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This paper analyzes the inefficiencies arising from the combination of fixed exchange rates, nominal rigidity, and free capital mobility. We document that nominal wages are downwardly rigid in emerging countries. We develop an open-economy model that incorporates this friction. The model predicts that the combination of a currency peg and free capital mobility creates a negative externality that causes overborrowing during booms and high unemployment during contractions. Optimal capital controls are shown to be prudential. For plausible calibrations, they reduce unemployment by around 5 percentage points. The optimal exchange rate policy eliminates unemployment and calls for large devaluations during crises.

Behavioral economics has demonstrated systematic decision-making biases in both lab and field data. Do these biases extend across contexts, cultures, or even species? We investigate this question by introducing fiat currency and trade to a colony of capuchin monkeys and recovering their preferences over a range of goods and gambles. We show that capuchins react rationally to both price and wealth shocks but display several hallmark biases when faced with gambles, including reference dependence and loss aversion. Given our capuchins' inexperience with money and trade, these results suggest that loss aversion extends beyond humans and may be innate rather than learned.

This paper examines the ability of a policy maker to control equilibrium outcomes in a global coordination game; applications include currency attacks, bank runs, and debt crises. A unique equilibrium is known to survive when the policy is exogenously fixed. We show that, by conveying information, endogenous policy re-introduces multiple equilibria. Multiplicity obtains even in environments where the policy is observed with idiosyncratic noise. It is sustained by the agents coordinating on different interpretations of, and different reactions to, the same policy choices. The policy maker is thus trapped into a position where both the optimal policy and the coordination outcome are dictated by self-fulfilling market expectations.

A model of security design based on the principle of information aggregation and alignment is used to show that (i) firms needing to finance their operations should issue different securities to different groups of investors in order to aggregate their disparate information and (ii) each security should be highly correlated (closely aligned) with the private information signal of the investor to whom it is marketed. This alignment reduces the adverse selection penalty paid by a firm with superior information. Adverse selection costs are often contingent on ex post publicly observable and contractible state variables such as exchange rates. In such cases, debt contracts are dominated by currency swaps. Moreover, optimal securities are derivative contracts that are contingent on state variables that influence adverse selection costs. This is because the netting of cash flows in these derivative contracts, in effect, alters the state-by-state seniority of different claims in a desirable way.

Thirty years ago, Milton Friedman and Anna Jacobson Schwartz asserted that the U.S. silver purchase policy of the 1930s imposed[] several years of drastic deflation on China" (1963, p. 699). Friedman's (1992) recent effort to maintain this view in the face of new data and interpretations contains assertions about China's economic history that conflict with available evidence. Friedman states that China's "modern domestic and foreign banks . . . served primarily the transactions activities and liquidity desires of the financial community" (1992, p. 77). This is not true. Domestic banks developed nationwide branch networks extending in 1936 to 1,695 branches in 526 locations (Yearbook 1937). Their involvement was never limited to the financial community. Domestic banks devoted substantial resources to the finance of commodity trade, manufacturing, government, and even farming (Rawski 1989, chap. 3). The memoirs of Chang Chia-ao, a prominent Chinese banker, illustrate the point: offices of the Shanghai and Commercial Savings Bank "were established near the railway depots in Shanghai and Nanking in 1917 to attend to mortgage of goods in transit" (Rawski 1989, p. 147). Nor were foreign banks involved exclusively with the financial community. Japanese banks, for instance, financed the development of Manchuria's agricultural exports, transport infrastructure, and industrial base (Manshu' kaihatsu yonju nenshi, 1964). Including the deposits of these institutions in China's domestic money supply produces ratios of currency outside of banks to the

The authors study the monetary theory implications of fixed costs associated with trade in private assets. The authors show that with heterogeneous endowment profiles it is possible for an endogenous subset of agents to hold currency even when it is dominated in return by a competing asset. With respect to positive issues in monetary theory, the model implies that changes in the steady-state growth rate of the money supply have a negative effect on real interest rates because of endogenous market participation measures. On the normative side, the authors show that there may be an equity-efficiency trade-off from monetary deflation. Copyright 1992 by University of Chicago Press.

