BOOK REVIEWS

AggregateTheoryand Policy
The Economics of Labor Force Participation.By WILLIAMG. BOWENand T.
ALDRICHFINEGAN.Princeton:PrincetonUniversityPress, 1969. Pp. xxvi+ 897.
$18.50.
In this massivecompilationthe authorsattemptto trackdown the determinants
of labor-force participation forthe variousage-sexgroupsthat comprisethe United
States population.Since it is impossiblein the space allottedto summarizethe re-
sults of almost 900 pages of text and statisticalappendices,this review limits
itselfto a briefdescription of the contentsof the book and some notes as to why,
on the whole,the average productper page falls considerablyshortof reasonable
expectation.
The text is dividedinto threeparts. Part I takes up conceptualproblemsand
describesanalyticalmethods.However,since the authorshave little to add to the
theoryof householdbehavior,and since theypreferto discussmethodological prob-
lemsin conjunctionwiththeiractual statisticalanalysis,Part I is in the natureof a
veryshortovertureto a verylengthyopera.
The guts of the volumeare containedin Part II. Here the populationis sliced
into fivegroupsaccordingto conditionsof age, sex, and maritalstatus. Typically
threechaptersare devotedto the analysisof each such group: a chapteron indi-
vidual characteristics,a chapteron labor-market conditions, and a chapterdissecting
long-term trends.For example,in the case of marriedwomen14 to 54, the authors
begin withan analysisof the effecton participationof such "individualcharacter-
istics" as color,numberand age of children,age, schooling,otherfamilyincome,
and thelike.The data utilizedhereare theone in one-thousand cross-sectionsample
of householdsof the 1960 census.Each characteristic is taken up individually.For
example,whencoloris underconsideration, the authorspresentcomparativepartic-
ipationratesforwhiteand negrowomen.However,since thereare othersystematic
differences betweenthesetwogroups,"adjusted" participation ratesare also reported
which,by means of regressionanalysis,attemptto controlfor correlationbetween
colorand othervariables.
Of course,the primaryaim is to measurethe influenceof labor-market conditions
on labor-force participation. This cannotbe done withdata on individualssince,in
cross-section analysis,it requiresa comparisonof participationrates in areas with
different labor-market conditions.The authorstherefore conductthis part of their
study with intercitydata for the census week of 1960. Some of the independent
variables tested here are the unemployment rate, earnings,and a device called
"industrymix" whichthe authorsconstructed forvariousgroupsto measurethe job
opportunities available to the specificgroup.Thereis, as expected,an overallinverse
associationbetweenlabor-force participationand unemployment. Surprisingly,such
an associationalso showsup forprime-agemales,a findingthatis in directconflict
with time-series studiesthat usuallyfindthisportionof the labor forceinsensitive
to cyclicalchanges.
The book is notrichin technological innovation.Nevertheless, thereare someneat
touchesin Part II. For example,by use of the 1/1,000samplethe authorsestimate
1190
 Book Reviews 1191
the additional-worker responseof marriedwomenby regressingtheir labor-force
participation on the employment statusof theirhusbands.Then, fromthe intercity
data theyderiveestimatesof the net effecton participation of a changein the un-
employment rate, so that,finally,when these two sets of estimatesare added to-
gether,the resultis to isolatethe discouraged-worker effectformarriedwomen.
Part II of thebook does have its problems.For one thing,one loses confidence in
the individual-characteristics analysiswhen one learns that the dependentvariable
is categorical-zeroif out of thelabor forceand one if in-and thatno special effort
has been made to deal with the statisticalproblemsthis creates.There are well-
knowntechniquesfor dealing with limiteddependentvariableswhich the authors
have chosen to ignore.This is most unfortunate since the chiefaddition to new
knowledgeprovidedby Part II residesin the individual-characteristics analysis.If
thisis unreliable,it is difficultto see wherethereis muchpositivemarginalproduct
overearlierworkby thesesame authorsand by others.
Part III of thebook commences witha chapterthatsummarizes theircross-section
evidenceon the effectof changesin labor-market conditionson labor-force participa-
tion,and thevolumethenconcludeswithsomeattemptsat supplementary time-series
analysis.The authorscalculate fromtheirintercitycross sectionthat the level of
hiddenunemployment in 1960 cameto about 1.3 millionpersons.This is a figurethat
is remarkably close to the 1.2 millioncalculatedby Dernburgand Strand.' In the
view of the authorsthisis a merecoincidence.Time-seriesstudiesare regardedby
them as inferiorto cross-section studies (even thoughcyclical variationin labor-
forceparticipation is a uniquelytime-series problem)so that any time-series result
thatis consistentwiththe crosssectionis so onlyaccidentallyor throughthe result
of faultyprocedures.
This peculiarlyinvertedlogic is defendedby a time-series analysisof B and F's
own concoction.Since this effortprovidesresultsthat are inconsistentwith their
cross-section findings, it is supposedto followthat all time-series analysisis faulty.
The chiefbone of contentionhere is that the measuresof labor-market tightness
employedby Tella2 (group-specific employment dividedby populationin the group)
and by Dernburgand Strand(total employment dividedby totalcivilianpopulation)
are inappropriate becausetheycorrelatepoorlywithsuch variablesas the unemploy-
mentrate,the GNP gap, and a gap based on theindexof industrialproduction. This
circumstance, however,is hardlysurprisingsince none of these variableshas very
muchto do withlabor-market tightness.This is particularlytrueforthe unemploy-
mentrate whichis the statisticmost favoredby the authors.
Time-seriesdata show that the elasticityof labor-force participationwithrespect
to employment has increasedgreatlyin recentyears. For example,quarterlydata
coveringthe threeyears 1967-1969provideelasticityestimatesof between0.92 and
0.96 as derived,respectively, fromnonhomogeneous and homogeneousregressions
whichtreatthepercentagechangein labor-force participationas a linearfunctionof
the percentagechangein employment. Over this same period,moreover,therehas
been no correlation at all betweenthe growthin employment (or the growthin labor
force) and the unemployment rate, even thoughthe correlationbetweengrowthin
employment and growthin labor forceis overpowering. This lack of associationbe-
tweentheunemployment rateand the growthin employment is shownby the regres-
sion

1. T. Dernburgand K. Strand,"HiddenUnemployment 1953-62:A QuantitativeAnalysisby

Age and Sex,"American EconomicReview,March1966,tables5 and 6.
by Age, Sex," IndustrialRelations,
to Employment
2. AlfredTella, "Labor Force Sensitivity
February1965.
1192 The Journalof Finance
u = 3.65 - 0.0382t- 0.0039A0E
(0.0164) (0.0255)
whereu is thequarterlyaverageglobalunemployment rate,A0E is thequarterlyrate
of growthof employment expressedas an annualrate,and t is a lineartimetrend.
What has happenedis that labor-force participationover this periodwas so re-
sponsiveto changesin employment that in the ratio that definesthe unemployment
rate-namely,
u=U/L= (L -E)/L
-growth in employment (E) was matchedon a one-for-one basis by growthin labor
force(L), so that verylittlehappenedto absoluteunemployment (U), and the un-
employment rate therefore merely drifteddown (as indicated by the significantnega-
tive time trend) because of a secular growthin the denominatorof the ratio of
unemployment to labor force,and in a mannerlargelyunrelatedto economiccondi-
tions.
Obviously,recentmovements in the unemployment rate had littleto do withthe
state of the labor market.Such movements, moreover,are sure to be uncorrelated
withlabor-force participation. It even happensthat the unemployment rate moves
perversely-rising as the labor markettightensand vice versa.This occurredin the
last halfof 1967 when,despitea sharprecoveryfromthe sluggishness of thefirsthalf
of the year, and despite a healthy employment gain of 2.5 per cent (annual rate),
the unemployment rate actuallyincreasedfromits firsthalf averageof 3.8 per cent
to an averageof 3.9 per centduringthesecondhalfof theyear.
Othersuch examplesare readilyavailable. The point is that the unemployment
rate is a verypoor measureof labor-market tightnessin time-series analysis.This
deficiency, moreover, is accentuated if the responsiveness of labor-market participa-
tion to changesin employment increases.Thus, just when the discouraged-worker
effectis actuallybecomingmorepronounced, regression equationsusingthe unemploy-
mentrate as theirindicatorof labor-market tightness may show thatit is becoming
less pronounced.Small wonderthat B and F's time-series regressions are in conflict
with their cross-section results,and with other time-series studies as well.
Hopefullythe readerwill pardon the reviewerfor dwellingon an issue that is
somewlhat marginalto the B and F study.However,it is importantto correctthe
impressiongivenby the authorsthat time-series studiesof labor-force participation
are of littlevalue. Then, too, the time-series discussioncomesat the end of a long,
winding, and oftenaimlesstrail-a trailthatleavesthereaderwho traversesit bored,
exhausted,and irritated.Whilethe authorswritein a lucid and pleasantstyle,their
efforts to introducegrace into the studyare continuallymarredby an old-maidish
propensity to dwellon minutiae,and by an absenceof any effort to assistthe reader
to assign weights to the relative importance of different issues. Finally, despitethe
book's massivenessand its pretentiousand fussyattentionto detail, thereare in-
numerableplaces whereanalyticaland statisticalvoids are filledwithmereseat-of-
the-pantssociologicalspeculation.
Despite thesenegativeaspects,thebook is an important landmarkin the empirical
analysis of household economic decision-making, and it must certainlybe read by
anyonewho has a professional interestin labor-force participation.From a longer-
range perspective,moreover,the book stands as a testimonyto the tremendous
progressthat one generationof economistshas made in the conductof empiricalre-
search.Because the 1970 Census data will be available soon, one is remindedthat
thisbook cannotbe describedas "definitive." Indeed,one can conjureup imagesof
 Book Reviews 1193
the authorspanting,salivating,and strainingat theircollarsin anticipationof this
new vintageof information.
THOMASF. DERNBURG
OberlinCollege

Errorsin ProvisionalEstimatesof GrossNationalProduct.By ROSANNE COLE.New

York: ColumbiaUniversity forthe National Bureau of EconomicResearch,1969.
Pp. xiv + 109. $6.00.
Economistsat the NationalBureauof EconomicResearchhave recentlycompleted
a numberof studiesof the accuracyof economicforecasts.Obviously,the qualityof
theseforecastsis affected by the accuracyof the earlyGNP data whichare used as
inputs for these predictions.Moreover,the earliestGNP data enable analysts to
interpretand identifymovements of economicactivity.It was, therefore, naturalfor
the NBER to sponsorRosanneCole's studyof the accuracyof the NationalIncome
data.
Miss Cole undertakesa verycarefuland thoroughanalysisof the qualityof the
National Income statisticsforthe years 1947 through1961. She explainshow the
GNP data are generatedfromunderlying seriesand indicatesthat foreach quarter
thereare at least six estimatesof GNP and its components.Since thesesix sets of
data naturallydifferfromeach other,Miss Cole explainswhy the fiveearliersets
of data differfromthefigures availableafterthemajor 1965 revisionsof theNational
Income statistics.
Usingan errormodel,the authorexplainshow a varietyof data errorsmay result
fromseveralsources.She thenshowsthatthemisestimates are primarily,as one might
expect,attributable to extrapolation errorsbetweenbenchmark revisions.Moreover,it
was interesting to discoverthat the earliest GNP estimatesshared some of the
characteristics i.e., positivechangeswereunderestimated,
of forecasts, whiledecreases
wereoverestimated.
Some particularfindings of thisstudydeservefurther mention.While severalpre-
vious studieslooked at the accuracyof the GNP estimates,only this study has
systematicallyinvestigatedwhetherthe data are betterthanthebest forecastsof the
same series.Three standardsare used forthe comparison:(1) the forecastsof some
economists,(2) the naive "no change" model,and (3) first-order autoregressive
extrapolations.The estimatesof changesin the NationalIncome Accountsare gen-
erallysuperiorto even the mostseverestandard.This findingthus corroborates the
resultsof earlieranalyses.These earlierstudieshad indicatedthat the preliminary
GNP data correctly approximated the actual movements, as indicatedby the revised
figures,whichoccurredin the economy.However,Miss Cole indicatesthat the first
data did generallyoverstatethe extentof cyclicaldeclines.
This studyalso indicatesthatsuccessivesets of data becamemoreaccuratein the
sense that theymorecloselyapproximatedthe revisedfigures, and this resultagain
corroborates previousfindings. Moreover,Miss Cole foundthat the provisionalesti-
matesof theincomecomponents of theNationalIncomeAccountsweremoreaccurate
than the expenditure estimates.This resultshouldbe particularly usefulknowledge
forforecasters who spenda considerable portionof theirtimeanalyzingcurrentdata.
It suggeststhat the analystshouldplace as muchemphasis(if not more) upon the
labor marketand incomedata as on the variousexpenditure figures.
While Miss Cole's analysisuses statisticalmethodsin a way thatis mainlyappro-
priate,two questionscan be raised.This study (and all the othersin this NBER
1194 of Finance
The Journal
series) analyze both the level and changeerrors.However,I am not certainwhy
attentionhas been placed on the level estimates.Forecastersdo not attemptto pre-
dicta specificlevelof GNP, but ratherthe changefromsomepreviouslevel.Second,
the revisionsin the earlydata fora particularperiodare comparedwiththe data for
the same periodavailable afterthe major 1965 benchmarkrevisionsin the National
Income Accounts.However,the 1965 revisionsmade conceptualchangesas well as
statisticalcorrectionsin the data. Given theseconceptualchanges,whichwere sub-
stantial,I am notconvincedthatit is appropriateto comparethe unrevisedand 1965
reviseddata. The two sets of figuresmightdiffermerelybecause the definitions
differedand notbecausethestatisticalprocedureswhichgeneratedthe estimateswere
faulty.There is no way of knowinghow the GNP estimateswere affectedby the
definitionalrevisionssinceMiss Cole does not considerthis point.
Despite thismethodological reservation,thisbook accomplishesits goal of demon-
stratingthe natureof the data problemsthat economistsencounterin analyzingthe
state of the economy.
H. 0. STEKLER
State Universityof New York,Stony Brook

Exit, Voice and Loyalty: Responsesto Decline in Firms,Organizations, and States.

