money, credit, and banking; monetary policy; consumer finance; mortgage credit

American Economic Association

Money, Credit, and Banking; Monetary Policy; Consumer Finance; Mortgage CreditSource: Journal of Economic Abstracts, Vol. 6, No. 2 (Jun., 1968), pp. 434-454Published by: American Economic AssociationStable URL: http://www.jstor.org/stable/2720034 .

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Money, Credit, and Banking; Monetary Policy; Consumer Finance; Mortgage Credit

AIGNER, D. J. AND SPRENKLE, C. M. A Simple Model of Information and Lending Behavior.

This paper develops a model of optimal short-run lending behavior with information as a variable input for the lending firm, and ex- plores some of the implications of the model for theories of credit rationing, lender specialization, and the numerous problems in- volved in defining the nature and extent of financial markets.

A model is first presented in which the interest rate on a loan is set at some "customary" level and the lender maximizes expected profit with respect to loan size and the amount of information to be obtained. Central to the model is the concept of an "information function" which relates estimated risk (as measured by default risk) to the amount of information obtained and to loan size. The effects of such variables as the stock of information on hand, the cost of obtaining additional information, and the cost of funds to the lender are analyzed through the use of comparative statics. The usefulness of this model is limited to cases in which the lender operates in a perfectly competitive market, for example, to the case of open market buying.

In order to examine imperfectly competitive loan markets, a second model is presented in which the interest rate charged is a variable to be optimized jointly with loan size and amount of information to be obtained. Along with the "information function", a new function is constructed which relates probability of acceptance by the borrower to the rate of interest offered. Comparative static behavior is again analyzed. Some of the results of the model include rationales for non-price credit rationing and for price discrimination, an explanation of lender specialization, and a better understanding of the dimensions of competition in lending markets. Jour. Finance, March 1968, 23(1), English. University of Wisconsin and University of Illinois

BALLING, M. Estimates of Changes in the Structure of Claims in Denmark 1960-65.

The aim is to present estimates of recent changes in portfolios of

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selected sectors of the Danish economy. The article also discusses problems related to a theoretical interpretation of the numerical information on the Danish financial development.

Part of the empirical material on the Danish capital market is of a pretty good standard, but it is only by accepting rather rough estimates, especially for the non-bank sectors, that one is able to study the pattern of intersectoral financial relations.

The economy is divided into five sectors: government, commercial banks, other intermediaries, households and firms, and the foreign sector. There are three types of claims: Cash, bonds, and direct lending. The data are presented in square claims-matrices for the beginning of 1960 and 1965 respectively.

There have been considerable changes in the structure of claims in Denmark 1960-65. The changes are partly explained by differences between saving and investment in the individual sectors. There has been a savings surplus in the Government sector as a consequence of a fiscal policy intended to limit private spending. There has also been a surplus in the intermediaries and in thle foreign sector, which is the counterpart of a considerable deficit on the current accounts of the balance of payments. The private business firms have had a growing savings deficit.

The structure of claims is affected too when a sector borrows to acquire claims. This type of action is particularly relevant in the monetary and non-monetary intermediaries, which have expanded strongly in the period considered.

Unfortunately the material is too poor to give an impression of the behaviour functions of the five sectors. The justification of the claims-matrices is presumably their ability to give a general view of the intersectoral financial relations. National0kon. Tids., 1967, 105 (3-4), pp. 167-83 (Danish). The Graduate School of Business Admin- istration, Aarhus, Denmark

BOHLER, E. Central Bank Policy and Scarce Liquidity: Final Re- marks. (Illiquiditit und Notenbankpolitik).

As agreed these final remarks should show the agreements and the differences between Pohl and myself.

The points of agreement may be summed up as follows: (1) Both see the fundamental importance of the "consolidation gap" for the inductioon of recessions. (2) We agree that enhanced liquidity has



436 Journal of Economic Abstracts

the tendency (to my mind not the exact result) of lowering the rates of interest and that easy money policy ameliorates liquidity. (3) Credit expansion promotes the expansion of the economy, if not hin- dered by contrary factors.

The differences relate to the following points: (1) Mr. Pohl con- founds model statements with statements of real facts. The former only are univocal or "exact." Empirical relations are not strict, they vary with circumstances and so do the results of interventions like credit expansion. (2) Actions of credit expansion differ in the results owing to the different circumstances and to the deviation from the suppositions of models. The chief hindrances are: consolidation gaps, overcapacity, structural change, saturations of demand and la- tent inflation. (3) Statements derived from national income accounts are model statements, corresponding to the logic of bookkeeping, not to reality. They do not describe causal factors, which are the expectations, that is the ex ante influences, which are the only real ones. (4) Statements derived from national income accounts, therefore, do not conform with the positivistic epistemologi- cal criteria proffered by Mr. Pohl. Ex ante data are scarce and in- complete, but they relate to reality as against the formal logic of bookkeeping information. Konjunkturpol., 1967, 13(3), pp. 193-97 (German). Eidgenossiche Technische Hochschule, Zurich

BRUNNER, K. AND MELTZER, A. H. What Did We Learn from U. S. Monetary Experience in t-he Great Depression?