Scholars differ on whether central bank intervention mitigates banking panics. In April 1929, a fruit fly infestation in Florida forced the U.S. government to quarantine fruit shipments from the state and destroy infested groves. In July, depositors panicked in Tampa and surrounding cities. The Federal Reserve Bank of Atlanta rushed currency to member banks beset by runs. We show that this intervention arrested the panic and estimate that bank failures would have been twice as high without the Federal Reserve’s intervention. Our results suggest that similar interventions may have reduced bank failures during the Great Depression.

In our two earlier articles in thisJournal (Frenkel and Levich 1975, 1977), we examined the relationship between transaction costs and profit opportunities in covered interest arbitrage. We suggested a procedure for estimating transaction costs in the foreign-exchange market by using data on triangular arbitrage, and we derived a model of covered interest arbitrage that explicitly accounts for these costs. Introducing transaction costs leads to a neutral band around the interest parity line within which profit opportunities do not exist. In our empirical analysis, which was based on standard published data sources, we estimated the various costs and the implied width of the neutral band. Based on these estimates, we concluded that (i) estimates of transaction costs in the foreign-exchange market which are based on triangular arbitrage are roughly equal regardless of the choice of the intermediate currency; (ii) in arbitrage between various pairs of currencies, transaction costs account for a similar percentage of deviations from interest rate parity; (iii) transaction costs account for a similar percentage of deviations from interest rate parity during periods of tranquil peg and managed float; and (iv) deviations from interest rate parity are consistently smaller when arbitrage is between an external pair of securities (e.g., Euromarket securities) rather than the traditional pair (Treasury bills). Our overall conclusion was that "the empirical data are consistent with the interest parity theory in the sense that covered interest arbitrage does not seem to entail unexploited opportunities for profit" (1975, p. 337). In his comment, Frank McCormick (1979) adopts our methodology to estimate transaction costs in the foreign-exchange market. Using a higher quality data base (the Reuter's news service data), McCormick calculates estimates of transaction costs which are significantly smaller

When the exchange rates of most of the major trading nations of the world are floating, the two-country theory of the balance of payments with traded and nontraded goods needs to be modified to take account of the multiplicity of foreign price levels for tradable goods.' This note develops the relationship between the price of traded goods in a single country and changes in exchange rates in all other countries, using a simplified version of the IMF's Multilateral Exchange Rate Model (MERM) (see Artus and Rhomberg 1973). Some notable simplifications are obtained under small-country assumptions. The standard technique for dealing with a group of floating rates is the concept of effective exchange rate (see Economic Report of the President 1974, pp. 220-26). When there are n countries floating, the movement of the dollar exchange rate may give a very inaccurate idea of real changes in the international purchasing power of any given currency. The effective exchange rate for a country can be defined as a weighted average of the exchange rates of its trading partners, with all rates being measured relative to some base year. An index can then be computed by comparing the actual exchange rate of the country with the weighted average of the rates of its trading partners. The simplest type of weighting system is a bilateral system of weights, using either export shares or import shares or an average of both. For example, an export-weighted effective rate index can be defined as in equation (1), where

Let currency be issued with several commodities as backing. If certain pricing rules are strictly followed, it is shown that currency can then be redeemed without restriction for any of the commodities and that, according to a certain definition, the currency retains constant value, so that general inflation cannot occur.

In an interesting paper in this Journal, Elhanan Helpman (1981) develops a simple two-country model to compare the welfare levels that are achieved under different exchange rate regimes. In a world characterized by perfect foresight, his basic finding is that equilibrium consumption allocations, and hence welfare levels, are identical under a floating exchange rate system and a (one-sided peg) fixed exchange rate regime. This result is due to Helpman's assumption that output is determined exogenously, which allows a separation of the real and monetary sides of the economy. The purpose of this paper is to extend Helpman's model by making two alterations in his setup: (1) to allow production to be endogenously determined as a function of labor force participation and (2) to allow welfare levels to be dependent on labor service as well as on consumption. The main conclusion then obtained is that a country may achieve a higher welfare level under a flexible exchange rate regime than under a fixed exchange rate regime, since it is able to choose an optimal rate of inflation (or currency depreciation).