By ALBERT 0. HIRSCHMAN. Cambridge,Mass.: Harvard UniversityPress, 1970.
Pp. x + 162. $6.95.
The titleof this book is by no means self-explanatory and it is perhapswise to
beginthe reviewby explainingwhatit is about. Since GiovanniDemaria's Materiali
per una Logica del MovimentoEconomicoII, therehas been no seriousinvestigation
of the problemsof decliningorganizations.Hirschman,however,does not actually
examinethe decliningorganizationso muchas whatwe can do about it. The tradi-
tionaleconomicsolutionto thisproblemis simplyto stop dealingwitha firmthatis
givingbad service.This is "exit." Complaining, on theotherhand,is "voice,"but for
Hirschmanthe conceptentailsa greatdeal morethansimplecomplaint.Pressuresof
all sortsare includedin thiscategory.Finally,"loyalty"is loyaltyto the declining
firm.Loyalty makes it less likely that a person will choose to "exit," and more
customerwillchooseto exertsomeotherformof pressure.
likelythat the dissatisfied
Hirschmanis no doubt correctin saying that economistshave paid very little
attentionto complaintor organization of pressureas a methodof dealingwithorga-
nizationalfailure.We have usuallysimplyrecommended thatpeoplequit dealingwith
any organization thatgivesunsatisfactory service.Since thereare some organizations
-state organizationscome immediatelyto mind-fromwhich"exit" is impossible,
investigation of otherremediesis surelyworthwhile. Anotherunique characteristic
of Hirschman'sbook is his delineationof economicdifferences betweenan increase
in priceand a declinein quality.As he sees it, organizations thatperform in a sub-
standardwayare notcharginghighpricesbut providing low-qualitygoodsor services.
The difference is not great,but it is real and deservesat least some consideration.
Unfortunately, I cannotreportthatHirschman has dealtwiththesematterssuccess-
fully.The specificproblemthatset himoffon thisresearchwas thepoorperformance
of the government-owned railwaysin Nigeria.He came to the conclusionthatone of
themajorreasonsforthisextremely poorperformance was theexistenceof a relatively
efficienttruckingindustry.Since the railroadscould continueoperatingon the tax-
payers'moneyeven if theyhad no customers, the movementof the customersaway
fromthe railroadto the truckfleetwas littlefeltby the railroadmanagement which
 Book Reviews 1195
was not therefore undermuchpressureto reformits methods.Hirschmanhypothe-
sizes thatif therailroadshad had a truemonopoly,thenthe variouspeople who had
to ship thingsfromnorthern Nigeriato the coast wouldhave exertedgreatpressure
one way or anotheron the railroadmanagement to improveefficiency,and that this
wouldhave been a desirablechange.This themerunsthroughmuchof the book. He
mainlydiscussessituationswherethe possibilityof switchingfromone supplierto
anotherhas no effect(or littleeffect)in improving of the supplierthat
the efficiency
is abandonedbecause that supplierhas othersourcesof income.
Unfortunately,if therehad beenno truckfleetin Nigeriaso thatpressurehad been
broughtto bear on the railroadto improveservices,it seemslikelythat this would
not have reducedthe net wastefulness of the railroad.It would simplyhave meant
that more moneywas extractedfromthe taxpayerto supportgood serviceto the
noisy customers.The railroad'saccess to taxpayers'fundsto pay for inefficiency
clearlywould not be reducedby its greatereconomicimportance.Further,thereis
no reasonwhythemanagement It wouldsimplyswitch
shouldbe any less inefficient.
to anothertypeofinefficiency.If it nowdraws$100 millionperyearfromthenational
treasuryto provideverylittleservice,it could, undertheseconditions,be drawing
$200 millionin fundsfromthenationaltreasury in additionto whateverit was getting
fromits customers.The net effectcould be a different type of inefficiency, but
Hirschmanoffersno argumentforless inefficiency underthesecircumstances.
The book,then,raisesinteresting-ifnot monumental-problems. Clearlythereis
roomin theliteraturefora 155-pagebook on theresponsesof customersto declining
efficiencyon the part of theirsuppliers,and on the differences betweenchangesin
qualityand changesin price.Unfortunately, thisis not the book.
GORDON TULLOCK
Polytechnic
Virginia and State University
Institute

Investment,Interest and Capital. By J. HIRSHLEIFER. Englewood Cliffs,N.J.:

Prentice-Hall,1970. Pp. x + 320. $9.95.
There is a well-known law that the lengthand complexity of a scholarlyworkis
inverselyrelatedto the author'sdepth of understanding of his subject. Professor
Hirshleifer'sInvestment, Interestand Capital is a short,straightforward, and com-
prehensibleexpositionof a body of theoryusuallyregardedas extensive,involved,
and difficult.There is no comparablesystematictreatment.
The book is not foreveryone.Hirshleifer assumesa toleranceforrigor-
effectively
ous (not necessarilymathematical)microeconomic theoryand some exposureto the
issues. But to its intendedaudience-persons with a professionalinterestin the
subject-the book is readilyaccessibleand definitely worthwhile.
The intendedaudience is fairlybroad. Capital theoryis importantfor what it
contributesto economictheorygenerally,and also because of its implicationsfor
specializedfieldssuch as cost-benefit analysis,business finance,investments, and
public-utilityregulation.These are all fieldsin whichthe investment decision,asset
valuation,and theanalysisof returnsto capital are important.
Hirshleifer'sapproach is very much in the spiritof Irving Fisher. He states
(p. 130) that"the theoryof investment and interestmustnot be regardedas follow-
ing laws different fromthose of 'mainstream'price theory.Rather,the theoryof
investment and interestis pricetheoryappliedto choiceobjectsof dated [and uncer-
tain] consumption claims."
Consequently, the following questionsare addressed.
1196 of Finance
The Journal
1. Howshouldfirms andindividuals theirrealsavings,
act tooptimize investment,
andassetholdings?
2. How do firms interactto determine
and individuals assetprices
equilibrium
(and thereby rates),and to determine
interest equilibrium and
investment
overtime?
consumption
The answersto thesequestions are theheartof Hirshleifer's approachto capital
theory. His emphasis is on realfactors ratherthaton moneyor thefinancial system,
and on equilibrium conditions in complete andperfect markets. Thereare usefuldis-
cussions oftheroleofmoney and oftheeffects ofincomplete and imperfect markets,
buttheseareappendages to thebasicanalysis.
In partI, whichcomprises thefirsttwo-thirds of thebook,Hirshleifer assumes
certainty. Following a compressed presentation of the principles of pricetheory,
optimalinvestment decisionsand the generalproblem of intertemporal choiceare
treated in depth.Sinceperfect capitalmarkets areassumed, theappropriate objective
is maximization of presentwealthwithoutreference to individuals' specific prefer-
ences.The variouspresent-value decisionrulesare shownto be theonlyreliableones
forachieving thisobjective. Solutions to a number ofclassicproblems are presented
-e.g., determining an individual's optimalconsumption pathovertime.
The determination ofaggregate interest ratesand aggregate investment is covered
in Chapter4. Thisis a conventional analysisof equilibrium conditions, notdifficult
giventhefoundation laid in previous chapters.
Forthecertainty case,Hirshleifer setsouta variety ofimplications andextensions.
Theobviousquestions, suchas thelinkbetween aggregate investment and theinterest
rate,are considered. The varioustraditional conceptsof capitalare analyzedas
specialcases,orpointsofview,within thegeneral Fisherian framework. He comments
ongrowth theory andincludes a chapteron theroleofmoney in sucha framework-
although thatchapter is moreinteresting as a bridgeto monetary theory thanas an
overallapproachto thesubject.
PartII, thelastthirdofthebook,retraces themajorpoints, buttakinguncertainty
intoaccount.It is halfas longas thefirstpartbecausemanyprinciples carryover
fromthecertainty case,and also becauseonlythebasicsof theanalysisunderun-
certainty are as yetavailable.WhereasPartI is a lucidpresentation of thebasic
theory anditsextensions, appliedto a variety ofissues,PartII is mainlyconfined to
basictheory. Intriguing extensions andapplications aresuggested, buttentatively.
The critical stepin introducing uncertainty is finding a reasonable andmanageable
description of theobjectsof choice.As Hirshleifer notes(p. 242), it is difficult to
relate"the commodities observably dealt within markets(tradeableassets,or
securities) to theunderlying entitiesentering intopreference functions (goods)."
Two usefulapproaches havebeenfoundso far.The first, whichfitsneatlyintothe
generalized Fisherianframework, is to differentiate commodities not onlyby their
dateof delivery, butalso by thestateof natureuponwhichdelivery is contingent.
Thusa farmmayoffer a goodcropnextyearin thestate"highrainfall'and a poor
cropin thestate"lowrainfall." Purchaseof therights to thecropamountsto pur-
chase of a bundle of two commodities, only one of which willactuallybe received,
depending on theactualstateofnature.This establishes a "state-preference" frame-
work,sincethe ultimateobjectsof economic activityare the consumption paths
associated withthevariouspossiblestatesofnature.
Alternatively,purchase ofrights to thecropcouldbe interpreted as purchase ofa
single(dated) commodity which is, however, a random variable.Then the object
becomes choiceoftheoptimal jointprobability distribution ofconsumption overtime.
Thisleadsto the"mean-variance approach," so calledbecausetheanalysishas been
 Book Reviews 1197
workedout in termsof portfoliotheory,in whichthe key variablesare the expected
value and varianceof portfolioreturn.
Part II is thus organizedas follows.First is the extensionof the principlesof
intertemporal choiceto includeuncertainty. useful,because most
This is particularly
discussionsof choiceunderuncertainty do not involvetimein any meaningful way.
The conditions forequilibriumare thenpresentedtwice-once forthestate-preference
framework, and once forthe mean-variance framework. Hirshleiferdevelopsimplica-
tionsas far as the state of the art allows.This is not veryfar,unfortunately; it is
difficult to writemorethanan introduction to the economicsof uncertainty.The field
is too young,and developingtoo rapidly.
It is hardto findfaultwiththisbook withoutbeingunfair.I willriskthisby pro-
posingtwo thingsthat could have been done better.
The firstproblemis that the treatment of the mean-variance modelis a loose end.
The basic propertiesof the model are carefullypresented,but not well-integrated
withthe state-preference modelor therestof the book. One is leftwithwhatappears
to be two distinctmodelsof equilibriumunderuncertainty. Actuallythe modelsare
consistentin behavioraland environmental assumptions, althoughthe mean-variance
modelis a special case. The only difference lies in how uncertaintyis described-a
matterof language,in effect.This calls fordirectionson how to translatefromone
framework to the other.
The second problemis inadequate guidance for readersinterestedin applying
capital theoryto specializedfields.Let us take corporatefinanceas an example.
Someonealreadyfamiliarwiththisfieldwill see a varietyof directlyusefulimplica-
tions.Someoneunfamiliar withthe fieldmay read the same materialand not know
whereto turnnext.Althoughit is impossibleto surveyall applicationsof capital
theory, it wouldnothave been difficultto supplyfurther referencesrelatingto applica-
tions.
These criticisms do not changemy overallevaluationof the book: Excellent.
STEWARTC. MYERS
SloanSchoolof Management,
Institute
Massachusetts of Technology

Dating PostwarBusiness Cycles: Methods and Their Applicationto WesternGer-

many,1950-67. By ILSE MINTZ. New York and London: Columbia University
Press forthe National Bureau of EconomicResearch.Pp. xiv+ 111. $3.75.
This National Bureau of Economic Research occasional paper is essentiallya
progressreportprovidingthe resultsof the firstpart of a largerstudy. For this
reviewer,readingthis reportwas an experiencesimilarto sittingthrougha movie
theater'spreviewsof comingattractions:One is showna littleand promiseda lot.
First,regarding whatis shown,theimmediateobjectivesof the reportare to provide
a business-cyclechronology forGermanyand at the same timeto developand test
new proceduresforevaluatingcyclicaldevelopments.
The apparentneed for reviewingand possiblyrevisingexistingstatisticaltech-
niquesused to date and measurebusinesscyclesarisesout of the comparativemild-
ness of the swingsin such traditionalmeasuresof aggregateeconomicactivityas
output,income,and employment duringthesepast twodecadesboth in the U.S. and
abroad. As the reportpointsout, this fact and the ratherlengthyperiodsin which
theseindicatorshave not declinedat all have led someeconomists
to ask whetherthe
businesscycle is obsolete.The answeris that it all dependsupon the definition
of
whatconstitutes a businesscycle.
1198 of Finance
The Journal
Three alternativedefinitions are discussed.First is what mightbe labeled the
classicalview,defining the cyclein termsof absoluteand presumably markedswings
in aggregateeconomicactivity.A second,modified versionfocuseson absoluteswings
in selectedeconomicactivities.Under this versionabsolutedeclinesin the selected
indicatorscan be labeled a recessioneven thoughthey occur in periodsof rising
income,output,and employment. The thirdis a definitionthat may have been
popularizedin recentyearsby interestin thegap betweenactual and potentialoutput.
This definition focuseson relativeratesof economicchange.Its essentialjustification
is the contention that "thereis no good reasonwhyalternationsbetweenperiodsof
say, 2-percentrisesand 1-percentfalls (whichcould qualifyas a classicalbusiness
cycle) shouldbe entirely differentin naturefromalternations betweenperiodsof say,
4-per cent rises and 1-percent rises." Mrs. Mintz adopts the latter definitionto
chronicleand date the postwarGermancycles.
Adoptionof the relative-change conceptrequiresmodification of the techniques
used to date the turningpoints.Mrs. Mintz devisestwo methodsin her study.The
firstadjustseconomicseriesforlong-term trends(usinga 75-month movingaverage)
beforelocatingpeaksand troughs.The secondconcentrates on percentagechangesin
the growthrate fromperiodto period,focusingon the changesfromhighand low
ratesratherthanon changesfromrisingand fallingratesof growth.In a fewtersely
writtenpages Mrs. Mintzdiscussesthe methodology, the Germanindicators, and the
resultsof applyingthe revisedstatisticaltechniquesto the Germandata. Since her
objectiveis to presenta singlechronology forGermany, and the resultsgivenby the
two methodsare quite similar,she opts for the firsttechniquebecause it yields
smoother, wider,and thusmoreeasilyrecognizablecycles.
The resultsrevealthree-and-one-half clearlydefinedbusinesscyclesduringthe 17-
year period.By way of contrast,thesefindings are comparedto the resultsof apply-
analysis"to the Germandata. In this instanceclassical
ing "classical business-cycle
methodsfailto recordany recessionin Germanybetween1950 and 1966.
Havingseenthepreview,we turnto thepromises.The projectwillprovidebusiness-
cyclechronologies forothercountrieswheretheyare not nowavailable. Furthermore,
the new tool forgedin this reporton Germanywill be applied to foreignand U.S.
data to see whatnewinsightscan be gleanedregarding "the causes and consequences
of businesscycles,and forexaminingthe achievements of economicpolicyin dealing
withthem."One eagerlyawaits these"comingattractions"with the hope that the
resultsjustifythe expectationsgeneratedduringthe preview.
HARVEy SHAPIRO
Department
U.S. Treasury

