Knowledge that Transforms

GOVERNMENTS in various underdeveloped countries have progressively assumed direct responsibility for economic growth and have often relied on borrowing from central banks to finance a part of their investment outlay. Consequently, central banks now have less freedom than before in the exercise of their monetary policy. However, monetary policy in these countries can still influence private outlay in such a way as to supplement or offset public expenditure and contain total effective demand within limits compatible with price stability. The present paper studies the case of India where the Government, through its Plans, has endeavored to step up public investment. The purpose of the paper is to focus directly on the policy decisions of the central bank the Reserve Bank of India. By directing attention to the accounts of the Bank, the present study reviews critically the Indian monetary policy since the beginning of the first Plan in 195I. Since the purpose is to evaluate monetary policy, the impact on Bank's accounts of fiscal operations and of the changes in foreign assets is assumed as given. In terms of Bank's assets, the changes in net claims on government directly influenced by government budgets and changes in foreign assets are considered as outside the scope of monetary policy.' It is further assumed in this paper that the objective of monetary policy is to maintain the prices of the previous year. Money Supply and Price Changes

In his recent publication, Gold and the Dollar Crisis, Professor Triffin revisits the old Keynes plan, designed during the Second World War for solving postwar international currency and payments problems. In Professor Triffin's view such a plan would solve our present difficulties in international payments. The book itself stems from two articles by the author, published by the Banca Nazionale del Lavoro in Rome in I959. An introductory section and a postscript composed of six comments on Professor Triffin's work (the sixth being by Mr. Khrushchev), have been added in the book form. In essence, the Keynes-Triffin scheme advocates the establishment of an international or supranational central bank of which all countries of the free world would be members. Such an institution would serve as a substitute for the present International Monetary Fund. It is clear that its merits and defects would have to be discussed on two different planes. On the one hand, Professor Triffin's New International Monetary Fund would create problems of a purely political nature, because much would depend upon on what basis, or by what type of voting system, the decisions of such an institution would be reached, given politically sovereign member states. On the other hand, a number of purely economic problems are raised by the existence and by the mode of operation of such an institution. It is beyond the scope of this note to discuss the problem of the decision-making process in detail. The difficulties that might arise are, however, quite clear. If all of the rules of the game were not laid down from the outset, whenever a decision were to be made, and no three-fourths, four-fifths, or unanimous agreement as envisaged by Professor Triffin were reached, it might impede the functioning of the institution. But let us assume that in one way or another decisions are made, and let us consider the impact of the new fund on international liquidity, and on the stability and policies of the member countries. Professor Triffin starts from the premise that the world supply of gold and annual gold production are insufficient to satisfy the international demand for liquidity generated by the growing volume of world trade. Moreover, he observes a striking, and in his view highly dangerous, concentration of reserves and of international short-term credit creation. To remedy this situation and to facilitate international payments, he envisages an international central bank which would absorb part of national gold and foreign exchange reserves and through which international payments simply would be effected as a bookkeeping operation. Under the Keynes plan, presented in the later years of the war, net surpluses or deficits in the balance resulting from autonomous transactions could accumulate in substantial amounts (not indefinitely, as Professor Triffin asserts-see page go). Professor Triffin realizes the damaging inflationary effects that such an unrestrained credit creation might entail. Consequently, he advocates a three, four, or five per cent ceiling on the annual expansion of world liquidity. Each member country would be required to hold a given proportion of its monetary reserves, say, twenty per cent, as deposit with the fund; it might, however, keep a greater proportion. With the twenty per cent reserve ratio, Professor Triffin estimates the initial capital of the fund at about $i I billion, initially held in the form of gold to the extent of about forty per cent, while the rest of the assets would be in the form of claims on member countries, primarily the United States and the United Kingdom. Thus in the initial stage not all official foreign exchange reserves of member countries (at present about $I9 billion) would be absorbed; there would be about $I3 billion outstanding, left in the hands of official short-term creditors within the member countries. Such balances would, according to Professor Triffin's plan, be absorbed over the early years of operation of the new fund. This, of course, would require some countries holding reserves with the fund well in excess of the 20 per cent. The expansion of world reserves would be effected in two different ways, comparable to those currently employed by national central banks. On the one hand, the fund could extend short-term credit on demand of the member countries; on the other, it could invest directly in members' security markets, both on short and on long term. It may be interesting to note that such credit creation would involve an annual increase of about i8 per cent of the fund's initial assets if the growth of reserves were to equal five per cent.