The purpose of this paper is to examine the interaction between the exchange rate and the trade balance within the framework of the portfolio approach to exchange rates and rational expectations. In a simplified linear version, it is shown that the difference between the spot exchange rate and its long-run equilibrium value is proportional to the current level of the trade-balance surplus normalized by the current stock of foreign-asset holdings. Therefore, the analysis provides some evidence in favor of the presumption that surplus country should have an undervalued currency (relative to its long-run level). The basic idea behind the analysis is that, in a world of high capital mobility,current flow payments disequilibria can be accommodated by capital flows without need, in principle, for exchange rate movements. Only if the public expects lasting change in the required rate of capital flows will exchange rates adjust, since in this case the expected time path of net foreign assets will be significantly...

Since 1971, no major currency has a formal link to a commodity. For the first time in history, every currency is wholly irredeemable, not as a temporary expedient but as a permanent matter. Monetary economists have generally treated irredeemable paper money as involving negligible real resource costs compared with a commodity currency. To judge from recent experience, that view is clearly false as a result of the decline in long-term price predictability. A key question for the future is, What if any substitute for a commodity standard will emerge as a long-term anchor for the price level?

A simple stochastic model is developed which demonstrates that information on the nominal value of money conveys sufficient information about the disturbance to currency and deposit demand so that monetary prices, such as adjusting the level of bank reserves, have no impact on the dispersion of price level forecast errors. However, if information on monetary aggregates is obtained only with a lag, then reserve requirements can reduce the disturbances to the demand for high-powered money and hence prices. Such a reserve ratio depends critically on the variance-covariance matrix of shocks to the monetary demands.

Because uncertainty often enters into economic transactions when payment is deferred, it may be advantageous to make the amount of payment depend on the occurrence of uncertain events. This general method of accomplishing risk-sharing is studied and its relevance is discussed in two cases: (1) uncertainty over the rate of inflation and cost-of-living escalators; (2) uncertainty over the exchange rate and foreign currency payment plans.

This article examines the effects of an experiment in the indexation of bank deposits in Hungary during 1946. It is argued that this experiment reduced substantially the tax base against which the inflation-tax rate, determined by the issue of government currency, could be applied. Consequently, indexation was the decisive mechanism making the Hungarian hyperinflation of 1945-46 atypical of other hyperinflations. It is suggested that contemporary indexing strategies should exclude demand deposits from indexation, especially in countries where a substantial amount of government revenue is collected from new money issue.

The need for issuing bigger denomination notes arises every 5 or 10 years in an economy like Taiwan where nominal income has been growing tremendously rapidly and where the public's currency holdings loom large in its total stock of money.' The authorities, however, have been reluctant to meet the needs of trade on the ground that the issuance of big-denomination notes is likely to be interpreted by the public as a sign of the overissue of currencies, and the mere expectation of inflation may drive the price level up even though the total stock of money is held constant. On the other hand, there was recently a shortage of 1-yuan coins in Taiwan. The authorities, in this case, responded very promptly and effectively in meeting the difficulty of coin shortages by issuing 1-yuan notes first and then by managing to provide an adequate amount of new coins. 2 Introduction of bigger denomination notes to relieve the public from the inconvenience of a higher price and unchanged maximum denomination implies a shift to a better denomination mix of money (currency). By the same token, mitigating the difficulty of coin shortages and providing an adequate amount of small-denomination currencies also imply an improvement in the currency size mixture. The purpose of this note is to analyze the macroeconomic effects of shifts in currency size mixture.

Expectations of currency reform are explicitly incorporated into a rational expectations version of the Cagan model of money market equilibrium, where expectations about the timing of reform are (lerived from a simple government rule for choosing when to reform the currency. The model is estimated for three of the episodes of hyperinflation that Cagan investigated, and the results support the hypothesis that expectations of reform were responsible for the apparent instability of the demand for money during the final months of these hyperinflations.