The Economicand FinancialSystem.By RICHARDA. WARD.Scranton,Pennsylvania:

InternationalTextbookCompany,1970. Pp. ix + 302. $8.50.
This brieftextbookis describedas "intendedprimarily as a textfora secondcourse
in undergraduate macroeconomics." In additionto chapterson money,aggregatede-
mand,consumption and saving,investment, prices,and dynamicequilibrium,
interest,
it includesone or morechaptersor majorsectionson each of the following:national-
productstatistics,flow-of-fundsstatistics,fiscaleconomics(includingtax structure),
economics,
international
assetdifferentiation, developingeconomies,welfareeconomics,
personalincomedistribution, comparativeeconomicsystems,and historyof economic
thought. As wouldbe expectedin viewof thenumberof topicscovered,the treatment
tendsto be eitherlackingin analyticalrigoror so summaryas to makecomprehension
difficultforthe student.Only a very limitednumberof diagramsis included (the
 Book Reviews 1199
author relies for illustrationon boxed hypotheticalexamplesto which no textual
reference is made), and thetextdoes notalwaysmakeclearthenatureof theassump-
tions or the difference betweenshiftsin curvesand movements along curves.Pro-
posals forinstitutional changeare presentedwithoutevaluationor witha summary
listingof pro'sand con's. The textprovidesneitherthe rigoroustheoretical treatment
demandedby most teachersof intermediate macroeconomic theorynor the institu-
tional backgrounddemandedby teachersof moneyand bankingor monetaryand
fiscalpolicy.
The problemis heightenedby the divisionof the text into largelyindependent
chapterson the various topics and by the author'spreoccupationwith long-run
questions.Most of the materialon pricesis includedin Chapter8, whilethe limited
amountof materialon employment is scatteredamongseveralchapters,withlittle
attemptat integration.Indeed, the author seems far less interestedin short-run
movements in eitherof the variablesthan in secular price movementsand growth
rates. Lags in the effectiveness of fiscaland of monetarypolicy are consideredin
completeseparationfromeach other.Conceptssuch as internalassets are presented
in earlychapterswithlittlepreliminary introduction and thenignoredin later dis-
cussions.The author explainshis decision to use self-contained chapterson the
groundsof facilitatingstudentreview and of providingflexibilityin instructor
scheduling.In view of the numberof excellentbooks of readingsnow available,
however,it is particularlyimportantfor the authorof a textbookto assume re-
sponsibility forintegrating the materialand developinga clear and well-formulated
analyticalstructure,ratherthan presentingchapterscontainingas widely varied
materialas possibleon a singletopic.
The treatment of monetaryeconomics,interest-rate determination,and the rela-
tionshipbetweenfiscaland monetaryeconomicsis particularlyunsatisfactory to a
readeroriginally attractedby theauthor'sdecisionto "pay somewhatmoreattention
to moneyand bankingand to publicfinancethando similarbooks" (Preface) and to
include materialon asset differentiation. Adequate treatmentof these mattersis
hamperedby the attemptto treattheoretical questionsconcerning monetarydemand
and interest-rate determination within the simple Keynesian liquidity-preference
framework and to presentan institutional framework generalenoughto applyto most
countriesof the freeworld,as well as by preoccupation withlong-runanalysis.
The authorselects the liquidity-preference framework ratherthan the loanable-
fundsframework becausehe believesthatthe liquidity-preference function-butpre-
sumably not the hoarding function of the loanable-funds theory!-can take account
of changesin transactions demandas incomechanges,whereas"in the loanable-funds
theorysavingriseswithinvestment and the continuation of the higherinterestrate
is notassured."(Page 82.) The analysisof assetsotherthanmoneyand bondsis con-
finedlargelyto savingsdepositsand shares.The authorconcludesthat near-money
can be takeninto accounteitherby allowingforits effecton the level and slope of
the liquidity-preference curveor by drawingup a demandcurveforliquidityrather
than money,the choice dependinglargely on whetherthe monetaryauthorities
regulatethe quantityof moneyor of "liquidity"(pp. 90-92). This treatment is far
fromadequate for takingaccountof the widespreadeffectsof the proliferation of
marketableas well as nonmarketable liquid assets and short-and long-runshiftsin
the availabilityof money-market facilities.Yet anotherproblemarisesin connection
withthetreatment of theeffect
ofpriceexpectations on theinterestrate; theincrease
in interestratesaccompanying an expectedpricerise is explained(pp. 75-76) as an
withbonds!
increasein thedemandformoneycompared
In an attemptto maintainthe generalityof the institutional in much
framework,
1200 The Journalof Finance
of his discussionthe authortreatsthe centralbank and the Treasurytogetherand
thus fails to distinguishbetweenTreasuryfinancingtransactionsand open-market
operationsof the centralbank. "If the government acquires more goods fromthe
privateeconomythan it takes throughtaxation,it issues a depositclaim on itself
to the supplierof the goods. . Now supposethat the government wishesto reduce
the amountof moneyin the privateeconomy.The government may thensell inter-
est-bearing securities.. This processof substitutionbetweenmoneyand nonmoney
liabilitiesof the government is termedopen-market operations.. .." (P. 216.) The
initial discussionof moneycreationemphasizesthe possibilitiesof variationsin
money-reserve ratiosand minimizesthe importanceof the relationship prevailingbe-
tweenreservesand deposits (p. 74). Amongthe proposalsfor change which the
authorseemsto look upon withsome favoris the substitution of a stable interest-
rate targetfor discretionary monetarypolicy. "Business investment decisionsneed
not fluctuatewithchanginginterest-rate but can be set on the basis
expectations,
of long-term expectationsregardingthe expectedreturnon capital.The maintenance
of economicstabilitywould then be the responsibility of fiscalpolicy." (P. 235.)
One need nothave exaggerated theindependence
ideas regarding of the centralbank
or the effectiveness of monetarypolicyto feelthat statementssuch as theseare un-
likelyto give second-or third-year studentsan accurateimpression of the function-
ing of the monetarysystemor the nature of the problemsfaced by fiscal and
monetarypolicyin the UnitedStates in recentdecades.
MONA E. DINGLE
of Missouri-Columbia
University

BusinessFinance and Investments

InvestmentBankingin America:A History.By VINCENT P. CAROSSO. Cambridge,
Massachusetts:Harvard UniversityPress, 1970. Pp. xiii+ 569. $14.50.
This twenty-fifth volumeof theHarvardStudiesin BusinessHistoryhad its gene-
sis in an offerfromKidder,Peabody & Co. to underwrite a historyof that firm.
Although, originallyits scope was thuslimited,the.completedbook presentsa schol-
arly and comprehensive studyof the investment-banking industryin America.Pro-
fessorCarosso's objective,to ". . . analyze the changingrole and practicesof the
investment bankerin the Americaneconomyfromthe 1890's to the 1950's" (p. x),
has been largelyachieved.
Beginningwitha chapterdescribingmerchantbankersand otherswho engaged
in financialactivitiesrelatedto investment bankingin the firstcenturyof the United
States' existence,Carosso devotesfourchaptersto the increasein the influenceand
prestigeof investmentbankingaccompanyingthe burgeoningindustrialexpansion
runningfrom1870 into the early 1900's,and to the industry'spracticesduringthis
period.He nextexaminesthe firstpressuresforsecuritiesregulations, the investiga-
tions of the Hughes Committee in 1908 and the Pujo Committee in 1912, the pas-
sage of "Blue Sky" laws by various states,and the formationof the Investment
BankersAssociationofAmerica(IBA) as an industry responseto theseevents.
His analysisof the eventssurrounding World War I, and of theirpivotal effect
on the Americaninvestment-banking industry,is perhapsthe most importantcon-
tributionof the book. Americaninvestment bankers'financing of Europeannations,
priorto the UnitedStates' entryinto the war,is examinedin detail.This era marks
the beginningof the United States' statusas a major international financialpower.
Carosso also points out how, later in this period,the financingof America'swar
effortthroughwar bonds revealedto investment bankersthe potentialmarketthat
in
lay offering securities to This
individuals. from"wholesale"to "retail"
transition
 Book Reviews 1201
investment-banking behaviordid muchto set the financialenvironment of the 1920's.
Questionablepracticesand speculativeexcessesof the 'Twentiesare welldocumented,
and theirsubsequentrolein the bankruptcy and reorganization of manyinvestment-
bankingfirmsin the 'Thirtiesis examnined. The discussionof the roles of deposit
banks,trustcompanies,and insurancecompaniesin the 1929 debacle is particularly
interesting,in view of the currentcontroversy concerningone-bankholdingcom-
panies.
Carossoshowshow the abuses of the 'Twentiesled to the Gray-PecoraInvestiga-
tionof 1932-34,theSecuritiesActs of 1933 and 1934,and the BankingAct of 1934;
he also recountshow investment bankersadjusted to this new regulatoryenviron-
ment.Finally,he examinesthe TemporaryNational EconomicCommitteeprobeof
1938, the controversy concerningcompulsorycompetitive biddingforcorporatese-
curities,and the famousantitrustsuit broughtby the JusticeDepartmentin 1947
that was eventuallydecidedin favorof the defendants.His researchinto the latter,
relativelyrecent,eventincludedinterviewswithseveralof the principals,including
JudgeHarold R. Medina,who presidedat the trial.
The authorconcludeswitha briefepilogue,in whichhe examinespresent-day in-
vestmentbankingin the lightof this half-century of changeand development. His
conclusionis that, notwithstanding the many economicand regulatorychangesof
the period,the primaryrole of the investment bankerin the capitalisticsystemhas
not altered,nor has his importancediminished.
The scholarlyorientationof this study is reflectedin an excellentthirty-page
bibliography, whichis classifiedas to primaryand secondarysources,and in an
averageof approximately one-hundred footnotesper chapter.Carosso'sstudyshould
greatlyfacilitatethe work.of otherscholarswho may wish to examinein greater
detailparticulareventsin the historyof investment banking.One unfortunate aspect
of the book,whichmay be a side effectof the comprehensive referencing,is a stac-
cato presentation that detractssomewhatfromthe book's readability.
As is true of any historicaltreatment, questionsconcerningthe author'sinter-
pretationsand emphasismay arise. One could certainlydisagreewithhis assessment
of manyaspectsof investment bankers'behavior.Similarly,one mightquestionthe
heavyemphasison eventsin whichKidder,Peabody & Co. had a hand and the sud-
den appearancein the finalchapter(withoutpreviousreference)of Merrill,Lynch,
et at. as an investment banker.However,on balance, this book is a scholarlyand
comprehensive studyof theactivitiesof these"capitalists'capitalists"duringa period
of profoundeconomicand politicalchange.As such, it is a usefulreferencework
providingmanyinsightsinto the role of the investment-banking industrytoday.
EDWARDA. DYL
The University
of Texasat Austin