One of the most intriguing questions in the history of monetary policy concerns the behavior of the Federal Reserve after 1929. Why did the Federal Reserve permit a decline of 25% in the money supply, currency and demand deposits, during 1929-33?

As has been noted frequently, the deflationary policy of the 1929-33 contraction followed a period during which recessions were mild and prices were relatively stable. The Federal Reserve is often given credit for the performance of the economy from 1922-28. Why was the policy that has been praised so frequently replaced by a policy of deflation and contraction that was so inappropriate for the time?

Previous attempts to answer these questions have emphasized either the desire of Federal Reserve officials to maintain the gold standard or a dispersion of power within the Federal Reserve System



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following the death of Benjamin Strong in 1928. We examine each of these contentions and find that there is very little evidence to support either.

We, then, present an alternative explanation of Federal Reserve action and inaction during the period and show that the alternative explains reasonably well both the timing of purchases and sales during the recessions of the middle 'twenties and during the depression starting in 1929. No special explanation of monetary policy during the monetary collapse of the early 'thirties appears to be necessary.

Two main reasons for the policy actions taken during the'twenties and early 'thirties and for inaction are: Adherence to a theory-the Burgess-Riefler theory-and the use of an inappropriate indicator of monetary policy-short-term market interest rates. Since the Federal Reserve continues to act as if the main tenets of the Burgess-Riefler theory are correct and continues to use short-term market interest rates as an indicator of monetary policy, we conclude that very little has been learned about monetary policy from the experience of 1929-33. Canadian Jour. Econ., May 1968, 1(2) English. Ohio State University and Carnegie-Mellon University

BRYAN, W. R. AND CARLETON, W. T. Short-Run Adjustments of an Individual Bank.

Most dynamic theories of the monetary policy mechanism, and reserve position doctrine in particular, specify a homogeneous banking system response to monetary policy actions. This article argues that the micro models of bank behavior implicit in these monetary theories remain untested and perhaps misspecified, basically because the macro experiment (changes in reserves leading to changes in deposits and earning assets) is the inverse of the micro experiment (changes in deposits leading to changes in reserve position and earning assets).

Most empirical work employing reserve position concepts have estimated macro models that assume implicitly a homogeneous banking system, and in which reserve position variables enter as regres- sors and deposits or earning assets as regressands. A better understanding of the lags and slippages in the transmission of monetary policies may require a disaggregated investigation of banking behavior.

An experimental model of a single bank's weekly balance sheet




adjustments is thus specified and estimated with the purpose of im- proving the micro foundations of the theory of monetary dynamics. The results tend to fortify the conclusions of other recent studies criticizing the use of free reserves as an indicator of monetary ease" or "tightness." Econometrica, Apr. 1967, 35(2), pp. 321-47, (En- glish). University of Illinois and Amos Tuck School of Business Ad- ministration, Dartmouth College

CANTERBERY, E. R. A New Look at Federal Open Market Voting.

Academic economists often attack the noneconomic tenor and vague nature of Federal Open Market Committee directives. But economists expressing frustration over FOMC decision-making sometimes fail to use their own model-building powers in their attempts to pinpoint responsibility for policy outcomes. This paper attempts to direct attention toward formalizing a FOMC decision- making model. Rejecting the usual political science approach to the voting mechanism, the models features include the use of economists' tools and a method for introducing economic conditions as an independent variable.

The period empirically examined is 1955-65. By identifying two types of economic performance that coincided with two distinct FOMC compositions, the author breaks these years into two periods for analysis: 1955-59 (Period I) and 1960-65 (Period II). It is hypothesized in the theoretical model that the majorities dominating each of the two periods had different value systems: they ranked policy goals in different orders of priority. Utility functions are specified for each of the two groups. Given the utility function of an individual member, the policy yielding the greatest satisfaction is de- cided by the probability assigned to inflation or recession. In turn, the "P" values required to turn a particular group toward anti-reces- sionary or anti-inflationary policies are solved.

Actual dissenting votes by FOMC members of the two groups are tabulated for the periods and divided among those favoring tighten- ing, easing, and indeterminant. With individual exceptions, the model of choice would have predicted accurately the policy deci- sions of the prevailing majority. The members of the two groups seemed to have nearly uniform policy objectives (the Robot thesis), and policy outcomes were consistent with the hypothesized prefer- ences of the majority. The experience and convictions of the majority remained nearly unchanged through these years, but a group



Subjects 439

(the Economists) with a different average preference function increased its power, especially between 1962 and 1965. Western Econ. Jour., Dec. 1967, 6(1), pp. 25-38 (English). University of Maryland, USA

CLOWER, R. A Reconsideration of the Microfoundations of Monetary Theory.

