Knowledge that Transforms

exactly the same way. It reduces investmentplus-consumption to the volume where the level of employment is not high enough to force up wages and thereby prices and incomes. If we need the iO per cent of output, we can not afford the fiscal policy that would prevent inflation any more than we can afford the monetary policy. And the same holds, of course, for all combinations of the two. Nor does our analysis point to the control of prices or of physical output. As long as employment is at a very high level, workers will press successfully for wage increases and the pressure will come to an end only when the impossibility of increasing prices to cover the increased cost has put enough men out of work to remove the pressure for higher wages. At this point the iO per cent output has also been removed. The use of physical controls to keep output down to the level where prices, costs, and wages do not rise must consist of preventing the iO per cent output right from the beginning. The only way out of this dilemma between accepting inflation and sacrificing the extra iO per cent, is to change our method of wage determination so that the very high level of employment does not result in the fruitless spiral of wages and prices. What is needed is a wage determining mechanism or market which will permit individual wage rates to be adjusted in response to change in the relationship between the demand and the supply in the particular labor market, while keeping the average level of wages from rising very much in relation to the increase in productivity. The criterion on which the wage must be determined in such an artificial market is the relationship between the number of men ready and able to take jobs in the particular labor market and the number of men actually employed in it. This ratio (the index of relative attractiveness) in conjunction with the national average of such ratios would determine whether the particular wage should be increased (and how much) or kept unchanged.1 Unless some such plan is developed for preventing very high levels of employment from raising the general level of wages more rapidly than productivity increases, the benefits of very high levels of employment, which may be of enormous importance in times of national emergency like the present, can be enjoyed only for very short periods and at the expense of severe damage to our greatest secret weapon the price mechanism.

THE decade of the I940'S brought a phenomenal increase in the of living of the people. Common observation bears this out; available data permit its quantification. When per capita disposable personal income adjusted for price changes is used as the best measurement of the standard of living, it would appear that the lot of the average American was about 30 per cent better in I949 than in I940 2 A series showing per capita real incomes is published periodically by the Council of Eco-

While this article was in press, the Editors were shocked to learn of the death of Dr. Ernest M. Doblin on July I4. They take this opportunity to pay tribute to the important work which Dr. Doblin did in many fields of economics and especially in the area of national income. The availability of income statistics as well as their improvement owe a great deal to Dr. Doblin. The following article stands as it was printed from manuscript without the benefit of author's corrections in proof.

DURING the period of the European Recovery Program (ERP), the first large scale provision of foreign aid by the United States in peacetime has been experienced. Foreign aid did not begin with ERP, and it may continue to exist as a general institution well beyond the duration of that particular program. But the practice of foreign aid outside times of acute national emergency required a deeper search for its rationale. The attention of policy makers and students came to be focused on the dollar shortage. The dollar shortage of foreign countries served as an explanation of the need for our aid, and its computation served as a means for establishing the amount of aid required. The search for an explanation of foreign aid in peacetime has suffered somewhat from the fact that the extraordinary situation of aid to Europe was not considered a part of a series of extraordinary situations that have been with us almost continually since 1940. The general problem of our foreign aid, its apparently prominent place in our scheme of things, was not sufficiently clear. It seemed necessary to rediscover some of the broader insights gained in World War II, especially during the great Lend-Lease discussion, regarding the nature of the relations between the United States and certain groupings of foreign countries. At the same time, it became apparent that it was necessary to distinguish between various phases of foreign aid which are characterized by different approaches. The dollar shortage is merely one line of approach. The dollar shortage is understood here as a particular process of foreign aid administration. This is not offered as a novel definition but rather as an attempt to catch the common meaning of the term in the time when it appeared and became operational in international economics. In particular, it seems useful to use the term not merely as a synonym for either United States foreign aid or a United States export surplus. Two Viewpoints on Dollar Shortage

IN his speech Pro Roscio Cicero observes that Solon was right when he did not include any rule in the Athenian law for the punishment of patricide or matricide: the mention of such a possibility might give someone the idea. This was more or less the attitude of the older economics to the financing of government expenditure by the central bank. There might be differences of opinion as to when public expenditure should be covered by taxation, and when by loans on the open market; but of loans from the central bank there could be no question. That could only lead directly into the jaws of inflation. The second World War has, however, shown that, in certain prescribed circumstances, the financing of public expenditure by the central bank need not lead to any considerable rise in prices. As is well known, the Germans financed their occupation expenses by drawing on the central banks of the occupied countries. In some of these, particularly in Greece, this led to inflation on classical lines, but in others, e.g., Norway, Holland and Denmark, there was no very striking rise in prices. In Denmark and Norway, prices rose in practically the same degree as in unoccupied and neutral Sweden, which pursued a cautious and conservative financial policy. This raises, first, the question of what results followed this method of financing and the knowledge thereby acquired must be fitted into the theory of economics; and secondly, the question of what practical use can be made, in normal times also, of this method. It is the first question in particular which is to be discussed here.