Knowledge that Transforms

mHE enormous growth of the public debt during World War II has been widely interpreted as a crippling restraint upon monetary policy. It has taken the exposure and experience of several years to demonstrate that this debt has, in fact, created a great new potential for monetary control. Although that potential has not yet been extensively utilized, the issues that have been raised as a limited application of the new power has been attempted are already coming under the scrutiny of scholarly analysis and of Congressional investigation. The process of discovery has, of course, been piecemeal; no one has yet produced a comprehensive formulation of the emerging possibilities; and in many quarters there has not yet been any real recognition or understanding of what has come about. Each of the three publications reviewed in the present paper deals with important segments of the new monetary doctrine that is slowly coalescing from the controversies aroused by Federal Reserve System policy over the past several years. Dr. Goldenweiser, uniquely suited for his task by more than a quarter century of participation in monetary policy formation at the highest levels, combines in very short space a clear, elementary, description of Federal Reserve functions, a succinct critical review of the principal actions taken by the System since its founding, and an outline of the measures he considers necessary to make adequate use of monetary control in its present environment.' Professor Bach's book, based largely upon his work for the Hoover Commission on governmental reorganization, is concerned more with the methods than with the substance of Federal Reserve policy-making.2 Although Bach sees less clearly than the others the new opportunities for monetary control, his description of System procedures fills a long-felt need, and his provocative suggestions for strengthening the control apparatus (while not altogether acceptable in the judgment of this reviewer) acquire added significance as the stature of monetary policy is enlarged. The Report of the Subcommittee on Monetary, Credit, and Fiscal Policies, prepared under the chairmanship of Senator Paul Douglas (and referred to henceforth in this review as the Douglas Report), represents the most penetrating Congressional investigation into monetary and banking questions that has been made since the founding of the Federal Reserve System.3 Taken with its two supporting documents, a digest of replies to questionnaires and a volume of hearings, the Douglas Report provides a range of new materials on both the mechanics and the substance of monetary control that could not possibly be catalogued in the space available here. Ignoring the valuable descriptive sections in the Bach and Goldenweiser books,4 as well as those contained in the Douglas Subcommittee documents, the present paper will be devoted to the principal issues for policy and organization that emerge from them. On the substantive side there are three key questions: (I) why is effective control over the money supply and the availability of credit necessary; (2) how is effectiveness in monetary and credit control to be achieved; and (3) what guides or criteria should determine the timing and direction of policy actions? Three further questions arise in considering the details of technique and administration: (4) what tools are needed, both general and selective, to implement the over-all requirements for effectiveness in monetary control; (5) how should the Federal Reserve System be organized internally to achieve the highest level of performance in policy-making and in administration; and (6) how should Federal Reserve policy be coordinated externally with the activities of other credit agencies, and with the broad economic program of the governmental administration? What follows is a brief

IT seems that a really great man in our field is known chiefly by one contribution which may or may not be his main achievement. As Malthus suggests population and Ricardo rent or perhaps the law of comparative advantage, so economic development, innovation, and entrepreneur are the catch words associated with Schumpeter. Such associations may be correct and may even have a function. Yet in the case of every great name in economics they are at best a small part of what constitutes the greatness. At worst they are a caricature. For what matters is not merely the one or the other idea, however great, however significant. What matters is the place of the idea in the vision of the genius, the theory in the literal sense: the view of things as a whole. Schumpeter, in his own writings, repeats this again and again: If a statement has logical flaws, it must be discarded. If it is free of logical mistakes, it receives its meaning only from its context. This viewpoint not only gives the clue to Schumpeter's open-mindedness and tolerance toward other men's ideas, his willingness and ability to see every point of view; it not only explains how he could understand everything and yet cling to his own view; it is essential to the real understanding of his theory.

C ONSIDERABLE progress has been made in U. S. national product and income statistics in recent years. One of the most useful improvements is that, since I939, quarterly estimates have been made available within two months following the close of the period. In addition to furnishing comprehensive indicators of general economic conditions more promptly than before, these quarterly estimates have made it possible to analyze many economic relations, involving lags shorter than a year, which could not be observed from annual data. There are, however, grounds for further improvements. This paper represents a very preliminary attempt toward partially filling one of the gaps, namely, monthly estimates of national product statistics.2 For the same reasons that quarterly estimates are desirable in addition to annual data, monthly estimates would be useful in providing a really up-to-date picture of economic developments and in supplying data for the study of many important economic relations which may involve lags even shorter than a quarter. In Section I, seasonally adjusted monthly estimates of the following components I of the gross national product are derived for the I946-49 inclusive: (I) personal consumption expenditures on durable and nondurable goods as a whole, (2) personal consumption expenditures on services, (3) gross private domestic investment in new construction, and (4) gross private domestic investment in producers' durable equipment.4 The estimated figures are presented in Table i and are plotted in Charts i and 2, together with the quarterly figures as reported by the U. S. Department of Commerce. In order to indicate a possible use of the monthly estimates, an attempt is made in Section II to find the lagged relation which, on purely a priori grounds, may be expected to exist between income and consumption. In spite of several statistical attempts to establish this lag on the basis of annual data, it seems that by no stretch of imagination could one believe that this particular lag is as long as a year. Since the pay period should be the most important single factor in the determination of this lag, and since by far the major portion of income payments in this country is on a weekly or bi-weekly basis, there are grounds for believing that this lag may be even shorter than a quarter. One would therefore be led to expect that the monthly figures would yield good lagged relations. On account of the difficulties inherent in drawing statistical inference from economic time series of a very short unit-period (in this case, a month), no definite conclusion is reached on this point. For what they are worth, the evidences found seem to indicate that the lag-by-one-month relation is about as good as the relation involving no lag at all.