andEstimation
Uncertainty in Economics,
Volume
111.1By D. G. CHAMPERNOWNE.
-San Francisco: Holden-Day,Inc., 1969. Pp. vi + 108. $5.00.
I cannotrecommend thisobviouslyintelligent
and originalbook to studentsseek-
ing an introduction to the economicsof uncertainty.2 It is too intelligentand too
originalto be a satisfactorytext.In otherwords,it is difficult
and idiosyncratic.
1. That onlythe thirdvolumeof a three-volume set is underreview,requiressome explana-
tion.The firsttwo volumesare textsin probability, and econometrics.
statistics, The last is a
self-contained
discussion
of the economiceffects
of riskand uncertainty.
2. Two excellentnontechnicalintroductions
have recentlyappeared:Borch,The Economicsof
Uncertainty (PrincetonUniversityPress,1968) and Raiffa,DecisionAnalysis(Addison-Wesley,
1968).
1202 The Journalof Finance
Although partofa seriesaimedat "third-year undergraduateswithan elementary
knowledge methods,"
of calculusand statistical eventhe mostadvancedgraduate
students willfindthisvolumeverydifficult-this, despitethe factthatthe book
doesnotlookveryhard.In contrast to theusualpractice,,theauthor'slucidstyle
masksgenuinely arguments.
difficult His reasoningis compressedand compact. Com-
plexandoccasionally questionableanalyseslurkin sharpcleanprose.Someexamples
willillustrate:Onlyhalfa page is givento sketcha proofof theexpectedutility
theorem. The reasonableness and eventhemeaning ofthepostulatesunderlying this
mostimportant and mostcontroversial resultare barelydiscussed.The discussion
(pp. 43ff.)of the effect of a variablelifetimeon savingrequiresthatthe reader
knowwhatit wouldmeanto pickan optimaltimepathof consumption in a con-
tinuous-time model.Champernowne doesnotapplythe formulae of thecalculusof
variations. at that,he appealsto thelogicbehindthem.This
Instead,and implicitly
approach, ofcourse, demands muchmoreofhisreaders. Champernowne's crispverbal
analysesare notalwaysconvincing. The discussionof theirrelevanceof thedistant
future on theoptimalexpansion of thefirm(p. 55) is an example.If I mustplan
todayto installcapacityto meettomorrow's demand,surelyit matters3 whether
theday aftertomorrow's demandis knownto be identical with,ratherthantwice
as muchas, tomorrow's.
Two otherexamples illustrate thatmanyof Champernowne's viewsare idiosyn-
cratic.Champernowne makesmuchof the (I had thought)thoroughly discredited
distinction between riskand uncertainty. In thelast sectionof thebookuncertainty
is put in theframework decisiontheory(althoughthisis not so ex-
of statistical
plainedto thereader)and aversionto uncertainty withfollowing
is identified mini-
maxdecisionrules.(Bayesianrules,to whichtheseare opposed,are restricted to
Bayesianrulesbasedon uniform priors.)Appendix B of Chapter20 arguesthat,
whilethe (in principle) observable vonNeumanutilityfunction measures notonly
"true"utility butalso attitudes towards thetwoby
risk,it is possibleto segregate
makingthe "fairlyobvious"assumption thatthe "true"utilityfunction exhibits
constant absoluteriskaversion(i.e.,thatone'sevaluation of riskyprospectsis not
affected by the levelof one's income-in "true" utility).
Sincechoiceunderuncertainty is a controversial and-rapidlychangingfield,only
a eunuchcouldwritea bookto whichno one wouldtakeexception. But thisfact
obligates an authorto disclosewhenhis viewsare notuniversally heldand to indi-
cate whereotherdiscussions maybe found.Champernowne does neither.The book
is particularly deficientin references. Although thebookcloseswitha perfunctory
"selectedbibliography"? (whichlistsno articles),theonlyworkof otherauthorsex-
plicitlyreferenced in thetextis Keynes'theory of interestand Mirlees'unpublished
dissertation.
I havemademuchof thisbook'sunsuitability as a textbecausea textis what
it is so obviously designedto be. Those alreadyfamiliar withthe fieldwill find
Champernowne's bookgenerally fascinatingbecauseofthemanynovelsimplemodels
developed in thebook.Chapter21 is a tourde forcein theartof economic model-
ing.It is infuriatingforthereasonsset outabove.
MICHAELROTHSCHILD
HarvardUniversity
3. Unlessthere
areperfect
capitalmarkets, seemsimthespiritofthemodel.
whichhardly
 Book Reviews 1203
forFinancialMobility.
Strategy By GORDON DONALDSON. Boston: GraduateSchool
of BusinessAdministration, Harvard University,1969. Pp. xiv + 350. $8.00.
GordonDonaldsonhas done it again: the rightbook at the righttime!
Roughlya decade ago his CorporateDebt Capacity appeared and provideda
rationaleformore-imaginative moneymanagersto use debtas a flexibleand resource-
ful instrument for businessgrowth.His views were widelydiscussedand his sug-
gestionsimplemented-overly so in far too manyinstances.Indeed, the 1960's may
well be called "the decade of debt."
At this stage it would be prematureto suggesta label for the 1970's, but the
environment of the past couple of years is filledwithfranticstrivingsby business
to lay its hands on funds-whereverobtainable."Tight money"is by now an al-
mostindefinableterm,but it servesas an understateddescriptionof recentevents.
And to the many corporationsthat blithelyassumed that the financingof eco-
nomicactivitywas merelya matterof mechanics,the near panic for liquidityin
the moneyand capital marketswas a not-so-gentle introduction to the notionsof
relativeand (in severaltragicinstances)absolutescarcity.
Donaldson'snewbook fitsrightintothisscene.In thisage of the unexpectedand
of discontinuities,his messageis basicallya plea forfinancialcontingency planning
-an approachthatseemsto have been overlookedor neglectedby too manyshort-
sightedor overlyoptimisticmanagers.
"Financial mobilityis definedas the capacityto redirectthe use of financialre-
sourcesin a mannerconsistent withthe evolvinggoals of management as it responds
to new information about the companyand its environment." (P. 8.) This theme
is repeatedconstantlyas the authordelves deeplyinto financialmanagementas it
is practicedratherthanhow theoristssay it shouldbe practiced.Indeed, Chapter2
on "A ManagerialView of Finance" is a classic expositionof the descriptivevs. the
normative approach.Here,Donaldsonrangesovercontemporary theoretical literature
whichfocusesupon thestockholder's perspective on corporationfinanceand contrasts
it withthe managerialapproach.The latterhas as its commondenominator ".
the need for the preservation and growthof the businessentity" (p. 44)-clearly
reminiscent of Baumol's effortsin appraisingthe goals of economicperformance.
As Donaldsonsizes up the "is-should"controversy (p. 174): ". . . financialtheory
assumesa significantly longertimehorizonforthedata of decision-making thanmost
companiesuse in practice."
The strategyof financialmobilityis developedin a sequentialpattern.First is
the need to categorizethe uncertainties;the unexpectedeventsthat may have an
importantbearingon the equilibriumof fundsflows.He discusseschangesin the
generaleconomicenvironment (recession),productinnovation,technology, consumer
behavior,and specificmanagement actions.It shouldbe noted,however,thatDonald-
son's discussionof thesefactorsignoresor,at best,understates thethreatof a general
liquiditysqueeze-such as occurredin 1969 and 1970. In this omissionhe joins the
ranksof almostall forecasters who also missedthe boat.
Next he delvesinto an inventoryof the resourcesof mobility;the variousways
by whicha businesscan meetexpectedor unexpecteddeficitsin funds.In this sec-
tion he providesa valuable serviceby urgingthe construction of a new type of
"balance sheet"-emphasizingnot the resourcesthat were committedhistorically
(the asset side), but the potentialresources,bothinternaland external,thatmay be
available in the future.These resources,Donaldson insists,should be regularlyas-
sessed as to magnitudesand availability.
Here, too,one mayquibblewiththeauthor'slistings.Recentpressureson liquidity
have literallycompelledmanycorporations to turnto the equitymarketsforfinanc-
1204 The Journalof Finance
ing-a phenomenonthat he places low on the priorityschedule,as it should be.
Again,one may suggestthe need fora transcending variable,such as the rate of
growth of the moneysupply relative to demand to provide some additionalinsight
into the potentialavailabilityof funds.
Lastly he urges that prioritiesbe set up linkingspecificresourceswith specific
contingencies. This would providethe full-fledged planningapparatus that is the
foundation of thebook.
A largepartof Donaldson'seffort is devotedto in-depthanalysesof the responses
of threecorporations to major distortions in fundsflows.These studies,describing
eventsand reactionsduringthe 1950's and early 1960's and makingingenioususe
of decisiondiagrams,are followedby a less detailedsectionon the behaviorof a
broaderrangeof businessesas theyrespondedto a varietyof changesin theiroperat-
ing environments.
In the closingsectionsDonaldson seeks to improveproceduresfor coping with
financialuncertainties.The resourceof "time" is analyzed: the need to learn more
about the futureenvironment in whichbusinesswill be operating.In this context
he makesuse of a computermodelof cash flowsin an attemptto assess the impacts
of variousassumptionson inflowsand outflows.An appendixcarriesa detailedde-
scriptionof just how one wouldgo about settingup such a simulationmodel.
For those accustomedto the lean logic of mathematicalnotationDonaldson's
book will provefrustrating-almost outrageous-in the way he painstakingly struc-
tures,reorders,and elaborateshis points. (But he spares us footnotes;only six
appear in the entirevolume.) His is the worldof practiceand experience,and the
attemptsto catalogue,categorize,and prescribeseem to go on endlessly.
But perhapsfortheseveryreasonsthis book shouldbe read by the disciplesof
the "new" finance:the Protagonistsof Pure Theory.Unquestionably, financialthe-
oryis wherethe actionhas been in recentyears; racingfarahead of the interestin
practiceor policy. (Does anyone read Dewing any more?) Donaldson makes us
pause to questionthe relevanceof what we're doing and-ultimately-leads us to
becomebettertheoristsor practitioners.
For thesereasonsI urge teachersof finance(especiallythoseunder35) to read
Donaldson carefullyand, hopefully,sympathetically. It may not turnout to be a
labor of love, but remember that virtueis its own reward.
And for corporatefinancialofficers-thoseharriedand befuddledactors in the
currenthit dramaof "Where'sthe Money At?"-Donaldson's disciplinedarguments
shouldproveconclusively that contingency planningis absolutelyindispensable.But
as they read and learn they will also come to recognizethat planningguarantees
nothing.For, as Donaldsonpointsout in theimportant work(p. 205): "No financial
strategycan protectagainstbad judgmentor inefficient management."
ROBERT A. KAVESH
New York University

Information forDecision Making: Quantitativeand BehavioralDimensions.Edited

by ALFREDRAPPAPORT. EnglewoodCliffs,New Jersey:Prentice-Hall,1970. Pp.
xi + 447. $7.95.
AlfredRappaporthas compileda collectionof essayson management information
systems with professionalcompetence and thoroughness that set this volume well
above the averagepublication.The materialhas been selectedand organizedcare-
fully,and end-of-chapterscholarlycommentaries providecandid criticismand inte-
gration.The volumecontainsthirty-four articlesdivided into threeparts, with a
 Book Reviews 1205
conspicuousabsenceof papers on information theoryand its functionalapplications
in business.
In Part I we findthewell-known and frequently quotedpapersby Ackoff, Morris,
and Hinkle and Kuehn. These are the seminalpapers. Othersincludea taxonomy
of management decisions(Archer)and computersimulation(Rowe). This part suf-
fersprimarily in its treatmentof simulation.For example,little (if any) attention
is paid to the trade-offsbetweensimulationand analyticaltechniques,the efficiency
of statisticalproceduresused in simulation,the problemof verification, data banks,
etc. This reviewerbelievesthatPart I could have benefitedfromthe inclusionof at
least twoadditionalreadings:Churchman, "An Analysisof SimulationExperiments"
(1963), and Naylorand Finger,"Verification of ComputerSimulationModels,"M.S.
(1967). Both paperswouldhave augmentedthe readingsin Chapter2.
Part II constitutes the main body of the book and deals withthe importanceof
information forplanningand control.This sectionincludesa numberof interesting
papers,rangingfromthe ambitiousrecommendations of Ansoffand Brandenburg
forbusinessplanningto theintroductory essay on sensitivity
analysisby Rappaport.
The papers by Demski and by Ijiri, Levy, and Lyon make excellentreadingand
have by now becomestandardassignments forgraduatestudents;yet,this reviewer
is puzzledby the conspicuousabsenceof similarworkby Mattessich.The inclusion
of, say, "MathematicalModels in Business Accounting,"AR(1958) would have
placed the workof Demski as well as Ijiri, et al., in betterperspective.Finally,
thereis a good paper on transfer pricingby Dopuch and Drake.
Part III is concernedwith the behavioralassumptionsunderlyingthe designof
management information systems.Of interesthere is the exchangebetweenBecker
and Greenand Stedryon budgetparticipation and its effectupon productivity and
morale.The inclusionof thisexchangeindicatesincreasingawarenessin the account-
ing profession of personalityand environmental in the decision
factorsas constraints
process.The last paper in the volume,by Churchman, presentsthe interestinghy-
pothesisthat the gap betweeninformation and decision-making cannotbe filledby
betteranalysisor modesof communication but onlyby an awarenessof the manager
and his modusoperandi.
In perspective,this volume is recommendedfor its organization,criticalcom-
mentary,and supplementary bibliographies.It should prove useful to studentsin
business.
GEORGEC. PHILIPPATOS
The PennsylvaniaState University

The Functionand Analysisof Capital Market Rates. By JAMES C. VAN HORNE.