Modern attempts by Patinkin and other writers to erect an intel- lectually satisfying theory of money and prices on Walrasian foundations have produced a general equilibrium theory of price and quantity behavior that is logically indistinguishable from the classi- cal theory of a barter economy. To develop a theory that is consistent with the most elementary facts of experience in a world where some commodities play a specialized role as means of payment, it is necessary to impose certain ratlher stringent restrictions on the choice alternatives of individual transactors-specifically, to dichoto- mize trading plans into two distinct classes: expenditure plans, involving offers to exchange accumulated cash balances for other commodities; income plans, involving offers to exchange non-money commodities for money income. This paper suggests a reconstruction of microeconomic analysis along these lines and outlines relevant implications for contemporary thinking about monetary phenomena. Western Econ. Jour., Dec. 1967, 6(1), pp. 1-8 (English). North- western University, USA and University of Essex, UK

COHEN, J. Integrating the Real and Financial Via the Linkage of Financial Flow.

It is the purpose of the paper to propose financial flow as an alternative linkage to interest rates in integrating expenditure theory and finance. The paper argues that the interest rate variable in expenditure functions is an imperfect proxy for financial flows since the amount of external finance and the interest rate lack any precise relationship. Higher interest rates may denote reduced finance if the supply of credit shifts to the left; but higher interest rates may also denote increased finance and increased expenditures if the demand for credit shifts to the right.

The paper outlines a macroeconomic model of expenditures in which the expenditure functions explicitly recognize the necessary conditions for expenditures. Financial flows replace interest rates in




expenditure functions and are a second category of variables in addition to internal sources of funds (income). Financial flows are made endogenous by being explained in terms of a model of circular flow. In such a model a sector's financial sources of funds are interpreted in terms of the availability of credit. A more general model is subsequently developed in which financial flows are explained in a context of financial markets and then "fed back" into the expenditure functions.

The relative effectiveness of credit flows and interest rates was tested for four categories of expenditures: household expenditures on consumer durables and residential construction, and corporate business expenditures on inventories and plant and equipment. The financial flow variable on the whole proved more significant than the interest rate in these relations.

The significant relationships obtained between particular categories of expenditures and particular types of credit instruments support the use of selective credit controls for restraining "trouble areas" of spending. Paradoxically, while historical experience is most abundant on the effectiveness of consumer credit controls, the possi- bilities for substitution among financial sources of funds seemed greatest here. Jour. Finance, March 1968, 23(1), English. University of Pittsburgh, USA

CRAMP, A. B. Financial Theory and Control of Bank Deposits.

This article examines, at a rather low level of abstraction, the theoretical underpinnings of the "old orthodox" case that control of bank deposits in the U.K. is practicable using the leverage provided by the commercial banks' cash ratios. It is argued that the theoretical case for the authorities' fears of instability of demand conditions in financial markets is stronger than academic critics have allowed, and it is suggested that in consequence control of bank deposits is likely to be more difficult the more urgent the situation that causes the policy to be adopted. Oxford Econ. Papers, March 1968, 20(1), pp. 98-108 (English). Cambridge University

CROUCH, R. A Model of the United Kingdom's Monetary Sector.

ITis paper estimates a model of the United Kingdom's monetary sector comprising supply and demand functions for various types of monetary assets including currency, bank reserves, demand deposits,



Subjects 441

time deposits, and total deposits. The model is "closed" by a simple distributed lag version of the quantity theory of money. Since the matrix of endogenous variables turns out to be triangular, the model is superficially recursive and thus OLS may be a consistent, FIML estimator of the system. In case the other conditions for recursive- ness are not met and the system is genuinely interdependent, TSLS estimates are also presented. Various interest rate and income elasticities are calculated. They conform broadly with previous single equation estimates of their magnitude.

One conclusion of the model is startling, however. This conclusion is that the so-called Special Deposits instrument of monetary control acts perversely. It is argued in the paper that this instrument does not affect the level of bank deposits. It merely affects the structure of interest rates. And, moreover, it affects them perversely. That is to say, an increase in Special Deposits (which conventional English monetary wisdom alleges to be a contractionary action) lowers short-time interest rates. Consider the following result which has been plucked out of the complete model. It is a TSLS estimate which is well identified.

r = -.042 + .00006Y + 1.093r. - .0015S2 + 0006T (.002) (.008) (.00001) (.045) (.0006) (.0002)

R2 = .949 , DW = 2.03

In this estimate r1 is the treasury bill rate, Y is national income at current prices, r0 is bank rate, S2 is Special Deposits and T is the outstanding stock of treasury bills.

Attention is called to the significantly negative sign on S2. When Special Deposits are increased, the treasury bill rate declines-which is the perverse relationship hypothesized in this paper and pursued in more detail in the author's forthcoming "Special Deposits and the British Monetary Mechanism." Nowhere but in Britain could the monetary authorities have a shot in their locker that actually boomer- angs on them automatically. Econometrica, July-October 1967, 35(3-4), pp. 398-418 (English). University of California at Santa Barbara

FAND, D. I. AND TowER, J. E. An analysis of tlhe Money Supply Process in Canada.

The paper applies the free reserve model to the Canadian monetary system to construct a money supply function using quarterly




data for the period 1955-1966. The portfolio behavior postulated for both the banks and the public utilize the framework developed by one of the authors in a paper on money supply analysis which re- views the econometric models of the American monetary sector.