It is widely believed that one of the Federal Reserve's first important monetary policy achievements was the deseasonalization of interest rates. The Federal Reserve supposedly accomplished this by introducing appropriate seasonal movements into the supplies of currency and high-powered money. This view implicitly assumes that there was no interaction between American and foreign financial markets. Two findings are reported that challenge this conventional view. First, interest rate seasonals disappeared in the United States and other countries at approximately the same time. Second, interest rate seasonal ended approximately 3 years before the seasonal movements of currency and high-powered money changed.

A number of contemporary writers such as Ida Greaves, Lord Chalmers, E. K. Hawkins, Newlyn, and Rowan have written articles on monetary problems in West Africa. Such articles have concentrated on monetary matters dating from the period of European control of the area. While such writings contribute to knowledge, they leave out an important aspect of monetary problems which is directly related to the cowrie currency system and the "Great Inflation" in West Africa (Nigeria), 1850-95. By so doing, they ignore the famous Marshallian statement: "Natura non facit saltum." The purpose of this paper is to explore the operation of the quantity theory in its rudimentary form in the cowrie1 currency system of West Africa, and the Great Inflation of 1850-95 in the same geographical and economic region. The currency of any country constitutes its money. Money is anything which performs the functions of a medium of exchange and a standard of value. In order for anything to fulfill these functions, it must be generally acceptable to sellers or other creditors in settling debts. Money is anything which is generally acceptable and commonly used as a medium of payment at a particular place. The geographical territory now known as Nigeria had a cowrie currency system and was part of the cowrie currency system of West

The authors analyze economies in which individuals specialize in consumption and production and meet randomly over time in a way that implies that trade must be bilateral and quid pro quo. Nash equilibria in trading strategies are characterized. Certain goods emerge endogenously as media of exchange, or commodity money, depending both on their intrinsic properties and on extrinsic beliefs. There are also equilibria with genuine fiat currency circulating as the general medium of exchange. The authors find that equilibria are not generally Pareto optimal and that introducing fiat currency into a commodity money economy may unambiguously improve welfare. Velocity, acceptability, and liquidity are discussed. Copyright 1989 by University of Chicago Press.

In an environment with private information, spatial separation, and limited communication, a currency-like object and more standard named credits can be distinguished. The credit objects can be used among agents in an enduring relationship, that is, among agents with known trading histories, whereas the currency-like object must be used among relative strangers. In this environment, collectively determined Pareto-optimal rules make the level of the currency-like object and the mix of currency to named credits responsive to individual needs and to economy-wide states. Total indebtedness is determined by the number of lenders, that is, by preference or demand shocks, and the mix of currency to credits is determined by transaction patterns among the agents. Copyright 1989 by University of Chicago Press.

Even if the world-war had ended a year earlier than it actually did and the peace which concluded it had imposed no sacrifice on Germany, the finances of the empire could not have been placed on a sound basis without recourse to a considerable capital levy. I estimated, in July, i9i7,' the levy that would then have been required at 20 per cent. It is therefore evident that the budget, even if there were no payments to make for reparations, could not now be balanced by means of current revenues. However, a general capital levy is at present very unpopular in Germany because the people whose money is invested in war loans, industrial bonds and mortgages have already lost more than 99 per cent of their property by the depreciation of the currency. Even the socialists have therefore lately confined themselves to (lemanding that the commonwealth should be given a share in the tantgible or real values (Sachlwerte) and this idea is indeed at first sight enticing enough. For real values have hitherto been treated with undue tenderness by fiscal legislation, and the owners of real values have in general not suffered at all or only a little by the depreciation of the currency. Indeed, some of them are, if we calculate their property in gold, richer than before the war. Nevertheless on closer examination it appears that a tax imposed on the real values alone would be unjust and moreover would not serve the purpose. In the first place, it would prove impossible to define in a satisfactory way the term " real values ": Are, for instance, preferred shares of industrial companies paying a limited dividend real values ? Besides, many real values, for instance, tramways, are in a far worse position financially than other kinds of property which are not "real values," such as, for example, foreign state bonds or shares in German banking concerns. Finally many investors in real values are less solvent than others whose property does not consist of real values.2 The reason that so many people at present favor a separate tax on