EnglewoodCliffs:Prentice-Hall,1970. Pp. xii + 180. $7.95 (paper, $3.95).
All too ofteneconomistscontentthemselveswith statementsabout, and theories
determining, "the" rate of interest-a quite abstractnotion-withlittleconcernfor
relatingthis rate to observedmarketrates.Additionalworkon theselatterrelation-
ships is thus verymuch in order,and this book attacks just such problems.The
principlesof specializationsuggestthat JamesVan Horne shouldwritea book such
as this,forit tracesratherclearlythe areas of his majorpast researchinterests.One
can questionwhethera collectionof such topicsshouldconstitutea book on interest
rates,but one can quarrelmuchless withVan Horne's familiarity and expertisein
theseresearchareas.
The book beginswith discussionsof the natureof financialintermediation, the
use of flow-of-funds analysis,and the role of interestrates in capital markets.Fol-
1206 The Journalof-Finance
lowingthis,attentionis givento reasonswhyparticularinterestrates differfroma
generallevel of rates. This portionencompassesdiscussionsof the termstructure
of interestrates,riskand marketability differences in financialinstruments, callabil-
ity and taxability,and whethera claimcoversthe residual- incomeof a firm.Nearly
all readerswill findthese,latterchaptersthe moreinteresting, and theyare nearly
entirelyindependentof the earliermaterial.The formerpart neitherstates much
that is controversial nor discussesmuchcontroversy. The theoryof financialinter-
mediationfollowsfairlycloselyGurleyand Shaw and others,and the theoryof the
role of interestratesis in essencethe applicationof fairlyelementary price theory
to capital markets.The discussionof flow-of-funds analysisbears littleif any rela-
tion to anythingelse in the book, and one wonderswhy it is included.The first
part of the book thus says that capital marketsaid in capital formationand the
redistribution of consumption over timeand that interestrates are the prices that
adjust to clear thesemarkets(and the discussionmightwell have brieflysaid just
about that).
Causes forvariationof particularcapital-market ratesfromthe pure rate are gen-
erallywell-handled. As mightbe expected,the chapteron the termstructureis the
longestand best,althoughsome recentworkapplyingspectralanalysisto the prob-
lem is unmentioned. The analysisof otherchaptersis not so detailedand rigorous,
partlybecause theirsubjectshave been studiedless. At timesthe analysisbecomes
too relaxed: "Thus, the principalpurposeof the call privilege[for U.S. Treasury
bonds] is not to achievea savingsin interest, but to obtainflexibilityin new financ-
ing near the finalmaturityof the existingobligation."(P. 126.) Except in discus-
sions of the termstructure, whenunsettledpointsare treatedthe controversies are
mainlydescribed,veryoftenwithlittleindicationof whichpositionis mostaccept-
able. One also sensesthat the author'sown researchresultsmeritsomewhatgreater
description and weightthanthe workof others.If the latterweredescribedas thor-
oughlyas the former, the readermightbe able to reachthis conclusionon his own,
surelya moresatisfactory state of affairs.
There is no concludingchapter,but one gets the feelingthat once he knowsthe
level of the "pure" rate of interest,he has read enoughto determinewhat any par-
ticularcapital-market rate will be. But this is a misleadingimpression, for not all
empiricalworkon factorsinfluencing particularrates are discussed.Perhaps most
notablyabsent is workon the effectsof inflationon capital-market rates. One can
argue that the pure rate includesprice-expectations but these are hypothe-
effects,
sized to operate differently on different capital-market instruments. A somewhat
morethoroughdescriptionof the determination of the pure rate wouldalso be wel-
come.
Several considerations,includingfairlyextensiveuse of materialdevelopedin an
earlierbook by the author,suggestthat thisbook is intendedfortextpurposes,and
it seemsusefulin that context.Its usefulnessis lessenedsomewhatby beingwritten
on different levelsat differentpoints.The firstpartrequiresminimalfamiliarity with
the subject,while the latterrequiresmore familiarity with economicsand finance
than the formerprovides.A fairlytechnicalappendixto the chapteron the role of
interestrates requiresyet a higherlevel of capabilityin the area. In spite of this,
however,the book seemswell-suitedas supplementary materialforcoursestreating
interestratesand capital markets.It providesa usefuland knowledgeable treatment
of importantpoints in interest-rate determination and capital-marketfunctioning.
As far as it goes,it givesstudentsa good bridgebetweenthe highlyabstractpure
rate and the veryrealisticmarketrateswhichare actuallyobserved.
WILLiAM E. GIBSON
Los Angeles
of California,
University
 Book Reviews 1207
and Markets
FinancialInstitutions
Money,BankingandIncome:TheoryandPolicy.By PHAM CHUNG. Scranton,Pa.:
InternationalTextbookCompany,1970. Pp. xv + 655. $10.50.
Accordingto the author,the organization of thistextbookis conventional.In fact,
thecontentis conventional, too. Whilethiswill encourageadoptionby manyinstruc-
tors,it will discourageinstructors who want to confronttheirstudentswith some
of the morecurrentand interesting issues in monetarytheory.
Part I deals with the role, nature,and evolutionof moneyand credit,and the
structure of moneyand capitalmarkets.Part II deals withcommercial bankingand
presentsan all-too-brief discussionof the process of deposit expansion.Part III
coverscentralbankingand its development and includesa chapteron centralbank-
ing in underdeveloped countries.The latterchapteris interesting, but of littlevalue
in a textbookdealingwithmoneyand bankingin the UnitedStates.
Parts I, II, and III, which formthe institutionalcore of the book, should be
thoroughenoughformostundergraduate money-and-banking courses.Parts IV and
V discussmonetarytheoryand policy.Unfortunately, thesepartscontainlittlemore
monetarytheorythan any good undergraduate macroeconomic-theory textbook.Fi-
nally,Part VI deals withinternational financeand the treatmenthereis betterthan
the averageundergraduate money-and-banking textbook.
Studentsmay encounterone problemin relatingthe institutional and theoretical
parts.Creditand interestratesreceivethe bulk of attentionin the chaptersdealing
with central-bankactions.However,in discussingmonetarytheory,both Classical
and Keynesian,theauthorfocuseson moneyand interestratesas the key variables.
The book should eitherconcentrateon central-bank and commercial-bank determi-
nationof the moneysupplyor else presenta credit,ratherthan a money,theory
of incomedeterrmination in Part IV. In view of the role of moneyin formalmacro-
economictheoryI thinkthe formeralternativeis preferable.
In this connectionthe author'sdiscussionof depositcreation(Chapter8) should
be developedinto a more generaldiscussionof moneycreationand ultimatelyof
money-supply theory.Unfortunately, most of the literaturedealing with money-
supplytheoryis containedin the professional journalsand is inaccessibleto (or too
difficultfor) the averageundergraduate. ProfessorChungbrieflydiscussesthe effect
on depositexpansionof changesin the ratiosof currencyand time depositsto de-
manddepositsand of changesin excessreserves.Followingupon this,I shouldhave
liked an analysis of the determinants of the currency,time-deposit, and excess-
reserveratios,therebypresentingthe elementsof money-supply theoryto the stu-
dent.The discussionof money-supply theorycould laterbe broughtto bear directly
on contemporary monetary-policy issues and especiallyon issues dealing with the
Fed's abilityto effectchangesin the moneysupplyand othermonetaryaggregates.
Anothercurrent,and increasingly important,issue in monetarytheorythat re-
ceivesno attentionfromthe authoris the effectof anticipatedinflationon the mar-
ket rate of interest.The effectof price-levelchanges on creditorsand debtorsis
discussedin Chapter16. If we add to the discussionthe assumptionthat economic
unitsattemptto maximizegains and minimizelosses we can come to some conclu-
sions about "nominal"and "real" rates of interest.For example,if creditorsexpect
to be hurtby inflation, it is reasonableto supposethat theywill tryto avoid being
hurt.In the faceof anticipatedinflationtheywill offerto lend onlyat a higherrate
of interestthan theywould demandin the absence of inflation.Similarly,debtors,
expectingto gain frominflation,will be willingto borrowat a higherrate than
otherwise.Thus the marketor nominalrate of interestwill containa premiumfor
anticipatedinflation.
Studentshave been asking,in my recentclasses,how interestrates can rise (in
1208 The Journalof Finance
1968, forexample)in the face of rapid increasesin the moneysupplyaccompanied
by a fiscalpolicy movingtowardrestraint.The conventionaltools presentedby
Chung cannotadequatelyanswerthat questionbecause theyignorethe distinction
betweenreal and nominalratesof interest.
Finally,it is disconcerting to findso manytextbooks,especiallymoney-and-bank-
ing textbooks, that discussfiscalpolicyin the absenceof its monetaryeffects.Con-
sider the discussionof the balanced-budget multiplier(Chapter 20). Aided by the
standardincome-expenditure diagram and an algebraicexample,Chungdemonstrates
that an equal increasein government expenditures and taxes leads to an increase
in the equilibrium levelof income.The process,not sufficiently discussedin the text-
book, seems simple.The increasein taxes large enoughto financethe increasein
government expenditures reducesconsumption, but by a smalleramountthan the in-
crease in government spending.Investmentis assumed to be constant; hence ag-
gregatedemand increases.However,the increasein taxes induces a reductionin
privatesavingas well as consumption. Initially,then,thereis an excess of private
investment over privatesaving.This disequilibrium conditionis resolvedwhen in-
come increasesthereby generating a level of saving large to financethe
sufficiently
constantlevel of investment.
Unfortunately, this analysisglossesover the crucialissue: How is that constant
level of investment financeduntilincomeand saving rise to the new equilibrium?
Keynesianeconomicsprovidesan answer.Because of the liquiditytrap, idle bal-
ances existthat can be tappedby businessfirmswithonlyslightif any increasesin
the rate of interest.During the period of disequilibrium, investmentis financed
partlyby currentsavingand partlyby a reductionin idle balances (and theircon-
versioninto active balances). This is fine,but what happens if no idle balances
exist? In diagrammaticterms,what happensif the LM scheduleis vertical?The
answeris, of course,thatthebalanced-budget multiplier(also the government spend-
ing and tax multipliers)is zero.
The monetarist position,whichstressesmonetary-policy effectsratherthan fiscal-
policy effects(a positionreceivingalmost no discussionfromChung) cannot be
properlyunderstoodby discussionsof fiscalpolicy that remainwithinthe context
of "45?-lineeconomics."As interestin the monetarist positiondevelops(whetheror
not acceptancedoes is immaterial),this textbookwill becomeincreasingly outdated
forit has failedto considercurrentand anticipateddirectionsof thoughtin mone-
tarytheory.
In conclusion,whileI expectthat this book will fillthe needs of many money-
and-banking courses,it willnot be satisfactory forinstructorswho wishto introduce
theirstudentsto currentideas in the field.
WILLIAM R. HOSEK
Universityof New Hampshire

Men, Money and Policy: Essays in Honor of Karl R. Bopp. Edited by DAVIDP.
EASTBURN. Federal ReserveBank of Philadelphia.Philadelphia:1970. Pp. 253.
This book of essays honorsKarl Bopp, retiringpresidentof the Federal Reserve
collection,even if much of it merelyre-
Bank of Philadelphia.It is an interesting
hashes central-bankinghistory.The originaleligibilityrequirementsfor rediscount-
ing and the backgroundof theserequirements are discussedmorethana fewtimes,
farpast thepointof boringthe reader.The book does not producemuchnew in the
way of theoryor policyrecommendations; indeedmostrecentdevelopments in mone-
taryeconomicsare not even recognized.This failureto discussthe more-important
 Book Reviews 1209
new contributions to, and issues in, monetarytheoryand policyis the mostsignifi-
cant weaknessof thisbook. Friedman'sanalysisof monetaryaggregatesis discussed
brieflyand dismissedas doomedto take its place on libraryshelves(p. 78). Most
recentworkby Guttentag, Wood,economists at theFederalReserveBank of St. Louis,
and othersin this area is not even mentioned.This failureto recognizenew con-
tributionsprobablyreflectsa generationgap betweenyoungerand oldereconomists;
but whateverthe reason,it is difficult to excuse.
Amongthe more interesting articlesare those by Hayes, Noyes, and Mitchell.
The essay by Hayes presentsthe 1966 creditcrunchas seen by an active inside
participantin the drama.The impactof the crunchon the money-market banks and
the savingsand loan institutions is describedin a dramaticmanner.
Noyes, addressinghimselfto the influenceof the bankingstructureon the effec-
tivenessof monetarypolicy,concludesthatintensivecompetition amongbanks both
fordepositsand forloans reducesthe immediateshort-run effectivenessof restric-
tivemonetary policy.He sees thisas a problemof timing,sincecontrolof the reserve
base ultimately bringsabout the desiredobjectivesof policy.Althoughhe concludes,
quite correctly,thatlittlehas been done to relatebankingstructureto the effective-
ness of monetarypolicy,Noyes himselfbarelyscratchesthe surfaceof the problem.
However,his discussionmakes a stimulating article,especiallyhis observationson
the behaviorof businessloans.
The essay by GeorgeMitchellalso analyzes the structureof bankingmarkets,
althoughin a more dynamicmanner.Mitchelladdresseshimselfto consequences
placed on banksin theiracquisitionof funds.He concludesthat undue
of restrictions
restrictionson banks may increasethe importanceof financialconglomerates and
fractionalizefinancialinstitutions in a way detrimental to the development of finan-
cial marketsin the UnitedStates (p. 107). His analysisraises the questionof just
how large banks must be for the proper developmentof our financialmarkets.
Mitchellalso argues for,some type of selectivecreditcontrolsin the allocationof
fundsratherthan simplydenyingbanks access to funds.Thus, if particularmarkets
are to be the focusof monetaryrestraint,the authoritiesmightimposedifferential
reserverequirements. Europeancentralbankshave used suchcontrolsforyears.
The articlesthat mostinviteadverse criticismare by Alexanderand Whittlesey.
To criticizethe Federal Reserve on the basis of its deliberateness(as Alexander
does) appearsrathersuperficial. If Alexanderhad attackedthe centralbank forre-
quiringbanks to keep sterilecash reserves,or withrespectto differentials in reserve
requirements, his argumentswouldhave been moreconvincing.
Whittlesey attemptsto assess thepowerof variouscentralbankersand fromwhat
thispowerderives.He accomplishes littleexceptto describecertaincommongeneral
characteristics.His was amongthe least analyticaland most frustrating essays for
thisreader.Fortunately forthe qualityof the book,mostotheressaysare distinctly
better.
Finally,Holland's essay on the discountmechanismraises more questionsthan
it answers.He claims that the departureof banks fromthe systemthreatensthe
implementation of monetarypolicy; on the basis of recentdiscussionit doesn'tap-
pear thatthepresentstructure is reallynecessary.Also,Holland's feelingthatreform
of the discountmechanismwill lead to a greaterproportionof borrowedto total
reserveswithtotal reservesunchangedinvitesthe questionof what will bringthis
about and why.In the lightof the increasedattentionthe discountmechanismhas
recentlyreceived,I expecteda morepenetratingdiscussion.This seems to rehash
the JointEconomicCommittee'sReport on the DiscountMechanism.
Overall,this is an interesting book, with some good essays. At times,however,
1210 The Journalof Finance
nostalgiais carriedto an extreme.Livingston'sarticle (using an Alice in Wonder-
land play) may be appropriateforthe EveningBulletinbut seemsinappropriate in
a scholarlybook of this type.
JOSEPH L. LUCIA
VillanovaUniversity

Home MortgageDelinquencyand Foreclosure.By JOHN P. HERZOGand JAMES S.