Because of the particular way in which required reserves are calculated in Canada, excess reserves and free reserves, on a statutory basis, may understate the available free reserves. In spite of this we find that the form of the equation, the size and quality of the coeffl- cients, and the R2 are very similar to those that we have for the U.S. data. This paper also suggests the desirability of estimating free reserves on a non-statutory basis. To do this we estimate excess reserves held as vault cash and obtain interest rate elasticities that are 50% larger-suggesting a more elastic response by the banking system.

If our calculated elasticities are correct, they would suggest that the Canadian monetary system may be more responsive to central bank action than is the case in the U.S.A. Two special features of the Canadian system are distinguished: the use of lagged deposits in calculating requirements, and the use of longer settlement periods. Our findings also suggest that since the legal requirements are less constraining in the short run, a considerable part of the stability in the Canadian banking system necessarily derives from portfolio behavior by the public and the chartered banks. Canadian Jour. Econ., May 1968,1(2), English. Wayne State University, USA

FRIEDMAN, M. The Monetary Theory and Policy of Henry Simons.

There is a sharp contrast between Henry Simons' monetary theory and his proposals for monetary reform. His monetary theory is so- phisticated and correct, and in no way outdated by later work. His proposals for monetary reform seem largely irrelevant or wrong and would find little support today even among those who share most completely Simons' basic objectives of social policy. This contrast and how it can be explained are the themes of the paper.

Simons regarded the urgent and immediate task of policy to be a thoroughgoing reform of the financial structure. He regarded such reform as a pre-condition for the satisfactory operation of any monetary rule.

The explanation suggested for the contrast between theory and policy is a mistaken interpretation of the Great Contraction of



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1929-1933. Simons interpreted that episode as reflecting a basic weakness of the financial structure, as having occurred despite the best efforts of the monetary authorities to stem it. We now know that this was not the case, that the depth and severity of the contraction can be largely accounted for by the errors of omission and commission of the monetary authorities.

There is great similarity between the views expressed by Simons and by Keynes-as to the causes of the Great Contraction, the importance of monetary policy, and the need to rely extensively on fiscal policy. And there is the same contrast between the sophistica- tion of the theoretical analysis and the validity of the policy recommendations.

Keynes' policy recommendations differed sharply from Simons', but not because of any difference in theoretical analysis or interpretation of facts. They differed because of a difference in temperament -Keynes was a reformer and so favored tinkering within the existing financial structure. Simons was a radical and so favored a drastic reconstruction of the financial structure. Jour. Law & Econ., Oct. 1967, 10, pp. 1-13 (English). University of Chicago, USA

GOUDZWAARD, M. B. Price Ceilings and Credit Rationing.

This paper demonstrates that rate ceilings determine how credit is allocated at consumer finance companies. Price theory analysis is applied to the problem and an empirical analysis relates credit losses of lenders to the various rate ceilings allowed in the 49 states with small loan laws.

Price theory analysis illustrates that under either the assumption of a competitive or an oligopolistic consumer finance industry, low rate ceilings effectively exclude marginal risk loan applicants from the consumer credit market.

A regression analysis applied to selected financial data obtained from 32 State small loan licensee reports for 1964 empirically con- firms this theoretical proposition. The variables in the regression equations are: YL = Credit loss rate; Y2 = Credit loss, salary, and administrative expense rate; X1 Gross rate of charge; X2 Loan size; X3 = Loan offlce size; X4 = Lender concentration; and X5

Per capita income. In practically every equation, the regression coefficients show a

strong and statistically significant relationship between credit losses




and rate ceilings. The simple coefficient for X1 and Y1 is a moder- ately high .70 and for X1 and Y2 it is .88. The regression coefficients (b), Beta coefficients (B), partial coefficients (ro1.2345), and t-values are clearly stronger and more significant for X1 than for any of the other variables. This relationship is also demonstrated by an F-test of the hypothesis B2 B3 = B4 B5 = 0 where the F-value of 3.06 is not significant at the .01 level and barely significant at the .05 level; and by the smaller F-ratio of 2.33 and R% .2345 of .26 for the equation Y1 = a + b2X2 + b3X3 + b4X4 + b5X5, both sub- stantially smaller than in the equation which includes X1 where the F-ratio is 8.09 and the R20.12345 is .51.

This analysis suggests policy makers should consider these credit rationing effects if they are to draft laws in the best interests of their constituents. Jour. Finance, March 1968, 23(1), English. University of California, Los Angeles, USA

GREEN, H. A. J. Uncertainty and the 'Expectations Hypothesis'.

The expectations hypothesis concerning the term structure of interest rates is examined in a barter exchange model which em- bodies the approach to the theory of choice under uncertainty proposed by Arrow and Debreu and developed by Hirshleifer. There are four commodities: consumption goods available at to (now), two types of claim to consumption goods at t1 ("short-term assets") -one to be honoured in event a and the other in event b, one and only one of which will occur before t1-and claims to consumption goods at t2 ("long-term assets"). In market equilibrium, each individual will either hold only long-term assets or hold only short- term assets or be indifferent between them. This is because he is assumed to make a definite single-valued estimate of the future rate of interest in event a, and a (different) definite estimate for event b; the estimates are not assumed to be the same for all individuals.

