Knowledge that Transforms

THIS note 1 deals with the measurement of the supply curve of female for the economy as a whole. It is not to be interpreted as a study of the supply for particular industries or occupations. In I940 for the first time the Bureau of the Census included data on wages and salary incomes in its Census of Population. The concept of labor was substituted for Earnings data were classified by sex. These changes in the presentation of population statistics made the measurement of the supply curve of easier and less open to doubt on the grounds of inadequacy of the basic data than was the case in the work of Paul H. Douglas.2 Both in his book and in his and Mrs. Schoenberg's article, the series representing wages was based on earnings in manufacturing. The average annual earnings in manufacturing in 4I cities were correlated with the proportion of the population gainfully employed. This procedure assumed that earnings in other industries bore the same ratio to those in manufacturing in all of the cities. With the Census now reporting frequency distributions of wages classified by size for each of the major cities, the assumption is no longer necessary. Douglas and Schoenberg found a negative relationship between numbers of women and children employed and average earnings. Since it was quite conceivable that instead of women seeking employment due to low incomes, the average earnings were low because a large number of women were employed, the authors adjusted the earnings series to measure the wages an equivalent adult male would receive. The correction was based on the ratio of men's to women's wages in each state as reported in a number of industries. They also found in each state the proportion of the employed who were women. The manipulation of the series in this way is no longer necessary, for the earnings data are classified by sex. Some bias in the earnings figures are still present because of the inclusion of those of children, but the number of children employed was not large enough to reduce the accuracy of my findings significantly. In previous Censuses, persons gainfully employed were defined as having an occupation, regardless of whether they were currently employed, available for employment, or neither of these. In I940 the force was defined by the Bureau as consisting of persons at work, seeking work, or on public emergency work in the week of March 24 to 30, I939. The figures excluded workers unemployed due to seasonal layoffs, who were not seeking work. Retired persons were also excluded. Neither of these groups at the time of the Cefisus was effectively a part of the supply. Under the former classification, however, many of them would have been reported as gainfully employed, since they would have given an occupation in answer to the questionnaire. The latest Census also excluded inmates of penal and mental institutions, who previously would have been considered gainfully employed because they worked regularly. For my purpose, this is an improvement, inasmuch as it is difficult to conceive of such inmates being available for other employment.3 Included in the force are new workers, without previous experience, seeking employment. In I930 new workers would probably not have reported occupations and thus would have been omitted. Entrepreneurs were included both in the I930 and the I940 series on labor. Since most of 1 I am indebted to Professors Milton Friedman and George J. Stigler for discussions on the methods used in this paper. 2Paul H. Douglas, The Theory of Wages (New York, I934); Erika H. Schoenberg and Paul H. Douglas, Studies in the Supply Curve of Labor: The Relation in I929 between Average Earnings in American Cities and the Proportions Seeking Employment, The Journal of Political Economy, February I937. Sixteenth Census of the United States (I940), Population, Volume iII, Part i, p. 3.

TNTIL very recently American aid programs to European countries consisted mainly of shipments of goods and services for immediate consumption or for building up productive capacity. At the present time, however, a new kind of aid, the Mutual Defense Assistance Program, consisting of military equipment, is also flowing to most of the ERP countries to refit underequipped defense forces and to arm new units. The London Conference of Foreign Ministers which ended May I9, I950, distributed the total burden of European rearmament among the Atlantic Pact member countries without, however, publishing any military or cost statistics. But it is clear that the new additional military responsibilities will require increases in present European military budgets. In the full employment economies of ERP Europe, where total output can rise only slowly, these new military responsibilities are so much greater than present levels of American arms aid under the Mutual Defense Assistance Program that a shift of productive factors away from civilian production will be required. To that extent, the purposes of ERP and the European rearmament program would seem contradictory. This paper will attempt to estimate the new economic and fiscal efforts required of these countries as a result of superimposing the new rearmament program on their recovering economies, as well as the amount of addib tional American aid that would be needed to fulfill both recovery and rearmament goals. Under the provisions of the Mutual Defense Assistance Act of I949, the United States is sending Western Europe approximately $i billion worth of arms during the present fiscal year. One hundred million dollars of this total is to be used to defray the transportation costs of American surplus equipment (originally worth $450 million), while the other $900 million is to pay for weapons which come from the United States reserve stocks, which must be replenished by current production. The procurement phase of the first year of MDAP ended on June 30, I950, and on June 30, I950, the Senate authorized the expenditure of an additional $1,223 million for the second year of MDAP. The recipients of this aid are the Benelux countries, France,2 the United Kingdom, Norway, Denmark and Italy. At this time, these countries are spending a total of $4,28o million per year on defense. Of this amount, France and the United Kingdom are spending $3,380 million, or more than 75 per cent of the total. The major responsibility for expanding the defense establishment of the Atlantic powers will thus fall on them.