Foreign exchange theorists have long recognized that some minimum covered differential must exist before covered interest arbitragers will move funds from one currency into another, essentially because each such transaction must net enough to cover the costs of transfers, such as brokerage fees. This paper will estimate this minimum covered differential for the arbitrage between U.S. and U.K. treasury bills and between U.S. and Canadian treasury bills. In Section I, the interest-parity theory is briefly stated. Section II analyzes the effect of arbitrage costs on the shape of the individual and market supply curves of arbitrage funds and develops a method for estimating the minimum covered differential needed for arbitrage activity. In Section III, the minimum differential for both U.S.-U.K. arbitrage and U.S.-Canadian arbitrage is independently estimated to be 0.18 percent per annum. This implies that an arbitrage transaction must gross at least 0.18 percent before arbitragers principally New York banks-will move funds between the dollar and the pound sterling or between the dollar and the Canadian dollar.

THE end of World War II left the monetary systems of the belligerent and occupied countries in a chaotic condition which will necessitate programs of reconstruction and reform if currency difficulties are not to continue to handicap foreign trade. The outstanding difficulties are the inflation which prevails in many of these countries and the fact that the official rates of exchange frequently overvalue the national currency. The first nation to undertake a far-reaching program of postwar currency reform is Ethiopia. Her monetary system, ever since the Italian invasion of I935, has been disorganized. Two steps have recently been taken to improve it: the first was the organization of the State Bank of Ethiopia in August, I942, and the second was the monetary reform, "Currency and Legal Tender Proclamation," No. 76, of I945, and Legal Notice No. 75, of I945, published in the Ethiopian official gazette, Negarit Gazeta (Addis Ababa), Vol. IV, No. 9 (May 29, I945). The new monetary reform embodies some principles which are modern and not as yet widely employed and which have been designed to fit Ethiopia's currency to the requirements of the International Monetary Fund.

AcHARACTERISTIC feature of the conduct of economic policy in a democracy is the practice of holding public hearings before legislative committees. Such hearings perform an important function in eliciting information and in guiding legislators and those charged with the formulation and administration of economic policy. The usefulness of the device, however, is impaired by tendencies which appear to be growing more aggravated and which clearly call for correction.' Perhaps the most serious of these tendencies is diffuseness, that is, the failure to hold the questioning to significant issues and the inclusion of endless irrelevancies. The very ponderousness of the published record often restricts its usefulness as a device for guiding and improving future policy. A second unfortunate tendency is for the hearings to degenerate into an ugly spectacle of bullying and badgering of witnesses. Such tactics, reminiscent of the McCarthy investigations, serve no conceivably useful purpose. The inevitable consequence of proceedings like those described below is to impair the attractiveness of civil service as a career, weaken the effectiveness as well as the morale of public servants, and lower respect for senators and representatives. In the calendar year 1957 the chairman of the Board of Governors of the Federal Reserve System, William McChesney Martin, Jr., appeared one or more times before the Banking and Currency Committee and a subcommittee thereof, the Committee on

RT IKHE attention recently focused upon forward exchange in economic writings, particularly in England, may be said to have been due more to the intricacy of the subject than to its importance. Unlike the forward contract in commodities, which has not as yet been held to have other than technical importance to commodity markets, the forward-exchange contract requires a fair amount of skill at mental gymnastics for its lively discussion-largely because a short position in one currency must sometimes be viewed the other way as a long position in another currency and has, for this reason, acquired a special literature. It is the purpose of this paper to evaluate that literature in the light of some American banking statistics bearing on it which have not as yet received adequate discussion. Besides calling attention to the statistical material the paper will attempt in conclusion to examine the contention insistently advanced by certain students, that the forward-exchange market can be used by monetary authorities as a costless device for the accomplishment of certain specific ends. The American statistical material referred to is found in the Statistics of Capital Movements between the United States and Foreign Countries and Purchases and Sales of Foreign Exchange in the United States, published by the United States Treasury Department and covering the period since the beginning of 1935.' In these publications the short-term foreign assets and liabilities to foreigners of reporting banks and bankers in the United States are set forth, along with security transactions between residents of the United States and foreigners, and these