Each individual is assumed to maximize expected utility, which depends on consumption (or wealth) at to, t1 and t2; the use of marginal analysis in this context is shown to imply risk-aversion. In the absence of transactions costs, an individual whose sole con- cern is with his position at t2 is on the margin between long-term and short-term assets when the forward rate of interest equals his subjective (arithmetic) expectation of the future rate. For someone



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who is also (or only) concerned with his position at t1, the forward rate must exceed his harmonic expectation of the future rate if he is to hold long-term assets. But risk-aversion alone is not sufficient to necessitate a premium in addition to his arithmetic expectation of the future rate; such a premium is necessary only if risk-aversion is present in excess of a certain degree. It has, however, been argued by Arrow that in general such a degree of risk-aversion is necessary if the expected utility hypothesis is to be logically consistent. Rev. Econ. Stud., Oct. 1967, 34(4-100), pp. 387-99 (English). University of Toronto

HASLEM, J. A. A Statistical Analysis of the Relative Profitability of Commercial Banks.

This study tests the significance of differences in management, deposit size, regional location, and the general economic environment on relative commercial bank profitability. Also tested are the significance of the variables on the general and specific operating relationships which determine relative profitability.

The data are an aggregation of 64 bank operating ratios (e.g., total expenses to total assets) compiled cross-sectionally for member banks in 1963 and 1964. Each year's data represent (theoretically) 384 means and variances for each of the 64 operating ratios for the member banks. There are four classes of relative profitability (measured by net income after taxes to total capital accounts) in eight deposit-size groups in each Federal Reserve District. The variables tested for significance were included in various combinations in four analyses of variance models.

Overall, the study shows that all variables tested-management, size, location, and time-are significant. Each variable significantly affected relative profitability and the majority of operating relationships. The tests of management differences indicated the importance of management performance on relative profitability. The tests for size effects reinforce the importance of scale factors. The size relationships were frequently nonlinear with generalized concave or convex shapes. The analysis of location effects reflects the greatly differing environments in which banks function. The very limited analysis of time effects suggests the importance of changes in the general environment on bank performance. Jour. Finance, March 1968, 23(1), English. The University of Wisconsin, USA




HUANG, D. S. AND MCCARTHY, M. D. Simulation of the Home Mort- gage Market in the Late Sixties.

A short-run simultaneous-equation model of the nonfarm residential mortgage market was estimated from quarterly data covering the experience of 1953-63. The estimates were then used as nonsto- chastic coefficients and relations to simulate the quarterly time paths of FHA, VA, and conventional mortgage loans, in gross terms, during 1966-1970. In the simulation interest was centered on the effects of the changes in the member banks' free reserves, the long-term capital yield, the FHA-VA ceiling rate, and the average maturity of home mortgages upon the demand and supply flows the three types of mortgage loans.

In addition to the control situation, four cases of monetary and housing policy mix wvere assumed: (1) tight money with neutral housing policy, (2) tight money with tight housing policy, (3) easy money with neutral housing policy, and (4) easy money with easy housing policy. In the control situation "normal" levels of free reserves and long-term capital yield (pseudo monetary policy variables) and of average maturity of mortgage loans and FHA-VA ceiling rate (housing policy variables) were used to obtain the control solution. (By a solution we mean a set of simulated time paths of the demand and supply flows). Then higher or lower than "normal" levels of thbe four instrument variables were assumed for the four cases of policy alternatives for each of which a solution was obtained.

This work indicates that if the gap between the ceiling rate and the long-term capital yield is maintained at a constant, flows of mortgage funds into FHA and conventional markets can be kept at a comfortable rate during the time of monetary tightness. Further, the supply of VA mortgage loans tends to dry up after imposition of tight money whether or not the gap between the ceiling rate and the long-term capital yield is maintained at a constant. Rev. Econ. Stat., 49(4), English. Southern Methodist University and the Brookings Institution

Orr, D. J. AND OTT, A. F. Monetary and Fiscal Policy: Goals and the Choice of Instruments.

The problem discussed in this article is the use of monetary and fiscal policy to achieve internal and external stability in a country



Subjects 447

which chooses to keep its exchange rate fixed and to avoid the use of direct controls over trade and capital movements. More specifically, the article re-examines the prescription by Mundell (IMF Staff Papers, Vol. IX, No. 1, March, 1962) that, in a disequilibrium situation, "monetary policy ought to be aimed at external objectives and fiscal policy at internal objectives."

The framework of the analysis is a model similar to Mundell's, with one crucial modification-the volume of imports is made a function of the components of aggregate demand (consumption, investment, and government purchases) rather than the level of aggregate demand (or income). Three policy instruments are considered-interest rate changes, tax rate changes, and changes in government purchases. Considering them in pairs, the application of Mundell's pairing criterion yields the conditions for internal-external pairing of instruments and target variables.

The principle conclusion is that the monetary-external and fiscal- internal pairing suggested by Mundell is not the proper solution in all cases; the pairing decision depends crucially on the values of the marginal propensity to import "out of' investment, consumption, and government purchases, as well as the responsiveness of investment and international capital movements to interest rate changes.