THIS paper has to do with an analysis of the behavior of the price of cocoa for the purpose of determining whether or not particular influences have gained ascendancy in the control over the cocoa market. Since the termination of price controls by the OPA in October I946, the price of cocoa has advanced from I4.95 cents per pound to more than 50 cents. The New York cocoa market is said to have been submitted to a squeeze by the British West African Produce Control Boards; ' and His Majesty's Government has gone on record to ensure that the Boards' operations are brought into conformity with any international obligations which it may have assumed, or may in the future assume.2 There are conflicting reports between what appears to be the avowed attitude of the British Government in establishing central marketing agencies, and the statement by The Econzomist that this latest rise in cocoa prices . . . is coincidence, and not design, which has produced the new marketing organizations and a steep rise in world cocoa prices at the same point of time.' For the American economy the spectacular rise in the price of cocoa is of twofold importance: (X) because the yearly imports of cocoa by the United States are about 40 per cent of the total world output of which, in recent years, more than one-half has originated in British West Africa;4 and (2) because it is said that the advance in price is a result of short-time reduced output, and, possibly, in the long run, a question of monopoly that is fundamental to the whole control scheme.5

IN the August I947 issue of this REVIEW, Mr. Willard W. Cochrane, presenting a summary of his study about family budgets among Corn Belt farmers in the United States,' concluded that two different forces emanate from the income-outlay behavior of farm families: an explosive force associated with expenditures for capital and a stabilizing force associated with expenditures for family living.2 The character of farmers' expenditures as a whole, however, was not ascertained. Furthermore, the procedure seems doubtful.

IN Dr. Tobin's rejoinder to my article of November I948,1 he greatly improves the visual presentation of the range in circuit velocity since I919. This does not solve the question of whether the decline in circuit velocity is more reasonably interpreted as the result of low interest rates or as a secular trend due to other socio-economic factors. His Charts 3 and 4 suggest that for the 12-year period, I9I9-30, there was a considerable correlation of the sort which he stresses, that is, the lower the rate of interest the lower the velocity. But for the succeeding period of equal length, the correlation is in the opposite direction. Dr. Tobin also suggests and I agree that thse explanation of the change in circuit velocity since I919 should be consistent with data for the 40 years prior to 1929. The chief purpose of this note is to indicate the character of the relation of circuit velocity to the rate of interest and the passage of time, respectively, for a longer period than that covered by the data in my previous article. Before presenting data for a longer period, I would like to make brief comments on three items of theory mentioned by Dr. Tobin. First, Dr. Tobin is right in saying (in the last paragraph of his rejoinder) that Keynes assumed constancy for short periods in V (= Y/M1) and not in v (= Y/M). But the paragraphs in my article which Dr. Tobin takes as a misinterpretation of Keynes 2 relate to Keynes' attitude toward the likelihood that a secular trend in income velocity exists, and therefore to changes in v abstracting from the influence of the rate of interest. Second, Dr. Tobin objects (in the next to the last paragraph in his rejoinder) to my reluctance to make an a priori assumption regarding the interest-elasticity of the demand for cash balances, after allowing for a secular trend in circuit velocity if such is found to exist, and claims that I am dodging a theoretical issue. On the contrary, what I have tried to do is to bring into focus the major theoretical issue between the Keynesian analysis and that of traditional theory in a form which has the most direct bearing on monetary policy and can be tested by factual data. This is done by looking at the correlary of the hypothesis of interest-elasticity of cash balances, namely, the assumption that v and M (after adjusting the former for trend in circuit velocity and the latter for a reasonable rate of growth) are compensatory. It is Dr. Tobin who is dodging the issue, which is not only theoretical but also factual, by insisting that the validity of the Keynesian, in contrast to the traditional, view should be assumed. Third, Dr. Tobin again misrepresents my position (in the same paragraph) by claiming that I hold that circuit velocity of money is a constant except for the time trend and has no relationship to the rate of interest. There is nothing in my writings to support this claim. What I have claimed is (a) that circuit velocity is more stable than is generally recognized and has a downward trend, (b) that there are notable deviations from trend associated with business fluctuations and certain other special circumstances, and (c) that the deviations associated with business fluctuations are in conformity with traditional theory and in conflict with the abovementioned correlary to the hypothesis of interest-elasticity of cash balances.3 In examining the long-run relationship of circuit velocity of money to the rate of interest, we cannot rely on the data which exclude time deposits from the supply of money. The data cited by Dr. Tobin (footnote 3 in his rejoinder) rest, for the 20 years from I890 to Igog, on