Knowledge that Transforms

THE admirable review article by Joseph S. Davis sets a high standard in workmanship. The review is many sided, meticulous, and on many specific points penetrating. Davis concurs in many of the lesser findings put forward in the book, but he is obviously much disturbed by the two main theses that emerge. He cannot accept the conclusion that a persistent excess supply of labor, with the attendant low per capita earnings, characterizes agriculture in the long run. Nor is he willing to take the cyclical instability of farm income associated with business fluctuations and treat it as part of the general problem of maintaining the aggregate demand by means of monetary-fiscal measures that are countercyclical in nature. Davis' dissent, therefore, is not with regard to details but on fundamentals. The basic differences between his approach and that underlying Agriculture in an Unstable Economy go much deeper than his liberal praise of the book might indicate. They are rooted partly in economic theory, partly in the empirical evidence considered relevant, and partly in concealed valuations. These analytical differences can best be made explicit by focusing first on the idea of equilibrium and second on fluctuations.

PROFESSOR DESPRES' review of Effects of Strategic Bombing on the German War Economy in the November issue of this REVIEW presents one of the comparatively rare occasions when an author is justified and perhaps even obliged to take issue with his reviewer. His interpretation of this report is both erroneous and casual; to allow it to pass unchallenged would imply concurrence in an egregious misreading of the report and, much more important, would perpetuate a false interpretation of the German war economy which it was a major task of the report to correct. Professor Despres begins his review with a handsome compliment to the authors for the light they throw on the German war economy. We (and our colleagues for whom we are presuming to speak) are grateful and we shall not be a whit less generous than Professor Despres. He was a leading member of the able group of economists whose advice to the Air Forces it was, in some measure, our task to appraise. It is our conviction -and one shared, we believe, by our colleagues on the Survey,1 -that the economic intelligence developed and the recommendations on targets derived represented a high level of achievement. In challenging Professor Despres' criticism of the report, we should like to be clear that we do not claim perfection for our handiwork. Its shortcomings, however, are not the ones Professor Despres discusses. He taxes the authors with recurrent confusions in economic analysis a blanket indictment which he does not feel obliged to substantiate. We find him guilty of lack of diligence in reading the report and of leaving confusion where there was none before. Professor Despres begins by accepting the central contention of the report, namely, that Germany's economy during most of the war was not in the technocratic state of total mobilization surmised by many foreign observers. The civilian population was not squeezed to the physiologically attainable limit, and the national industrial plant was not exploited to the technical optimum. The fascist political and economic equilibrium was different from that of the democratic countries, yet it was anything but stable there were class conflicts that were bridged but not solved, and divergent interests that were compromised but not unified. This social and political framework imposed insurmountable limitations on the volume of output and on the degree of mobilization.2 A wrong (or naive) theory of the monolithic nature of the fascist state gave rise to an equally wrong notion that the sky was the only limit on Germany's technocratic efficiency. By agreeing on this point, Professor Despres clears the way for his most serious objection. He believes the authors stumbled into a booby trap set up for them by General Thomas when they accepted his view that Germany's preparations were insufficient. A fairly superficial examination of the report (particularly of Chapters I and II) would have convinced Professor Despres of the absurdity of his charge. Germany's war preparations are there described as fully adequate for the kind of a war that Hitler hoped to conduct and win. For a program of aggrandizement based on threats, blackmail, and occasional police action, armament in width i.e., an impressive volume of available arms, exceeding by far the one at the disposal of the Western Powers was all that was needed. The report then makes clear that General Thomas and his colleagues on the General Staff never underwrote Hitler's strat-

UNDER the new statute, the Bretton Woods Agreement, which defines obligations of countries regarding international financial policies, exchange depreciation has been accepted as the correct and suitable policy to correct a 2 There is no agreed definition as to what constitutes a fundamental disequilibrium.3 But it would seem without question that the definition comprises a position of disequilibrium in the balance of payments of a country lasting over a certain period of time and resulting in a persistent decrease of that country's liquid assets.4 object of the present paper is to draw attention to the existence of two different types of each of which has the following characteristics: (a) it will lead to a persistent balance of payments deficit, and (b) for the country concerned, this deficit can be eliminated by an alteration of the rate of exchange. But while for one of these two types of disequilibrium the alteration of the rate of exchange of one country has an equilibrating effect on the economies of all countries, such an alteration creates serious new disequilibria if the original disequilibrium is of the other type. main part of this paper will be devoted to an analysis of the international effects of exchange adjustment in this second case. Failure to make adequate distinction between these two types of disequilibrium may have been caused by a lack of adequate terminology and by the consequent over-extensive reliance on the terms and undervaluation. Overvaluation is being used to describe two different things. In the first place it refers to a cause of a balance of payments disequilibrium, namely a relative rise in prices in a country (after allowing for changes in the rate of exchange) compared with the world. It is in this sense that one would state that the I945 rate of 50 French francs to the dollar constituted an overvaluation of the franc. In the second place the term indicates the existence of a balance of payments disequilibrium, without reference to any particular cause. In this sense it was said that sterling was overvalued in I945 and I946, although the point was made at the same time that comparing relative prices or relative price increases in the United Kingdom and the United States, sterling was undervalued compared with the dollar. Since a country's balance of payments depends not only on relative prices, these two situations may, but need not at all, coincide. It would seem to contribute to clarity on 1The author is an official of the International Monetary Fund. This paper was written prior to his employment by the Fund and should not be considered as an expression of the views of that organization. 2 Articles of Agreement of the International Monetary Fund, Article IV, Section 5. Recent experience shows interesting cases of appreciation to correct a favorable disequilibrium (Canada, Sweden). This paper deals with the unfavorable type of disequilibrium only. 'For a discussion of the difficulties of defining this term, see Ragnar Nurske, Conditions of International Monetary Equilibrium, Essays on International Finance, No. 4, Princeton, N. J. 'A recent interpretation of the Articles of Agreement of the Fund, recognizing in principle chronic unemployment as a legitimate cause for depreciation, does not go far toward providing a general definition of the term interpretation made by the Executive Directors of the Fund on September 26, I946, was as follows: The Government of the United Kingdom has stated its intention to maintain full employment and has requested an interpretation of the Articles of Agreement as to whether steps necessary to protect a member from unemployment of a chronic or persistent character, arising from pressure on its balance of payments, shall be measures necessary to correct a fundamental disequilibrium. The Executive Directors interpret the Articles of Agreement to mean that steps which are necessary to protect a member from unemployment of a chronic or persistent character, arising from pressure on its balance of payments, are among the measures necessary to correct a fundamental disequilibrium; and that in each instance in which a member proposes a change in the par value of its currency to correct a fundamental disequilibrium the Fund will be required to determine, in the light of all relevant circumstances, whether in its opinion the proposed change is necessary to correct the fundamental

gross output of Russian industry was approximately two hundred billion rubles. A rough calculation making use of the relation between the wage bill and all other costs in earlier years would suggest 220 billion as the more appropriate figure. Profits earned by industry amounted in I940 to I4.2 billion rubles.Y30 The total value of gross output could thus be estimated at about 234.2 billion rubles. Net output is assumed to have amounted to 55 per cent of gross output I or I28.8I billion 1940 rubles -I4.37 billion I94o dollars. This can be used to obtain a figure of 33.75 billion industrial dollars of I940 purchasing power