Estimates of the crucial parameters from various econometric models are used to see what t-he pairing criteria derived from the model suggest about the proper direction and magnitude of fiscal and monetary policy in the U.S. if the internal and external goals are to be achieved (using 1966 data). The results support the monetary-external, fiscal-internal prescription for the U.S., but they also indicate that very large changes in short-term interest rates and taxes (or government purchases) would be required to eliminate the payments deficit while maintaining full employment. Quart. Jour. Econ., May 1968, 82(2), English. Southern Methodist University, USA

PEDERSEN, J. Chaos in the Danish Capital Market.

Danish credit policy over the last 10 years is reviewed. It is maintained that owing to the ambitions of the Central Bank to play a role in the control of the balance of payments and even of economic activity as a whole, there has been a competition between the government and the bank to intervene in the economy with the result that




interventions on the part of both have been more severe than would have been the case if only one agency had been responsible for the control of the economy. The Central Bank has applied its credit policy every time it felt it necessary to intervene. As this intervention mainly affected residential building it ran counter to government policy, which was at any cost to promote building activity. Thus a competition between the bank and government to intervene and to neutralize each other's intervention has led to continuously rising interest rates accompanied by rising subsidies to housing and several other activities where the exorbitant rate of interest has been felt.

Gradually the rate of interest had, in fact, become out of harmony, not only with the rates at which most investment was financed, but also with the international level of interest rates. In order to gain control the Central Bank in 1965 introduced a severe rationing of credit also extending to the issue of bonds and to short-term capital imports. However, this policy, too, has been neutralized by government subsidies, and a further escalation of interest rates, especially outside the organized market, has resulted. It is proposed that the bank and the government agree on mutual reductions in interest rates and subsidies, especially with respect to building, so as to obtain a greater harmony between the official rates of interest and the prevailing cost of finance. Nationalokon. Tids., 1967, 105(3-4), pp. 109-25 (Danish). University of Aaarhus, Denmark

POHL, R. Central Bank Policy and Scarce. (Illiquiditit und Noten- bankpolitik).

According to Professor Bohler, the problems connected with financial consolidation in the West German economy cannot be explained by the ex post relationships used in social accounting, since these relationships are only logically derived from a set of definitions. Causal analysis is only possible when using ex ante values: a large portion of investment was not financed with long term loans (the consolidation gap) because, in spite of the tight money policy, ex ante investment was considerably larger than long term ex ante savings. An easy money policy would raise ex ante investment even further over ex ante savings and thereby only serve to increase the consolidation gap.

An analysis of Bohler's statements according to the modern "Phi- losophy of Science" (e.g. Popper) shows that he only presents the



Subjects 449

appearance of an explanation: his premises are pure assumptions, such as made by theoreticans to describe fictitious economic pro- cesses with the aid of an ex ante economic concept. Bohler formu- lates his assumptions in such a way that they do not contradict his statements about the phenomenon to be explained (the consolidation gap). The field of possible compatible assumptions is so great that Bbhler can always find assumptions to "justify" his conclusion that easy money policy would not narrow the consolidation gap; such an explanation contains no information that can be tested empirically except the phenomenon to be explained.

Thus "immunized" Professor Bohler does not need to confront the facts, my proposition that an easy money policy and the resulting increase in bank liquidity would cause banks and non-banks to supply more long term funds and thereby reduce the consolidation gap. Konjunkturpol., 1967, 13(3), pp. 185-92 (German). German In- stitute of Economic Research, Berlin

RIEBER, M. Bids, Bid Patterns and Collusion in the Auction Market for Treasury Bills.

Dealers in U.S. Government securities comprise a small subgroup of bidders on the weekly auction of Treasury bills. Their combined allotment usually varies from twenty to thirty per cent of the total amount awarded. This paper is an attempt to determine, from the bids alone, whether there is evidence of collusive bidding among the dealers.

The test for collusion involves an analysis of the bids submitted by each dealer over a series of auctions to determine whether these participants use patterns of bid placement when submitting bids on each auction, and the configurations of these patterns. The interrela- tionships among the patterns of the various bidders are analyzed to determine whether they could be merely chance events; bidders are not colluding. Because the Treasury acts as a discriminating monop- olist, all of the multiple bids submitted by each dealer on each auction can be used for the test. The statistic chi-square is used as the criterion of similarity; the means by which a dealer's bidding patterns are separated.

In general, if a given large number of auction leads to the identi- fication of a large number of bid pattern groups for each dealer, this implies that bid placement is essentially random. However, because




multiple bids are submitted and accepted and because the lowest bid price accepted by the Treasury is unpredictable, a collusive agreement must be in terms of the pattern of bids submitted by each dealer on each auction. If dealers submit bids randomly, it may be impossible to dove-tail the bids of a group of dealers so that a collusive objective is reached.

Based on the data compiled from the bids of sixteen dealers over seventy auctions beginning in December 1958, no evidence of collusion was found. Jour. Law & Econ., Oct. 1967, 10, pp. 149-68 (En- glish). University of Missouri

RUFFIN, R. J. The Equivalence of Liquidity Preference and Loan- able Funds Theories in Stock-Flow Economies: A Comment.