increase in the scarcity of funds. If, instead, the short run refers to a definite time period, such as one year, then in one of our examples the short-run decline in investment would come to I.28 percent,5 and in the others it would be 20 percent. Or, to put this differently, how should we interpret the elasticity in the following example? T = $I5,000, D = $500, and P is initially 6 years. Then the age at replacement is 5 years. If there should be increase of ioo percent in the required rate of return -to use Duesenberry's phrase -with the payoff period being cut to 3 years, the age at which replacements are made would be io years. But this would imply a 20 percent reduction in investment lasting for 5 years. Query: is the investment function elastic? Now, let us consider the denominator in the measure of elasticity. It should, of course, refer to the relative change in interest rates, or if desired, in the required rate of return. If the item has a long life it is nearly correct to identify the percentage fall in the payoff period with the percentage increase in the required rate of return. But if the item is expected to have a short life, there would be a very considerable difference. To illustrate: a project which has a 3-year payoff period and an expected life of 4 years would yield about 23 percent. If the payoff period of this item were reduced to 2 years, its yield would come to 47 percent.6 In short, it is dangerous to identify the percent change in the payoff with the percent change in yields except when the item is expected to have an operating life of, say, ten or fifteen years, or longer.7 To summarize: the investment response that Duesenberry finds is misleading, the change in interest rates as he calculates it could be wrong, and the assumptions upon which he bases his illustration are arbitrary. It is hard to take this seriously as evidence for or even suggestive of a very elastic investment function. What makes the whole matter most surprising is that just before setting out his example he identified the elements upon which the elasticity really does depend the pattern of yields expected on all the various projects. But he has not used them.

There are several major reasons why general levels and patterns of concentration in United States and United Kingdom manufacturing industry might be expected to differ; among them are size, economic history, growth patterns, international trade, and anti-monopoly policy. Assuming similar technology of production in both countries, smaller domestic markets (in terms of geography and level of demand) would make for higher concentration ratios in the United Kingdom, since fewer optimal-size firms would suffice for each industry.1 Of course, past technological trends may have offset this, by evolving lower optimal firm sizes, such as the British system of shorter runs as against American mass production. Britain's greater maturity, and the widespread rationalization waves in the last two generations, would point toward higher British ratios. As for growth patterns, Britain's higher proportion of basic manufacturing trades (metals and heavy engineering), where economies of scale may be greatest, might also indicate a higher general level of concentration. Britain's greater involvement in international trade probably is important for individual industries, though its effect on concentration ratios might go either way. And Americans might suppose that United States anti-trust policy has kept the ratios relatively lower there than in the United Kingdom (though anti-trust vigor may merely reflect a largely ideological, and token, effort against an especially grave concentration problem). Other reasons one way and the other could easily be added. With all the difficulties of measurement and comparison that plague this topic, and with all the counterpoised influences in the two countries, it is surprising that one recent comparison, by P. Sargant Florence in I953 dealing with the year I935, reaches the straightforward conclusion that on the whole American manufacturers are roughly equally in control as are the British.2 In contrast, Rosenbluth in I952 reached different conclusions for the same year, I935, on the basis of a frequency of employment in manufacturing industries by degree of concentration.3 In each iO per cent bracket, cumulative United Kingdom employment as a per cent of the total exceeded that in the United States; in short, more employment was in more highly concentrated industries. It is clear therefore that the general level of concentration is higher in the British industries.4 As for patterns of concentration in sectors and industries, Florence found a remarkable association between specific industry ratios, whereas Rosenbluth's figures for matched industries tended to show important differences. Whatever the truth about comparative concentration in the United States and the United Kingdom (and whatever such a comparison may mean), the discrepancy and obsolescence of these conclusions suggest a need for more research, especially concerning more recent years. Now that two new sets of ratios for a fairly recent year (195 i) are available, a new Transatlantic comparison is bound to be made. This paper, it is hoped, provides it. Methods. The methods used in this paper are intuitively simple.5 In the British data from Evely and Little, industries are classified according to the degree of concentration of their employment in the largest three firms, and this gives a frequency dispersion with ten ten-per-cent categories.6 For the United States a similar tabulation for the same year (195I) has been drawn from that rich volume of data com-

HE purpose of this paper is to present a T short-term planning model for the Indian economy. It involves (a) the formulation and implementation of an input-output model for India, closed with respect to all household consumption except that originating from government employees, and (b) an endogenous determination of the distribution of consumption expenditure among several groups of households, each group having a specific consumption pattern. The paper is divided into three sections. An attempt is made in section I to classify the economy into several sectors. In section II, we calculate the intersectoral transfers of intermediate products as well as final goods and services. Section III presents the planning model and considers the possibilities of using it for planning purposes.