EARLEY. New York: ColumbiaUniversity Press forthe National Bureau of Eco-
nomicResearch,1970. Pp. xx + 160. $7.50.
This monograph is partof thecontinuing seriesof studiesin the NationalBureau's
Qualityof CreditProgram.This analysisof one-to-four-family, residential-mortgage
creditrepresents an initialeffortto quantifyand to isolate the significant variables
that affectmortgagequalityand to constructan indexto measurechangesin mort-
gage quality.Previousstudies,as the authorsexplainin ChapterI, fail to test for
statisticalsignificance and reach conflicting conclusions.Unfortunately, this mono-
graphdoes not resolvethe issues,although,againstthe backgroundof the previous
studies,it is a stepin the rightdirection.The studydoes provide: (1) a comprehen-
sive overviewof theproblemsconfronting mortgage-credit analysis; (2) a firmfoun-
dationupon whichfutureresearchmay be built; and (3) a summaryof the state
of the art.
The scope and timelinessof the study are impressive.A nationwidesample of
nearly13,000homemortgagesfromsavingsand loan associations,mortgagebankers,
and mutual savingsbanks is used. However,the study is necessarilylimitedbe-
cause of difficultiesin data collectionand because the mostrecentobservationsoc-
curredin 1963. Comingas it does in the midstof unusuallytightmortgage-market
conditionsand a growingconcernover nationalhousingpolicies,the studyis also
verytimely.
The presentationis nonmathematical and accessible to those withoutstatistical
or mathematicaltraining.Supportingstatisticsare relegatedto appendices,but the
main thrustand conclusionsmay be gatheredwithoutever consultingthem.The
statisticsused are explainedin simpleprose,withoutthe aid of formulas.The au-
thorsfrequently use tables and chartsto illustratetheirwell-written discussion.
The practitioner and the academicianalike should findthis studyworthwhile as
an aid to collectingtheirthoughtsin the area, althoughcautionshouldbe exercised
in assessingthe authors'conclusions.
The monograph is dividedinto fiveparts: an introduction and summary, a back-
groundchapter,a chapteron theresultsof themultiple-regression analysis,a chapter
on the construction of a mortgage-qualityindex,and threelengthyappendiceswhich
provideinformation on the samplingtechniquesand the supportingstatisticalre-
sults.
The firstchapterbrieflysets forththe background,objective,methodology, con-
clusions,and some (but not all) of the caveats against acceptingthe results,the
last disguisedundersuggestions forfurther research.This may misleadreaderswho
do not siftthroughthe remainderof the chaptersand discoverfor themselveshow
importantthese and othercaveats are. Amongthe more-serious problemslisted in
this sectionis the authors'copioususe of dummyvariablesand the biases theyin-
troduceinto regressionanalysis.The warningtakes only two sentencesand ends
with the authorschoosingto "ignoremany of these problems."One must turnto
the appendicesto realize the scope of the difficulty. Dummy variablescomprisea
substantialportionof each equation. In addition,the authorsarbitrarilyassign a
 Book Reviews 1211
rangeof scale values to thesedummyvariables,presumablyreflecting some known
patternof risk that is neveradequatelyexplained.The bias introducedby these
techniquesunderminesthe positiveway in whichthe conclusionsare summarized.
The authorsalso raise the questionof usingotherstatisticaltechniques,such as
multiple-discriminantanalysis,butunconvincingly dismissthemon thegroundsofcom-
putationaldifficulty and expense-even thoughdiscriminant analysis would yield
similarresults,providemore commonlyaccepted statistics,and allow for greater
flexibilityin testingamonggroups.
ChapterI providesa broad treatmentof post-WorldWar II mortgagequality
until 1967. The rise in the importanceof home-mortgage creditis documented, and
changesin loan,borrower, and property characteristicsoverthe periodare discussed.
The trendin foreclosures and delinquenciesis notedas havingdeclinedthroughthe
early 1950's and then to have risen through1967. The resultsand techniquesof
othermortgagedelinquencyand foreclosure studies are summarized.The authors
correctlypoint out the weaknessesof these otherstudies,such as theirfailureto
test for significance, noncomparability, and restrictedsamples. The authorsclaim
theirstudywill remedythesedeficiencies by usinga nationwidesamplethatincludes
both currentand noncurrent loans, delinquenciesand foreclosures, all loan types,
and different lenders.
ChapterII sets forthmethodsand results.Data are brokendown into paired
groupsaccordingto the dependentvariable: delinquentand foreclosed, and current
and delinquent.The dependentvariableis assigneda dummyvalue of eitherzero
or one and regressedon all the mortgagecharacteristics foreach of the threelenders.
Then forcomparability, regressions are run on the mortgagecharacteristics common
to all threelenders,and finallya regression is runon a currentand foreclosedpair-
ing forthe savings-and-loan data.
The statisticalsignificance of the regressions is testedthroughF, R2, and Lorenz
statistics.The last, as the authorsstate,is "not a part of the standardstatistical
repertoire" but was developedby themforthispurpose.This statisticmeasuresthe
predictiveaccuracyof the regression equationsat particularlevels of the index,but
the authorsestablishno criterionto judge whatis acceptableaccuracy.The authors
use thisLorenzstatisticextensively, devoting25 appendixpages to supportingtheir
resultsand to dismissing(unconvincingly) the verylow R2's achieved.One wonders
whetherthe R2 is adjusted (the authorsneversay), forwith the large numberof
dummyvariablesused,a negativeadjustedR2 is possible.One also wonderswhether
the data used fortheLorenzstatisticrepresented a hold-outsampleor thesame data
fromwhichthe originalindex was computed.The latterprocedurewould enhance
theapparentpredictive abilityof themodel.In any case, too muchemphasisis placed
on thevaguelyinterpreted Lorenzstatistic.
The significance of individualmortgage-characteristic variableswas tested by t
statistics.Amongthefactorsrelatedto delinquency, borrowing forrefinancingand the
presenceof juniorfinancing wereimportant, althoughthis could be testedonly for
conventionalmortgages.The loan-to-valueratio was positivelyand significantly re-
lated to delinquency.The term-to-maturity variable was oftennegativelyrelated,
althoughthe authorscould not bringthemselves to accept thisresultand reluctantly
concludethatthenegativity is nota "true"indicationof therelationship betweenrisk
and term-to-maturity. Theirreluctanceis explainedin thenextchapterwhenthenega-
tivesignof thisvariabledetractsfromtheaccuracyof theirqualityindex.The authors
also failto explaintheirdistinction betweenwhatGuttentaghas called "defaultrisk"
and "creditrisk" in rationalizingthis result.The payment-to-income variable was
also unexpectedly negative,and the authorscreditthis to what may be one of the
1212 The Journalof Finance
major difficultiesin mortgage-credit analysis,i.e., available data have alreadybeen
pre-screened by the loan officerand are thus biased. Borrower'soccupationand
numberof dependents provedsignificant, althoughthissignificance was not generally
supportedby the t statistics.Marital status and borrowerage both proved insig-
nificant.Regionand the loan-type(FHA, VA, conventional)provedsignificant.
The factorsrelatedto already-delinquent loans goinginto foreclosure weresimilar
to factorsrelatedto delinquency.However,the term-to-maturity variable became
positive,althoughtherelationship was statistically at 5 per cent.Occupa-
insignificant
tion ceased to be significant, but in additionto borrowerrefinancing and junior fi-
nancing,construction loans on new homesproved significant.
Amongthe variablesrelatedto currentloans goingdirectlyinto foreclosure, the
presenceof junior financing,borrowerrefinancing, term-to-maturity, and regional
variableswere significant. The loan-to-valueratio became insignificant. Conclusions
forthispairingwerebased on the savings-and-loan sampleonly.
ChapterIII constructs a time-seriesindexbased on thecross-sectional resultsof the
previouschapter.The authorscorrectly stressthe possibilityof changingparameters
and thepitfallsof substituting time-seriesdata intoa cross-sectional regressionmodel
but proceedto use the methodanyway.They justifiably maintainthatdata are not
sufficientfor time-series modelsbecause the age distribution of the data had been
foreshortened by the repayment of mortgagesbeforethe samplewas taken.By sub-
stitutingtime-seriesdata on loan-to-value, term-to-maturity, payment-to-income, loan
purpose,and juniorfinancing intothe cross-sectional models,the authorsconstructed
an index for the postwarperiod. The constructedforeclosure index reflectedthe
actual postwarexperience, but the delinquencyindexdid not followthe recordedup-
ward patternbecause of the negativesign awarded the term-to-maturity variable.
The authorsalso conclude,withoutexplanation,that VA loans are slightlymore
riskythan FHA's, accordingto this index.However,the questionof usinga cross-
sectionalmodel fora time-series indexand of using insignificant variablesin con-
structing the indexbrings the of
reliability the index intoquestion.
In summary, thismonograph takesa stepin therightdirectionformortgage-credit
analysisand surveysthe problemsin the area. However,the authors' conclusions
should be qualifiedin the light of what strikesthis revieweras relativelyweak
supporting evidence.
STEVEN E. BOLTEN
Universityof Houston

ProgrammedText in Money and Banking.By JOHN T. MASTENand W. WARREN

Inc., 1969. Pp. vii + 263. $4.50.
HAYNES. EnglewoodCliffs:Prentice-Hall,
This programmed-learning textcoversmanyof thestandardtopicsin a money-and-
bankingcourse:ChapterOne investigates the typesand functionsof money,financial
and Gresham'sLaw. ChapterTwo describesbank balance sheetsand
intermediaries,
simpleaccountingtransactions,and ChapterThree introducesthe bank-reserve mul-
tiplierand cataloguesthe sourcesand competinguses of bank reserves.Chapter
Four presentseconomicand financialtimeseriesto describepostwarbusinessfluc-
tuations. Chapters Five throughEight analyze bank-management behavior,the
structureand policyweaponsof the Federal Reserve,and the mechanicsof bank
money-supplyexpansion and Federal Reserve monetarycontrol. Chapter Nine
deals withmonetarytheoryfroma quantity-theoretic point of view,whileChapter
Ten presentssimpleincome-determination models.The remainingtwo chaptersdis-
cuss moneyin internationalfinance,includingthe balance of paymentsand foreign-
exchangemechanisms, rates,and regulations.
 Book Reviews 1213
The materialin thebookis presented on a veryelementary leveland to answer
everyquestionwouldbe tediousand verytime-consuming, consideringthematerial
covered.Whilethestatedpurposeof thetextis to supplement coursematerial in a
waythatforces students toparticipate,I fearthatthetextmayboreor at leastmire
manystudents.
The bookis strongest whendescribing eitheraccounting procedures and balance
sheetsorpostwar time-seriesplotsofdifferent financial A priori,
variables. onewould
expecttheprogrammed-learning approach tobe usefulin thosepartsofa money-and-
bankingcoursedealingwithaccounting practices.ChapterFive, entitled"Bank
Management," whichdiscussesthecomponents of thebankbalancesheetand the
structure
organizational ofa typicalbank,is thebestin thetext.However, theac-
countingaspectsofmoneyand banking are notall handledso completely. The book
providesonlylimiteddiscussion of,and littlepracticewith,basic T-accounttrans-
actionsbetween banks,thepublic,and the FederalReserve;and the sourcesand
competing usesofbankreserves aremerely statedandnotderivedfromconsolidated
balancesheetsofthevariousmoney-producing The programmed-learning
institutions.
approachis also usefulto describe actualfinancial and economic data. An inherent
dangerhereis drawing conclusions aboutcausal relationships fromcoincident be-
haviorof different series.Since the authorsdo not offersufficient warning, the
must.
instructor
The textis weakestin attempting to presentmodelsof incomedetermination,
modelsof moneyexpansion, and the theoryof monetary policy.Analysisis either
or nonexistent,
simplified and no empirical resultsare presented.For example,the
ofmoneyexpansion
discussion paysonlylip serviceto theroleofthecashdrainand
doesnotdiscusstheroleof excess-reserve behavior or borrowingbehavior in deter-
mining thefinallevelofthemoney supply. Thelinkagebetween changes in themoney
supplyandtheresponse ofrealvariables is handled byconsidering differentnumerical
variantsof theequationof exchange (without between
evendistinguishing identities
and equilibrium conditions).The bookeschewsthegeneral-equilibrium approachto
interest-rate
determination, concentrating on thepartial-equilibriumliquidity-prefer-
enceandloanable-funds theories.The general lackofanalysisin thesesections leaves
thetreatment superficialand evenmisleading.
Sincesomeareas of a money-and-banking courseare moreamenableto a pro-
grammed-learning approach thanothers, mydisappointment withsectionsofthetext
mayderivefromthisincompatibility between theapproachand thematerial, rather
thanfromdeficiencies in theauthors'treatment. The onlypartsof thetextI would
recommend to mystudents are thosetreating accountingconcepts,but evenhereI
hesitatebecausethecoverage is incomplete andverytime-consuming.
KENNETH A. LEWIS
BostonCollege

