Knowledge that Transforms

THE International Monetary Fund has supervision over the exchange rate and exchange control policies of members and also provides financial assistance to members. importance of its supervision of exchange rate and exchange control policies is generally recognized; opinions differ, however, on the importance of its lending operations. Mr. Nurkse has said, The main function of the International Monetary Fund will be to create an addition, and quite a substantial addition, to aggregate international liquidity. 1 Mr. Viner, discussing the original Keynes and White plans, said, By creating an additional and flexible supply of internationally liquid means of payments both plans would provide needed safeguards against either world or local deflations originating in national balance of payment difficulties. This is the greatest service which the plans would render . . .n2 present paper examines the contribution which the Fund's lending operations may make to international monetary stability and the avoidance of deflationary and restrictive measures. Reasonable stability and freedom in international monetary relations are possible only if appropriate measures are taken to achieve balance over a period of time in the international transactions of individual countries. adoption of suitable exchange rate and exchange control policies is of fundamental importance. But if unnecessary changes in exchange rates, excessive restrictions on current transactions, and domestic deflationary measures are to be avoided, it is perhaps of equal importance that countries have some available means of meeting balance of payments deficits. From this point of view the Fund's lending operations may be considered as important as its supervision of exchange rate and exchange control policies. Although the Fund has the power to object to exchange rate changes and exchange controls on current transactions, it can not do so in practice unless there are some other means of meeting the deficit or correcting the situation.

SINCE I did not have opportunity of seeing Dr. Hansen's article in February issue of this REVIEW 1 before publication, I must offer a belated rejoinder, which I have promised Editor will be brief. Let me begin by correcting Dr. Hansen's impression that everything said in The Bogey of Economic Maturity about the stagnationists was intended to apply to him personally. To be sure, I quoted principally from his writings, which offer most coherent and systematic exposition of stagnationist theory, but I tried to make clear that I was addressing myself to a whole school of thought, not to its major prophet alone. Because some of Dr. Hansen's disciples have displayed less caution and moderation than master, I had occasion to -take to task some views he did not share, and for which he should not be held responsible. If my cautionary explanations did not make this sufficiently clear, I am glad of this opportunity to state in writing what I have long since told Dr. Hansen personally. In view of limited space at my disposal and untimeliness of a delayed rejoinder, I shall content myself with suggesting approach or direction my reply would take if spelled out, leaving a fuller development of argument to book itself.

A NY attempt to estimate the future volume of American exports should be based on an appraisal of the marginal propensity of the to import American products (the ratio of a change in imports of American goods to a change in national income), and on the relationship of the prices of American goods to foreign prices. Computation of the marginal propensity to import for the outside world is not possible because of lack of adequate data on national income for most of the foreign countries; and even when these figures are available, the logical and technical difficulties of combining them into a homogeneous magnitude are exceedingly great. Even greater obstacles stand in the way of a meaningful statistical approach to the problem of price relations. The price index of American exports pertains to prices received by American exporters and does not take into account the additions resulting from duty payments, license fees, cost of transportation, and similar charges incurred by the foreign importers. With the numerous changes in tariff schedules and other trade barriers of the interwar period in mind, it would be unwise to assume that these additions have remained constant (or have moved proportionately to export prices) and therefore can be neglected. If an attempt is made to appraise explicit tariff changes as a cause of changes in the volume of American exports, a simple comparison of American export prices with foreign wholesale prices has little meaning. A rise of foreign prices induced by an increase of foreign import duties would make prices of American goods relatively lower; and, assuming a normally shaped demand curve and other factors constant, this rise in prices would justify an a priori expectation of a larger volume of exports. On the other hand, the imposition of import duties in foreign countries for protective purposes would lead to the expectation of a decline of American exports unless the demand for American goods is completely inelastic. But even if these logical and technical difficulties could be overcome, another set of prices would have to be considered. For all commodities for which alternative sources of supply are available, the prices, or more precisely the supply curves, of potentially competing countries enter into the determination of the volume of American exports. For instance, the quantity of American wheat exports is, among other things, dependent also upon the supply of Argentine or Canadian wheat. Within the practical limitations of statistical data and techniques, it is impossible to include directly all relevant factors.

For descriptions of curves, see footnote to Chart 7. Equation found:

Official gold sales in the Middle East for the express purpose of combating inflation were inaugurated in Iran in June 1943; in Iraq, Palestine, Trans-Jordan, Syria, and the Lebanon in August 1943; and in Egypt in November I943. Official sales were discontinued in June 1944 in all of the above countries with the exception of Iran where they were continued into the fall of I944. Official gold sales in Bombay, India, began in August 1943 and were continued until April I945.2 Just how effective gold sales in the Middle East and India have been is difficult to determine. Nowhere have the proceeds from such sales accounted for more than a fraction of the