Empirical economic analysis requires precise definitions of the variables under study. This has been clearly brought out in the recent discussions regarding the relative abilities of autonomous expenditures and money in predicting income or consumption (see Friedman and Meiselman 1963, 1965; Hester 1964; Ando and Modigliani 1965; and DePrano and Mayer 1965). One of the by-products of the discussion was that the definitions of the variables used are important, and to a certain extent the results may be biased in favor of or against a particular theory by the manner in which the relevant variables are defined. In these studies, a great deal of attention was focused on the concepts of autonomous and induced expenditures, and relatively little was done (except by Friedman and Meiselman 1963) to solve the long-standing problem of the definition of money. It is, therefore, not surprising that in empirical research economists use a "narrow" (currency outside banks, plus demand deposits adjusted) as well as a "broad" (currency outside banks, plus all commercial bank deposits) definition of money. In recent years, arguments have been put forward by Gurley and Shaw (1956, 1960), and others inspired by their work, to further broaden the definition of money by including in it liabilities of nonbank financial intermediaries. Gurley and Shaw maintain that the liabilities of the nonbank financial intermediaries are close substitutes for money, and that the rapid growth of these liabilities in recent decades has had the effect of reducing the demand for money. On the other hand, Professor Friedman (1959) and his associates (Friedman and Meiselman 1963; and Friedman and Schwartz 1963) prefer the "broad" definition of money, and, on the basis of historical evidence, show that only commercial

R rEVISIONS of three notable British works on public finance, all of which revisions appeared in I936, are here subjectedsomewhat belatedly-to critical review. Stamp's Fundamental Principles retains its original form and has undergone but few changes. These have been incorporated in text and notes by the use of brackets, so that the reader can easily identify the new matter in this excellent volume. The additions, in the main, deal with the sales tax (pp. 84-90), the taxation of capital gains (pp. 92-93), the varying attitudes in different countries toward tax evasion (pp. II9-20), and the major developments since I920 in Great Britain, Germany, and Holland, in taxation for nonfiscal purposes (pp. 200-203). Few significant developments since the printing of the previous edition escaped the attention of Sir Josiah. Singularly, he does not mention the "token" money or "aluminum currency" used in connection with many state sales taxes in the United States, although he does observe the use of schedules and prepaid receipts and comments upon the petty annoyances connected with retail-sales taxes. All of which confirmed his previous views, for "the characteristic defects of the tax worked out in theory twenty years ago have all been justified by experience, and few surprises have emerged" (p. 89). Incidentally, these sentiments are shared by Dalton (p. II2), but not by Shirras, who regards sales taxation as a desirable complement to the progressive-income tax (p. 6i9). In connection with the discussion of death duties, Stamp repeats the observation contained in his earlier edition that "opinion in the United States has hardened to the view that a federal inheritance tax

The book by Milton Friedman and Anna Schwartz 'A monetary history of the United States, 1867-1960' (Princeton Univ. Press, 1963) is reviewed. The review is divided as follows: (1) Money-supply theory: base, multiplier, and money stock; reserve ratio and currency ratio; explanation of the base. (2) Velocity theory: breakdown of the permanent-income hypothesis of velocity; search for an explanation; case against 'the case against interest rates'; case for interest rates. (3) Monetary policy.

HE purpose of this article is to show in detail what were the forces back of the adoption of the ratio of i6: i in the coinage legislation of i834 in the United States. Special attention will be given to explaining the abrupt switch away from the earlier proposed ratio of I5.625: I toward the higher ratio in the closing weeks of the session of Congress which enacted the measure. In general, it will appear that political animosity for the Bank of the United States was the principal force lying back of the adoption of the ratio more favorable to gold, the supporters of the legislation professing, at least, to believe that by promoting the currency of gold they would strike a blow at the currency of bank notes, especially those of the Bank of the United States. This aspect of the matter has been perceived by earlier writers such as J. Laurence Laughlin, J. B. McMaster, William Graham Sumner, and more recently by Neil Carothers and Carl Brent Swisher.' However, none of these writers has discussed the matter in very great detail. Nowhere, as far as I have been able to find, has anyone brought out in full detail the significance of the impact of the tense political situation arising out of the bank controversy in the spring of i834 upon the important coinage legislation of that year. The coinage legislation of i834 was enacted at a time when the fate of the Bank of the United States was overwhelmingly the dominant political issue of the day. President Jackson, accepting the challenge of Clay and Biddle, had vetoed, in the summer of i832, a bill rechartering the Bank, had fought the campaign of