Since Cliff Lloyd's paper (Review of Economic Studies, 1960), considerable uncertainty has existed over whether the presence of stock-flow goods invalidates the Hicksian proof of the static equivalence of the liquidity preference and loanable funds theories of interest. Lloyd interpreted Walras' Law as stating that one equation is redundant; hence, in a stock-flow economy in which each good is represented by two equations, the elimination of one of the equations does not cancel one of the markets. But Walras' Law does not state that one equation is redundant; it states that the total excess demand (including both stock and flow demands) for one good follows from the sum of all the other excess demands. Thus, the standard proof of static equivalence can be used for a stock-flow economy. Rev. Econ. Stud., Oct. 1967, 34(4-100), pp. 420-21 (English). Washington State University, USA

SKINNER, A. S. Money and Prices: A Critique of the Quantity Theory.

The subject of this paper is Sir James Steuart's critique of the proposition "increase commodities they become cheaper; increase money, they rise in their value."

In dealing with this subject three main issues are considered: (1) Steuart's reasons for examining the causal relationships between money and prices; a discussion which points towards the difference between the "quantity theory" understood as proposition, theory, theorem, and maxim. (2) Steuar's discussion of the determinants of



Subjects 451

price and the functions of money (investment and transactions). (3) Steuart's views as to the way in which changes in the supply of money can affect price levels; an argument which is notable for the attempt made to integrate the theory of money and price.

In conclusion it is suggested that the historian of ideas may find Steuart's treatment of particular topics of value (such as the theories of price and interest). On the other hand, the modern student may be reminded of the difference between the equation of exchange and the quantity theory properly so called; of the difference between establishing empirically verifiable relationships between mag- nitudes and the statement of a theory. Scottish Jour. Pol. Econ., Nov. 1967, 14(3), pp. 275-90 (English). University of Glasgow, UK

TLTSSING, A. D. The Case for Bank Failure.

The greatest single barrier to reform of the banking structure, it is asserted, is the doctrine that banks cannot be permitted to fail. This doctrine derives, in turn, from three social disiderata: (1) that failure of unsound banks not lead, through panic, to failure of sound ones, since the failure of sound institutions would be non-functional and uneconomic; (2) that the payments mechanism not be dis- rupted; and (3) that the integrity of depositors' accounts be pre- served.

It is argued that the major hazards to bank viability-illiquidity, bad assets, overbanking, and mismanagement-are not socially dis- ruptive but, on balance, useful hazards. Exposing individual banks to the risk of failure would thus be socially desirable. Further, it is argued that the three desiderata (above) are consistent with the failure of individual banks, and that, with minor changes in banking law, bank failure can be made an acceptable but quite rare outcome of even fairly untrammeled competiton. Jour. Law & Econ., Oct. 1967,10, pp. 129-48 (English). Syracuse University

WHALEN, E. L. An Extension of the Baumol-Tobin Approach to the Transactions Demand for Cash.

This model for optimal transactions cash balances proceeds from the basic receipt-and-disbursement assumption of the Baumol-Tobin approach: a firm receives a lump-sum cash receipt at the beginning of each transactions period and makes its disbursements in a steady




stream until at the end of the period receipts and disbursements are equal. This receipt-and-disbursement pattern generates an average transactions balance equal to Y/2, where Y is the volume of receipts or disbursements. If the firm invests part of this balance in long- term income-earning assets, it later must borrow to meet its sched- uled disbursements, but the income from an appropriately sized investment will exceed interest charges on borrowed funds.

The difference between income and interest charges is maximized when

M = (1 - p/i + p2/2i2 )Y/2

where M is the average transactions balance, p is the rate of return on long-term investment, and i is the rate of interest charged on borrowed funds. If i is greater than p, M is positively related to i and inversely related to p.

The above equation is adapted for regression analysis, and statistically significant estimates with correct signs are obtained for the regression coefficients using seasonally-unadjusted quarterly time series for the money supply, gross national product and short-term interest rates. The explanatory power of this equation appears to com- pare favorably with that of alternative demand-for-money hy- potheses.

A model allowing both for borrowing and for asset-switching transactions synthesizes this approach with the Baumol-Tobin approach. Optimal transactions cash balances are thereby explicitly related to not only the above variables but also to the rate of return on short-term investments, the cost of engaging in asset-switching transactions and the cost of negotiating loans. Jour. Finance, March 1968, 23(1), English. Indiana University, USA

YEAGER, L. B. Essential Properties of the Medium of Exchange.