Introductionto MonetaryEconomics.By ROBERT E. WEINTRAUB.New York: The

Ronald Press Company,1970. Pp. x + 444. $8.50.
This is not a traditionalundergraduatemoney-and-banking textbook.Professor
Weintraubhas writtenan unusual,perhapsunique,monetarytextin thatit presents
the"monetarist" viewof monetary economics,to the virtualexclusionof any modern
competingview. The introductory chapteron the "Scope of MonetaryEconomics"
sets the tone for the remainderof the text.There, 8 of 16 pages are devoted to
MV = PT or some othervariantof the equationof exchange.Weintraub'swriting,
fromthe outset,suffers froma lack of rigor.For example,in drawingthe distinction
betweenthe formulations MV = PT and MV = PQ, he writes:(on p. 11) "...and
1214 The Journalof Finance
T is thesumof all thequantitiestraded,i.e., thevolumeof transactions;"(on p. 12)
". . . whereQ denotesthevolumeof thisyear'sproduction;"and (on p. 13)".. . and
the volumeof transactions Q."
The nextthreechapters(55 pages) are devotedto monetaryinstitutions. Chapter
2 describestheevolutionof thebankingsystemand of theregulatory agencies.A few
minorerrorsappear,such as designatingthe CurrencyAct of 1863 as the National
BankingAct. In Chapter3, commercialbankingand the industry'sstructureare
discussed.For a book publishedin 1970,it is unfortunate that 1964 data are used to
describethe bankingindustryof "today,"sincemorecurrentdata are readilyavail-
able. The recentemergenceof bank holdingcompaniesand the large numberof
mergersin thepast fewyearsare not mentioned. The basic toolsof monetarypolicy
are consideredbriefly in Chapter4.
Part II of thetext (6 chaptersand 129 pages) is a fairlygood presentation of the
mechanicsof themoney-supply expansionprocess.Most money-and-banking textsare
quite deficientin money-supply theory.Weintraub'stext does not sufferfromthis
weakness.Essentially,Weintraubderivesand explainsthe money-supply multiplier
and presentsa modelforanalyzingthemoney-supply expansionprocess.The modelis
a four-quadrant diagramthatinitiallyappearsintractablebut,aftera littlestudy,is
manageableand usefulto the student.However,the seriesof diagrammatic experi-
mentsconductedby theauthorare so mechanicalas to makestudentslose sightof the
underlying behavioralrelationships.
Afterdefiningand describingmoney,Weintraubpresentsand discussesdetailed
data on the sourcesand uses of base money.There again, withoutexplanation,1964
data are used, even thoughcurrentmonthlydata are available. In addition,two
importantdifficultiesmar the discussionof the effects of policytoolson the determi-
nantsof themoneymultiplier. First,I cannotagreewithWeintraub'sstatementthat
"Changesin thediscountrate have no effecton the nonbankpublic'sbalance sheets,
nor,in the contextof macrostatic analysis,do theyinfluence thepublic'sbehaviorin
any way" (p. 162). Second,Weintraubarguesthat,initially,increasesin the legal
reserverequirement will absorb excess reserves,hence,decreaseobservedexcess re-
serves.In the next sentence,he writesthat decreasesin reserverequirements tend
to decreaseobservedexcessreservesimmediately. I cannotsee how contrarychanges
in reserverequirements can have the same initialeffects on observedexcessreserves.
Part III (8 chaptersand 151 pages) is entitled"Money and Macrostatics."
Chapters11 and 12 cover the measurement and determination of nationalincome,
ignoringthe moneymarket.Keynesianmoneydemandis explainedin Chapter 13.
Weintraubwritesof the Keynes of the GeneralTheory (1936) and ignoressubse-
quent refinements of the theoryby such postKeynesiansas Baumol, Duesenberry,
and Tobin. In fact,thistextnowherementionstheportfolio approachto the demand
formoneyassociatedwithJamesTobin and his followers.The discussionproceeds
on a verysimplelevel but is marredby severalconfusinginaccuracies.First,the
graphicalrepresentation of the transactionsdemand for moneyis wrong(Figures
13-1 and 13-3). Accordingto the graphs,the desiredtransactionsbalance is about
fourtimesthesize of income.The oppositewouldbe morerealistic.Second,the asset
demandformoney(L2) is writtedas L2 = g(i)/i, where". . . g is the coefficient
expressing the powerof the interestrate to affectthe asset demandformoney"(p.
259). I foundthat studentswereinclinedto cancel out the i's in the ratio,leaving
L2 = g, whichis accurate,mathematically, if g is (in fact) a coefficient
as Weintraub
alleges.On page 311, g does legitimately appear as a coefficient wherethe money-
demandfunctionis writtenas Md = kY - gi.
Chapter14 introducesmoneyinto the Keynesianincome-determination modeland
 Book Reviews 1215
Chapter15 containsa standardderivationof the IS-LM model.At one point,Wein-
traubmakesthe unsubstantiated statement, ". . . examination of the historyof the
U.S. moneysupplysince 1928 revealsno evidencethatM will not risewhenB rises"
(p. 299). Accordingto Table 10-1 of the text (p. 185), fromJune,1930 to June,
1933,themonetarybase (B) increasedby 22.4 per centwhilethe moneystock (M)
decreasedby 23.5 per cent.Moreover,fromDecember,1936, to December,1937, B
rose by 5 per centwhileM fellby 4.2 per cent.This reviewerfeelsthat these two
contrarymovements are at least some evidencethat M will not alwaysrise whenB
rises.
In Chapter16, the IS-LM modelis used to determine income,prices,output,and
employment, withheavyemphasison algebraicmanipulation. The finaltwo chapters
in Part III set forththe "monetaryapproach."There is the usual discussionof how
and whymoneyaffectsthe economy.In Chapter18,,entitled"Velocity,"Weintraub
discussesthe independence of changesin the moneysupplyand changesin velocity.
The conclusion?Althoughvelocityfluctuates independently of changesin the stockof
money,suchchangesare predictableby thequantitytheoryof moneydemand.Hence,
givenMV = Y, changesin the moneysupplywillhave predictableeffects on income
(eventually).What about thearguments of the RadcliffeCommitteeand the Gurley-
Shaw thesis?These protagonists are introduced and dismissedin less thanone printed
page, since"the empiricalevidencethoughnot conclusivewouldappear to denyboth
the RadcliffeCommittee'sassertionand the Gurley-Shawthesis" (p. 357).
The fourthpart of the textdeals withthe balance of payments,consistingof two
chaptersand 22 pages.The materialthereinis not relatedwell to the restof the text
and littlewouldbe lost by eliminating it.
The book's finalpart discussesmonetary-policy issues. In the chapterentitled
"PolicyChoices,"theconflict in goals exemplified by thetrade-off betweenunemploy-
mentand inflation(i.e., the Phillipscurve) is explained.Aftersome consideration of
the constraints imposedby such tradeoffs to policymakers, Weintraubdives into a
discussionof rules versusdiscretionby the monetaryauthorities.Under a section
headed "PersonalPreference," he writes(p. 388):
I wouldsharplylimittheexerciseof discretionary authority in themonetary sphere.
myopinionis thatCongress
Specifically, shouldrequiretheFed to act to holdunemploy-
mentUE to lessthan4 (or even3y2) percentof thelaborforceand to holdincreases in
the wholesalepriceindexto less than1 (or 1%) per centin any twelve-month period.
Even thedimmeststudentwillsee something wrongwiththisprescription. Only three
pages earlier,Weintraubpresentsa graphof the hypothetical trade-off betweenun-
employment and inflationshowingthat 4 per centunemployment is likelyto be ac-
companiedby 4 per centinflation, and that 1 per centinflationis likelyto be accom-
panied by 8 per cent unemployment. If Weintraub'srepresentation of the trade-offs
is reasonablyaccurate,how would the Fed be able to carryout the Congressional
orders?ProfessorWeintraubis obliviousto thiscontradiction in his prescribedrules.
In conclusion,it is incumbentupon reviewersof textbooksto offera general
recommendation regarding appropriatenessforclassroomuse. I recentlyadoptedthis
text on a trial basis in one undergraduatemoney-and-banking section.The text
provedan unfortunate choice.I neitherplan to use thebook again norrecommend its
use forundergraduate coursesin moneyand banking.
VITTORIO BONOMO
VirginiaPolytechnicInstituteand State University
1216 The Journalof Finance
International Finance
The InternationalMonetaryFund, 1945-1965.By J. KEITH HORSEFIELD, MARGARET
G. DE VRIES, and others.Vol. I, Chronicle,pp. 663; Vol. II, Analysis,pp. 621; Vol.
III, Documents,pp. 549. Washington, D.C.: InternationalMonetaryFund, 1969.
$5.00 per volume($12.50 forthe set).
The International MonetaryFund has prepareda three-volume recordof "Twenty
Years of International
MonetaryCooperation"runningfrom1945 to 1965,not as an
official
documentbut as a "historywrittenfromtheinside"by staffmemberson their
ownresponsibility:a year-by-year Chronicleof the Fund's development;an Analysis
of its proceduresand policies; and a collectionof key Documentsrelatingto its
conceptionand operations.
VolumeI
The firstvolumedescribeshow the Fund developedinto the institution it is to-
day. Mr. Horsefieldcovers the importantdecisionsin chronologicalorder,with a
summaryof the positionstakenby majorparticipants, based largelyon the minutes
of the ExecutiveBoard,and a recordof the officialswho have shapedtheinstitution.
The fullnessof the recordand the recapturing of the atmosphereof international
negotiation-thedifferences amongparticipantsand the difficultiesin findingagreed
words for a compromisedecision-should make this work a primarysource for
scholars.
The meritsof the chronology are honestyand balance. The ten-pagesummaryof
the storyof the GeneralArrangements to Borrow (the GAB) between1960 and
1962 (pp. 507-516) illustratesthesevirtues.This agreement,whichmarkeda de-
cisive stage in U.S./EuropeanfinancialrelationsafterWorld War II, incorporated
severalnovel and controversial features.To implementthe GAB, the Groupof Ten
was created,whichswiftly becamea majorforumfordecision-making in international
finance.Under the GAB, a small group of industrialcountrieson occasion made
creditsavailable to the Fund on the basis of theirown decisions.This grouping
of a limitednumberof countriesintroduceda "key currency"or "key country"
elementinto international financialarrangements,
in contrastto the BrettonWoods
conceptionof a globalinstitution.' overthesepointsare coveredin detail
Differences
in thishistory.
Horsefield'srelianceon therecordsof theExecutiveBoard bothenrichesand limits
the usefulnessof the finalproduct.A criticalevaluationof the IMF's development
would requireinsightsinto the conflicts-ofideas and of personalities-whichpre-
ceded ExecutiveBoard discussionof manykey issues. Further,thesematerialsshed
littlelighton why the ExecutiveDirectors(who have representational ratherthan
policy-making statusin theirgovernments) wereinstructedto take thepositionsthey
tookin the deliberations.
As background,the readerwill findthe Fund's "Prehistory"(Part I) a distin-
guishedreviewof familiarmaterials.It tellsa well-known story:How the proposals
fora postwarmonetary systemcurrentin 1941 werefinallyblendedinto theArticles
of Agreement acceptedat BrettonWoods; but thishistoryis far richerin technical

1. In 1943-45Williamshad beencriticalof the globalcharacter of the proposedFund and had

recommended insteada "key currency" approach,stressingthe role to be playedby the leading
industrialcountriesin achievinginternationalmonetary These viewsare summarized
stability. in
Vol. III (Documents),pp. 119-127. They are availablein detailin Williams' PostwarMonetary
Plans and otherEssays(New York: Knopf, 3rd edition,revisedand enlarged, in
1947),especially
Parts I and II and Appendices2, 3, and 4. However, Williams'approachwas not accepted at that
time.
 Book Reviews 1217
It should assume an
detail and clearerthan earliersurveysof these negotiations.2
financeand in advanced
undisputedplace on readinglistsforcoursesin international
workin international economics.
VolumeII
In VolumeII, the emphasisshiftsfromchronology to analysisof Fund activities.
This Analysisseeks"to bringintosharperfocusthereasoningwhichled to theFund's
actions"in threemajor areas: exchangerates and gold; exchangerestrictions; and
the use of Fund resources.
Exchangerates: The commitment of each memberto maintaina par value and to
consult the Fund before changing its parity constitutesthe heart of the system
establishedat BrettonWoods. When the new institutionopened in 1946, many
membershad multiple-or fluctuating-rate systems,or had unitaryratesheavilysup-
portedby networksof controlsleftover fromWorldWar II. Mrs. de Vries' several
excellentchaptersclarifythesecomplexproblemsand underscorethe flexibility with
whichthe fledgling IMF encouragedeach memberto discardcontrolsand to move
towarda unitarypar value.
These efforts constitutea greatsuccessstory.Gradually,the less-developedcoun-
triesconsolidatedtheirmultiplerates,and the industrialcountriesmade theircur-
renciesconvertible, both forcurrentand (thoughnot requiredunderthe Articlesof
Agreement)forcapital transactions as well,firston a de factoand thenon a de jure
basis. The multilateral worldsystem,envisionedby Anglo-American plannersin the
dark yearsof 1942 and 1943, became a realityin 1961 when ten major European
countriesacceptedthegeneralobligationsof membersunderArticleVIII. This return
to liberal trade and paymentsarrangements surelyranks among the Free World's
majoraccomplishments in internationalaffairsin the last 25 years.
The key problemwas to establishand to maintainthroughtimean appropriate
patternof exchangerates.Membersweremorereluctantto changetheirparitiesthan
had been anticipated.Between1958 and 1967, rigidityof exchangeratesamongthe
majorindustrialcountriesmade the BrettonWoods systemof the adjustablepeg (as
it was interpreted in practice) morenearlyakin to a fixed-rate systemof the pre-
1914 varietythanto any recognizableformof limitedflexibility.
Duringthisperiod,the processesof balance-of-payments adjustmentprovedto be
more uncertain than the founding fathers had contemplated. Through 1965, the
ExecutiveBoard neverdiscussedthe generalrole of exchangerates in balance-of-
paymentsadjustment(p. 116). The Fund's passive role underthe Articlesand the
sensitivity of severalmembersabout that role contributed to this outcome.But the
primaryexplanationis foundin the deliberatepolicychoicesof the majorindustrial
countriesto make "ratherslightuse . . . of the instruments of balance-of-payments
adjustmentthatwereprovidedat BrettonWoods."3
However,this neglectof the adjustmentproblemand rigidityof exchange-rate
practicescouldnot survivethestrainsdevelopingin worldfinancialmarkets.Between
mid-1967and 1969, the industrialcountriesfoundchangesin parityunavoidablein
practice-whateverthey may have thoughtabout them in theory.Three major
currencies alteredtheirpar valuesin thisperiod-the poundin late 1967,the French
francin mid-1969,and theD-markin late 1969,givingfreshrelevanceto thehistoric