This paper investigates the effects of devaluation in a two-commodity, two- country, and two-money model with full employment and price flexibility. Primary emphasis is placed on the effect of a change in the real value of money on real expenditure and on the effects on relative prices of a redistribution of expenditure between countries. The stability properties of the model are related to the transfer problem in barter theory and to the Marshall-Lerner condition. Given stability, it is shown that a devaluation will improve the balance of payments.

F NOR a long generation Carl Menger has been in AngloSaxon countries a famous but seldom read economist. Historians of economic thought always give to him at least honorable mention as the man who, with Jevons and Walras, rediscovered and popularized the theory of subjective value. But the barriers of inaccessibility and language have served effectively to hide all but the barest outlines of his work from the bulk of English-speaking students of economics. None of Menger's writings has been translated, and his magnum opus, Grundsdtze der Volkswirtschaftslehre (i871), has long been out of print. Menger's fame, in fact, has been largely a reflection of the achievements of his foremost disciples, Wieser and Bbhm-Bawerk. This is a serious injustice; in important respects his theoretical structure was superior to that of his followers. Accordingly the London School of Economics deserves especial gratitude for having removed the barrier of inaccessibility, although not that of language, by fittingly closing its valuable series of "Reprints of Scarce Tracts" with his collected works.' Menger's writings fall within three rather clearly defined fields: economic theory, methodology, and currency. The present essay is concerned only with his economic theory, which, with the exception of the long article, "Zur Theorie des Kapitals" (i888, in Vol. III of the reprint), is presented in the Grundsitze.2 Full bio

THIRTY years have passed since anyone wrote a book exclusively-or even largely-devoted to an analysis of the supply of money. Phillip Cagan's Determinants and Efects of Changes in the Stock of Money, 1875-1960 (1965)1 would be welcome, therefore, if it did no more than intensify interest in a subject that lay dormant until recently. The book does much more, however. Cagan patiently examines the multitude of factors that influence the principal determinants of the money supply and hence the money supply itself. He then extracts from his data information about the perennial questions: Do changes in money cause the subsequent changes in output and prices? Or, is the stock of money pulled up and down by secular and cyclical changes in prices and output so that movements of money may be regarded as of little or no causal significance? These questions have been debated so heatedly that it is refreshing to find an answer that is neither polemical nor assertive. Cagan concludes that the secular movements of the price level can be reasonably interpreted as a response to prior changes in money. Similarly, he finds that severe depressions are caused by a decline in the rate of change of the money stock, although the depression may have been started by nonmonetary factors. The alternative viewthat movements of the money stock are the result of price and output changes-can at best explain a few of the episodes but fails to account for the period as a whole or for many of the deep depressions. In mild cycles, however, the evidence that Cagan examined does not permit him to discriminate sharply between the two views. Both processes, stimulus and feedback, are at work, and he concludes that the rate of change of money both influences and is influenced by the behavior of the real sector. These conclusions and much of the rest of Cagan's discussion make clear that the neglect of the theory of money during most of the past thirty years cannot be explained by the depth or extent of our knowledge. Cagan presents a rich and, at times, imaginative discussion of the factors influencing the money-supply process that differs substantially from the oversimplified versions of "money creation" contained in most textbooks. Frequently, he concludes that we know very little about the forces producing secular and cyclical movements in some of the principal determinants of the money supply-for example, the public's currency ratio and the banks' reserve ratio. Most of the book develops from a simple formula, given in the first chapter, that relates the money supply (defined as currency plus total commercial-bank deposits of the public) to three determinants. Chapters ii-v analyze the combined contribution of the three determinants and examine some of the reasons for the timing of secular and cyclical changes in each. Cagan then uses the information he has assembled to reopen the long-standing disputes about the direction of causality and about the so-called Gibson paradox that has played a prominent role in previous discussions of classical monetary theory. Unfortunately, the book is uneven. Some problems of little current interest are explored in great detail while others of greater * Discussion and joint work with Karl Brunner made an important contribution to the review, and helpful comments from Phillip Cagan clarified several points. Financial assistance from the National Science Foundation supported the research underlying the review.