In comparing bow near-moneys and the actual medium of exchange affect the operation of the whole economic system, we must go beyond examining how closely substitutable they are for each other from the viewpoint of the individual holder. We must empha- size the manner in which people acquire and dispose of money and implement a change in their demand for it. W. T. Newlyn's "neutral- ity" criterion goes part-way in explaining why this is so important. Furthermore, the medium of exchange trades on no market and at



Subjects 453

no price specifically its own, and it is the thing in which incomes are routinely received and spent. For tlhese reasons, an excess demand for it shows itself to individuals less clearly than does an excess demand for any other thing, even the nearest of near-moneys. An excess demand for actual money eliminates itself more indirectly and with more momentous macroeconomic consequences. The analysis supports the diagnosis of depression as an essentially monetary dis- order. Kyklos, 1968, 21(1), pp. 45-68 (English). University of Vir- ginia

ARENA, J. J. The outlook for financial disintermediation. New Eng. Bus. Rev., Dec. 1967, pp. 2-8.

BIRcH, E. M. AND HEINEKE, J. M. Stochastic reserve losses: a rejoinder. Am. Economist, fall 1967, pp. 60-61.

CASE, F. E. California's continuing need for mortgage capital. Calif. Manag. Rev., winter 1967, pp. 80-90.

DALY, H. E. A note on the pathological growth of the Uruguayan banking sector. Econ. Develop. and Cult. Change, Oct. 1967, pp. 91-96.

DELLAMoRE, G. 11 contributo del sistema bancario alla politica del risparmio. (With English summary.) Risparmio, Oct. 1967, pp. 1753-63.

EVANS, C. D. AND WARREN, F. G. Farm credit and tight money in 1966-67. Agric. Fin. Rev., Nov. 1967, pp. 1-13.

FRANZSEN, D. G. Inflasie en die finansiele meganisme. So. Afr. Jour. Econ., Sept. 1967, pp. 175-88.

HERR, W. McD. Understanding changes in non-real-estate farm debt. Agric. Fin. Rev., Nov. 1967, pp. 23-31.

HORWICH, G. Real assets and the monetary-interest-rate mechanism: a reply. Jour. Pol. Econ., Oct. 1967, pp. 769-71.

JOHNSON, R. W. Regulation of finance charges on consumer instalment credit. Mich. Law Rev., Nov. 1967, pp. 81-114.

KAREKEN, J. Commercial banks and the supply of money: a market-determined demand deposit rate. Fed. Res. Bull., Oct. 1967, pp. 1699-1712.

KERSCHAGL, R. Zukunftsprobleme der Notenbanken. Schmollers Jahrb., 1967, 87(3), pp. 257-74.

KING, D. A. Financial developments in 1967. Surv. Curr. Bus., Nov. 1967, pp. 11-19.

LAUMAS, G. S. The degree of moneyness of savings deposits. Am. Econ. Rev., June 1968.

LEE, M. L. Cash and credit demand for durable goods. Quart. Rev. Econ. & Bus., winter 1967, pp. 59-73.

MATTER, A. Aktuelfe Probleme des Hypothekargeschaftes. Wirtschaft und Recht, 1967, 19(3), pp. 190-95.

NISBET, C. Interest rates and imperfect competition in the informal credit market of rural Chile. Econ. Develop. and Cult. Change, Oct. 1967, pp. 73-90.

ONADO, M. Il mercato delle cartelle fondiarie. (With English summary.) Risparmio, Oct. 1967, pp. 1780-1838.

REAL, P. E. El Banco Central y el momento economico argentino. Rev. de Econ., 1967, 14(20), pp. 11-25.




SCHAEFER, A. "Banque de D6pot" und "Banque d'Affaires." Wirtschaft und Recht, 1967.19(3), pp. 172-82.

SCHULTHESS, F. W. Zum Kredit- und Emissionsgeschaft der Schweizer Banken. Wirtschaft und Recht, 19(3), pp. 161-71.

SCHWEIZER, S. Die Bedeutung der Bilanzsumme bei den Grossbanken. Wirt- schaft und Recht, 1967, 19(3), pp. 183-89.

STUCKEN, R. Die Haushaltspolitik im Gesetz zur Fdrderung der Stabilitat und des Wachstums der Wirtschaft vom 8. Juni 1967. Finanzarchiv, Jan. 1968, pp. 202-19.

THYSGESEN, N. New evidence on the functioning of capital markets: a review article. National0k. Tids., 1967, 105(3-4), pp. 184-.

TITTA, A. Aspetti di una Cassa di risparmio moderna. (With English summary.) Risparmio, Aug. 1967, pp. 1444-77.

TUCKER, D. P. Credit rationing, interest rate lags, and monetary policy speed. Quart. Jour. Econ., Feb. 1968.

VAN LERBERGHE, K. De rekeneenheid, begrip en huidige verschijningsvormen. (With English summary.) Econ. en Soc. Tijdschrift, Oct. 1967, pp. 425-37.

VEPA, R. K. A unique credit system for small industries. Asian Econ. Rev., May 1967, pp. 343-54.

VONTOBEL, H. Der Schweizer Privatbankier im Wandel der heutigen Zeit. Wirtscbaft und Recht, 1967, 19(3), pp. 196-200.

WEITZMAN, M. A model of the demand for money by firms: comment. Quart. Jour. Econ., Feb. 1968.

WITTE, J. G. JR. A comment on "Real Assets and the Theory of Interest." Jour. Pol. Econ., Oct. 1967, pp. 767-68.



money, credit, and banking; monetary policy; consumer finance; mortgage credit

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