on the industrial composition of the work force.4 major weakness in such a dependence stems from the obliteration of cyclical changes in the industrial composition of employment, and what may be only short-run changes can too easily be interpreted as long-run movements.5 For example, decennial data for I930-50 show that there has been a long-run increase in employment in the tertiary industries, and this fits the pattern which Colin Clark and others hypothesize.6 However, yearly data on employment patterns, such as those of the BLS, indicate that there is considerable cyclical movement in the industrial composition of employment, with the result that service occupations rise as a percentage of total employment in recessions or periods of less than full employment. Each of the recent Census years (I930, I940, and I950) had a sizeable portion of unemployment, and it is by no means clear that the long-run trend of the tertiary industries is entirely consistent with the industrial pattern that emerges when decennial data are used. However, it is not the purpose of the present paper to discuss the degree to which decennial data are truly indicative of long-run trends, nor to evaluate the effectiveness of BLS data for estimating short-run movements. present intent is merely to contrast the industrial distribution of employment obtained from BLS data with two distributions derived from the decennial data. More specifically, the distribution derived from BLS figures is compared with two estimates prepared by researchers associated with the National Bureau of Research. First, the Carson-Barger estimates for the labor force7 and, second, John W. Kendrick's more recent employment figures for the industrial distribution 8 are juxtaposed with BLS figures. Both the Carson-Barger and the Ken'Bureau of Labor Statistics, United States Department of Labor, Handbook of Labor Statistics, 1950 Edition, Bulletin ioi6 (Washington, 1950), I-5; Measurement of Industrial Employment, Monthly Labor Review, 76 (September 1953), 968-73. 2 Bureau of Labor Statistics, Department of Labor, and Earnings, Annual Supplement (June 1958). 'Ewan Clague, The Shifting Industrial and Composition of the Work Force During the Next Ten Years, Daily Labor Report (Washington, 1958), Thursday, January i6, 1958, Special Supplement, i-II; reprinted in Monthly Labor Review, 8I (July 1958), I676-9I. ' Cf. Simon Kuznets, Quantitative Aspects of the Growth of Nations, III. Industrial Distribution of National Product and Labor Force, Development and Cultural Change, vi (July 1957), 19-32; Colin Clark, Conditions of Progress (3rd ed., New York, 1957); P. Whelpton, Occupational Groups in the United States, I820I920, Journal of the American Statistical Association (September I926), 335-43; and Daniel Carson, Changes in the Industrial Composition of Manpower Since the Civil War, Studies in Income and Wealth, Vol. xi (New York, I949), 46-I34. For an instance of such misinterpretation, see George Stigler, Trends in Employment in the Service Industries (Princeton, 1956). 6 Colin Clark, Conditions of Progress (London, 1957) ; and A. G. B. Fisher, Economic Implications of Material Progress, International Labour Review, LVII (July

T HE now orthodox treatment of monetary and fiscal policy is to present the two techniques separately as dissimilar devices for achieving the same general goals. Monetary policy, it is said, influences aggregate expenditures in the private sector indirectly by affecting the cost and availability of credit. Fiscal policy, on the other hand, affects aggregate demand directly by varying government expenditures and/or the tax load on the private sector. From the beginning it has been recognized that the two instruments are not independent: they are necessarily connected by the problem of debt management, and a budget deficit or surplus may carry with it implications for the stock of money. Nevertheless, in terms of their impact monetary and fiscal policy are as a rule compared only in a general way, the point of contact being effective demand. Yet, fundamentally monetary and fiscal policy resemble each other not merely in the goals that they are designed to achieve, but in the methods used to achieve them. Both techniques affect the use of economic resources by influencing the same general variables -i.e., the availability of income and capital funds. At one time the two techniques could be set in sharp contrast on the basis of their origins in separate historical epochs. In itself, monetary policy partakes of the classical tradition, which held the government's impact on the economy to be at best neutral and at worst parasitical. For the classicals the only reasonable course of action was to restrain the ever-expansive lusts of the government and to minimize government influence on the economy by adherence to the balanced budget rule. Monetary policy was a dependent phenomenon. It was not intended to determine the allocation of productive effort between investment and consumption -a prerogative rightfully belonging to the individual citizens taken in sum but instead to enable the voluntary savings of the public to be embodied in useful capital goods. The banking mechanism properly should neither force savings nor permit public willingness to save to be wasted through the failure to extend additional loans to business. The sole variable influencing the decision to save was the interest rate, in the setting of which the banking system was not to act independently, but instead to seek fairly to represent the balance between productivity and thrift. Thus neoclassical monetary policy was limited to making effective the public's savings decisions by transferring to industry the available capital funds.' Fiscal policy, in its initial orientation, diverged sharply from monetary policy. Of fundamental importance for its early development was the conviction that the long-run, as well as the immediate, economic problem was that of coping with depressed conditions. During the I930's when expansion could be regarded as the sole desideratum of economic policy, fiscal policy came to be viewed as a powerful stimulant while monetary policy came to be regarded as ineffective. In this atmosphere of abortive expansion, it is not strange that the two instruments were viewed in sharply contrasting terms. Fiscal policy, it was argued, added directly to aggregate demand, whereas monetary policy could only affect aggregate demand indirectly -by (weakly) influencing the desire to invest out of borrowed funds. Even under conditions of depression, so sharp a dichotomy is only partially valid. It applies to the expansion of government expenditures, considered in isolation. Tax reduction, however, achieves its purpose not by adding directly to demand but by persuading consumers or inves-

HE purpose of this paper is to consider T Canada's mechanism of international adjustment from I946 through I957. Canadian loans and export credits amounted to approximately $2 billion during this period. The classical writers, i.e., Ricardo and Mill, as well as the modern Keynesians, primarily Metzler and Machlup, state that when a nation is involved in long-term lending, the capital account is the independent variable and as such induces equilibrating changes in the current account.' The two schools differ, however, with respect to the mechanism of adjustment. The classical writers claim that adjustment occurs through changes in prices and factor allocations, whereas the latter group claim that adjustment takes place through changes in purchasing power. The thesis offered here, however, is that the adjustment process from this capital outflow can be explained conceptually by a system of mutually interdependent equations. The paper is divided into three parts. The first outlines the adjustment process, utilizing simultaneous equations for two periods, I94650 and I95I-57, using a three dimensional model, the analysis of which is not amenable to geometrical presentation.2 Then an attempt is made to verify statistically the hypothesis presented in the model. The last section deals with the application of the model for balance of payments analysis. Adjustment Process Under the Simultaneous Equations Approach