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The purpose of this note is twofold: (1) to simplify the unnecessarily complicated exposition of the finite approximation to the model and (2) to relate the model to perhaps more familiar representations of the stockadjustment hypothesis. It is hoped that in both respects this note will serve to make the Houthakker-Taylor formulation more accessible and increase its currency in discussions of consumer behavior.

FOR nearly four years following the legal stabilization of the franc in I928 gold flowed persistently into the vaults of the Bank of France, and the reserve ratio rose again to the high level which for long before the war it had been the policy of the Bank to maintain. With so ample a reserve the authorities experienced no difficulty in preserving the gold parity of the franc in the face of the depreciation of sterling and the devaluation of the dollar. But powerful forces were nevertheless at work undermining the apparent strength and stability of the French currency. The deterioration of the economic and financial situation shook public confidence in the future of the franc, and in April, I935, the Bank began to lose gold far more rapidly than it had acquired it during the early post-stabilization years. After eighteen months of growing monetary strain and great political turmoil the stubborn defense of the franc of I928 was abandoned and its devaluation accomplished. During the first half of the period under survey the dominant feature in the French monetary situation was the phenomenal absorption of gold by the Bank of France. Although this movement has evoked much discussion, its nature and causes have not yet been wholly freed from obscurity, and they still leave room, therefore, for analysis. Such an analysis the first part of this article attempts. The second part of the article examines the difficulties, the accumulation of which constitute the background of the devaluation, while the closing section discusses briefly the devaluation and its effects.

CONGRESS. in I945, prohibited the further issuance of Federal Reserve bank notes.' Judged upon the basis of its relative volume of circulation, this type of currency is of little significance. Nevertheless, the conditions surrounding its issuance, use, and retirement have produced an interesting and controversial, if minor, episode in the nation's monetary and banking history. There have been three different periods during which new issues of Federal Reserve bank notes were put into circulation, and each has been followed by a period of gradual retirement of the notes. The flotation of Federal Reserve bank notes during the period December, 1942-November, I943, was the third and last; and it is this particular episode in the history of these notes which has created so much controversy. A welter of charges has been made, variously accusing the Treasury-Reserve authorities of using the Federal Reserve bank note to secure interest-free funds for the government, of using the notes to "dilute" the reserve of the Reserve banks, and of using "printing-press" money to defray current expenses. The government has been accused of "bad faith," of engaging in a species of financial legerdemain which perpetrated a fraud on the American people. It has been charged that these actions of the Treasury and the Reserve officials have violated the spirit and letter of the laws governing the issuance of Federal Reserve bank notes and that the methods followed have added to the "inflation potential" of the country and have tended to undermine confidence in the integrity of the government's monetary authorities.2 Many of these charges appear to the writer to be grossly exaggerated and to be premised upon outmoded concepts of the nature and function of money in our modern economy. This paper attempts to make a full and comprehensive examination of the available facts and to make an impartial appraisal of the validity of these charges. A brief recounting of the more salient facts in the history of the Federal Reserve bank note will assist the reader in formulating his own judgment of the wisdom and correctness of Treasury-Reserve actions and policies during this controversial 1942-43 period. The Federal Reserve Acts provided for the issuance of two kinds of central-bank notes or paper money-Federal Reserve bank notes and Federal Reserve notes. The Federal Reserve bank notes were intended to serve two principal purposes: (i) to provide a method for supplanting the national bank notes, so that the national banks would not suffer losses in the process of having their notes retired, and (2) to provide an interim currency in case the new form of currency, the Federal Reserve note, might not be issued in sufficient quantity as a consequence of the inability or the unwillingness of member-banks to discount the requisite volume of eligible commercial paper with the Reserve banks. Federal Reserve bank notes were not intended to become a