2. Perhapsthe outstandingearlierreporton theseeventsis foundin RichardN. Gardner,

Diplomacy(New York: McGraw-Hill,expandededition,1969). An appraisalof
Sterling-Dollar
the 1956versionof the Gardnerbook can be foundin my review(Review of Economicsand
February,1958,pp. 94-96).
Statistics,
3. International
MonetaryFund,AnnualReport,1965,p. 12.
1218 The Journalof Finance
innovationat BrettonWoods: that a membercountrycould,subjectto international
review,choose to employexchange-ratepolicy to protectits domesticeconomic
stabilityfrombalance-of-payments disturbance.
Exchangerestrictions and use of Fund resources:Two powerfulinstruments for
improvingthe adjustmentprocessare associatedwiththe Fund4: the procedurefor
annualconsultation withmembers, and thetermsand conditions associatedwithFund
credits.
The annual-consultation proceduredevelopedout of theobligationof memberswith
restrictionsto consultannuallywiththeFund. These consultations, which"encompass
all aspectsof a member'seconomythathave a director indirecteffect on themember's
balance of payments"(p. 558), came to be regardedby membersas "oftenthe most
comprehensive international reportof its kind." As a result,the ExecutiveBoard
agreedin 1960 to authorizeannual consultations withall members,whetheror not
theyhad restrictions.
On Fund borrowings, theArticlesof Agreement did not spell out the conditionsof
access by members.Througha seriesof decisionsbetween1947 and 1952 that are
fullyreportedin thishistory,the conditionalcharacterand temporarydurationof
Fund lendingwere established.The descriptionof this gradualprocessis burdened
withtechnicalmaterialsof limitedgeneralinterest, but the end-product is important:
the gradualcreationof proceduresforan unprecedented multilateralsurveillanceof
the nationalpoliciesof borrowing countries.
Constitutional aspects: For theeconomist, theconstitutionalmaterialspreparedby
GeneralCounselGold in thelast six chaptersof the Analysistreatfamiliaractivities
in an unfamiliarway. The BrettonWoods systememergesas a radical innovation.
Exchangerates have become a matterof commonconcern,subject to international
scrutinyand endorsement, and membershave cometo acceptproceduresunderwhich
theirrepresentations can be challengedand specificeconomictargetscan becomea
conditionforcredits.
From the beginning, the new institutionproceededdelicatelyto establishin prac-
tice "the divisionof authoritybetweenthe Fund and membersin mattersthat were
exclusivelywithinthe domesticjurisdiction beforethe Articlestookeffect"(p. 564).
Practicalcompromises werealways soughtin whichconflicting pointsof view could
be accommodated, and potentiallydisruptivedifferences avoided.They have empha-
sized concurrence and accommodation, and avoidedrecourseto sanctions.
As a result,effective communication has been establishedconcerningthe policies
of borrowing countries.On the otherhand,"it is clear that the influencewhichthe
Fund or any otherorganizationcan exerciseon a surpluscountryis limited."5For
such countries,compliancewith the Fund's code of behaviordependslargelyupon
moral suasion and upon the country'srecognition of its longer-run self-interest.
This asymmetry should be recognizedas a failureof one of the Fund's most
audaciousinnovations:to createwithinthepaymentssystem,in thewordsof Keynes'
ClearingUnion,"an internalstabilizingmechanism,by whichpressureis exercised
on anycountrywhosebalanceofpayments... is departingfromequilibrium in either
direction."6For the sanctionsagainst creditorcountrieswritteninto the "scarce
currency"clause of ArticleVII weretoo severe: "it was not to be expectedthat the
Fund's customary cautionin applyingsanctionswouldbe relaxedin the case of sanc-
tionsas seriousas those. . . underArticleVII" (pp. 587-88). Gold adds (p. 588):

4. JacquesJ. Polak, "The PresentWorkingof the International

MonetarySystem,"speech
beforeJapanEconomicResearchCenter,January27, 1970 (mimeo.),p. 7.
5. Pierre-Paul "StampMemorialLecture,"London,December2, 1969(mimeo.),p. 9.
Schweitzer,
6. Vol. III, Documents,
p. 201 (Italicsin original).
 Book Reviews 1219
This has led someobserversto concludethatthe onlyprovision underwhicheffective
pressure couldbe appliedagainsta member thathas a substantial
and persistent
surplusin
its balanceof payments is sterile,and thattheinternational
adjustmentprocessis all the
weakerforthatloss.
On the otherhand,the surpluscountrieshave had a recordof cooperativebehavior.
They have not maintainedsurplusesby deflationary policies,or by restrictions
on
importsor on capital outflows.The Germans,in particular,also providedtemporary
palliativesto cushionthe effectsof theirreserveaccrualson othercountries.
VolumeIII
The last volumecollectsprimaryDocumentsrelatingto the institution. The basic
monetary plans fromthe 1940's are reproduced,
togetherwithan invaluableseriesof
questionsand answerson the InternationalMonetary Fund in which the U.S.
Treasurysoughtin 1944 to explainhow the new monetarysystemwouldwork.The
Fund's basic documents-theArticlesof Agreement and SelectedDecisions-together
withthe textsof major Fund pronouncements and of sevenmajor staffreports(on
internationalreservesand liquidity;on compensatoryfinancing;on quota increases;
and on the Special DrawingRightsfacility,and proposedchangesin Fund rulesand
practices)completethisreference volume.
Exchange-rate arrangements, economists, and otherinterestgroups
This modestrecordunderstatesthe achievements of the Fund as a majoradvance
in international cooperation.The Fund has become the central,althoughnot the
exclusive,institutionforinternational financialmanagement. It is now the principal
source forboth conditionaland unconditionalliquidityand is graduallyassuming
functions thatsuggestan emerging worldcentralbank.
Perhapstheoverriding contribution of thesevolumesis to underscore the enormous
experiencethisinstitution has accumulatedon mattersthat membershad previously
regardedas almost entirelywithinthe provinceof national decision-making. At
BrettonWoods, sovereigncountriesaccepted de jure "considerablelimitationson
theirrightto determinethe value of their. . . currencies"on the basis of "firm
internationalcommitments . . . administered by an international organization."7
These volumesdemonstrate howprofoundly the Fund agreementalteredexchange-
rate arrangements, something whicheconomistshave been slow to recognize.For the
exchangeratehas acquireda dual character. It is botha marketpriceand a negotiated
price.The professional literaturestressesthe role of exchangerates in clearingfor-
eign-exchange markets.Because exchangemarketsshouldclearin an orderlyfashion,
economists preferarrangements underwhichexchangevalues wouldfluctuateenough
to maintainbalance over time.An overwhelming professionalpreferenceformaking
shiftsin economicresourcesthroughmarketprocessesexplainsthe one-sidedsupport
economistshave givento flexibleexchange-rate systems.But thisemphasispays too
littleattentionto the international and intergovernmental characterof the par-value
systemas a formalcommitment now embodiedin the Fund's Articlesand in the
nationallaws of each member.
Economistswhohave challengedthepar-valuesystemwereconvincedthatit would
inevitablylead, in a worldof discordantnationalpolicies,to networksof controls
and financialcrises.However,theone-sidedacademicpreference forflexiblerateshas
been matchedby an equally one-sidedpreferencefor the par-valuesystemamong
government authorities, bankingofficials, and entrepreneurs.
7. J.Marcus
Fleming,TheInternational Fund:ItsFormsandFunctions
Monetary (Washington:
IMF, 1964),pp. 6-7.
1220 The Journalof Finance
Government and businessmen
officials have a revealedpreference forthe par-value
system,thoughfordifferent reasons.Government recognizethe exchangerate
officials
-asa keypricein theeconomyand a majortool of economicmanagement available to
them.They are reluctantto surrenderthis policyinstrument. Some also value the
commitment, in the par-valuesystem,to international cooperationand to a code of
good behavioron the part of sovereigncountriesin an interdependent world.8They
can also regardthe activationof the Special Drawing Rightsfacilitylast January
as a big step towardan orderlycreationof international liquiditysubjectto multi-
lateralagreement.
Supportof the businessand financialcommunity forthe par-valuesystemrestsin
partupon self-interest.Whyshouldentrepreneurs and bankersnot welcomethe shift
to the centralbank of a substantialpart of the exchangeriskassociatedwiththeir
foreigntransactions?
But thispreference forthepar-valuesystemas a systemamongpracticalmenand
officialsrests also upon broad principles.First, thereis a widespreadconviction,
especiallyamongconservatives, that "the maintenanceof a givenparityis probably
in most cases the most realisticand persuasiveobjectiveconduciveto the proper
management of an economy."9 Second,thesemenrecognizethat the interdependence
createdby thecontemporary revolutionsin communications, technology,and adminis-
trationextendsthe entrepreneur's horizonfar beyondany nationalmonetaryarea.
Entrepreneurs' marketing,production,and (to a lesser extent) financialstrategies
have a globalfocusthatcan onlyclash withconceptsof highlyflexibleexchange-rate
arrangements. That some of the most creativework in international economicsis
now beingdone underthe auspicesof graduateschoolsof businessadministration is
a spin-off fromthe corporateenergiesnow devotedto global economicintegration.
Compromise:limitedincreasein flexibility
Despite manydifficulties,the par-valuesystemestablishedat BrettonWoods has
survivedbecausepracticalmenhave notbeen preparedto abandonit. However,these
same men have had to recognizethat,until nationalpoliciesare more completely
harmonized,par values can not be as rigidas they had been prior to mid-1967.
Defendersof the par-valuesystemsee thatthe unwillingness of the industrialcoun-
triesto changepar values, even whenexperiencing protractedsurplusesor deficits,
createda growingthreatto that system.
This unwillingness to changeparitiesderivedmorefrompoliticalthan fromeco-
nomicconsiderations. in surpluscountrieswerereluctantto take fromtheir
Officials
exportersthroughan appreciationany part of the foreignmarketstheyhad obtained
in strenuousglobal competition.Politicalleadersin deficitcountriesoftenheld that
the competitivebenefitsof devaluationwouldbe outweighed by its domesticpolitical
disadvantages.
The series of shocksexperiencedin worldfinancialmarketsaftermid-1967,re-
markablefortheirseverityand variety,forcedofficials, entrepreneurs, and academic
economiststo seek waysof rendering processesof adjustmentmoreorderlyand more

8. For example,Roosahasstressedtheneedforone'sowngovernment to have"a senseofinvolve-

mentand responsibilityfortherateof exchangebetweenits currencyand thatof othercurrencies
in theworld"and the needto avoid a moveby countries toward"the advantagesof competitive
as was donethrough
to beggareach other'sneighbor,
depreciation, . . . a deterioration
the thirties
intocurrency blocs."MiltonFriedmanand RobertV. Roosa,TheBalanceofPayments:Freeversus
FixedExchangeRates (Washington: American 1967),pp. 82-83.See also the
Institute,
Enterprise
relatedarguments on pp. 49-51.
9. Speechby FinanceMinister Fukuduof Japanat FundAnnualMeetingin October1970.(See
Summary AnnualMeeting,1969,p. 32).
Proceedings,
 Book Reviews 1221
Over the past fewyears,academiceconomists,
effective. government entre-
officials,
preneurs,and bankershave focusedon the role of limitedexchange-rate in
flexibility
a par-valuesystem.Some of theseeffortsare availablein papersby academicecono-
mistsand bankersundertheauspicesof theBurgenstock groupand in materialsto be
releasedfromstudiesthe Fund was chargedto conductat the 1969 annual meeting
on proposalsforgreaterexchange-rateflexibility.
bycrisis"... orbyothermeans
"Adjustment
Underexistingpolicies,the par-valuesystemexperienceddisturbances in financial
marketson threeseparateoccasionsbetweenmid-1967and end-1968so seriousthat
some marketshad temporarily to be closed: duringthe devaluationof sterlingin
November1967; duringthe gold-market crisisin March 1968; and duringthe DM/
Frenchfrancdifficulties in November1968. Fortunately, did not pro-
the difficulties
duce a go-it-aloneunilateralismin national economicpolicies on the part of the
majorindustrialcountries.On the contrary, threeof thesecountriesalteredtheirpar
values afterinternational consultations and in accordancewithFund procedures:the
poundin 1967, the Frenchfrancin mid-1969,and the DM in October1969. These
decisions,togetherwithdomesticmeasuresintroducedto supportthem,help to ex-
plain the interludeof stabilityin international financialmarketssince the end of
1969. There was, in brief,relieffromwhat Emmingerhas describedas "the distor-
tionswhichtheinternational monetary systemsuffered becauseof thestubbornrefusal
of Franceand Germanyto adjust theirexchangeratesto reality."'10
The cooperativeresponsesof theindustrialcountriesduringthesecrisesconfirm the
value of the 20 yearsof cooperation in postwar monetary matters described in these
volumes.Jointconsultativeefforts, both throughand outsidethe proceduresof the
Fund, have producedunprecedented multilateral surveillanceover nationaldecision-
makingin international financialaffairs.
It is the establishment of proceduresforcooperationthat makesthe Fund an ad-
vance in internationalrelations; not because its membersyet agree on ways to
achieve and to maintaininternational economicbalance. There are no agreed and
effectiveproceduresforadjustment,and the deliberatecreationof reserveassets by
multilateral agreement has onlycommenced. The problemsof adjustmentand stability
in the world economypresenta never-ending series of challengesto the major
industrialcountries;as soon as advancesare made in dealingwithone set of them,
otherdifficultiesdevelop.The distinctive contribution of the Fund to thisprocesshas
been to providethe only code of good behaviorof juridicalvalidityin this field
and to be the repository of an accumulatingexperience,describedin thesevolumes,
drawnfromtheattemptsof its membersto cope withtheseproblemsas a joint enter-
prise.
In thisperiod,adjustment decisionstakenby majorparticipants have too frequently
been neglected,or postponed-on economicor politicalgrounds-untilconditionsin
financialmarketsreachedcrisisintensity. Yet thepar-valuesystemhas held together,
and neededchangesin par value have eventuallybeen made. The processof adjust-
menthas too oftenduringthepast 25 yearsbeen characterized as one of "adjustment
by crisis"ratherthanby orderlymeans.The processof "adjustmentby crisis"has
thusfar been effective in settinginto motionchangesin nationalpoliciesneeded to
reducestrainsin the worldeconomy,thoughonlyafterdelay and oftenin disorderly
ways. These tensionshave been resolvedconstructively only because the major
industrialcountrieshave approachedthem as a joint responsibility and have not

10. Dr. OtmarEmminger,

"StabilitythroughRevaluation," (HamburgNovem-
Intereconomics,
ber 1969,p. 341.
1222 The Journalof Finance
chosengo-it-alonepolicies.The industrialcountrieshave been willingto accept the
fact of economicinterdependence and to formulatecorrectivenational programs
broadlyconsistentwiththe rules of good behaviorestablisheda generationago at
BrettonWoods.
SAMUEL I. KATZ
BoardofGovernors
oftheFederalReserveSystem

Public Finance
IndustrialDevelopmentBond Financing:Businessand Community Experiencesand
Opinions.ALABAMA BUSINESS RESEARCH COUNCIL, in cooperationwiththe Center
forBusinessand EconomicResearch,Collegeof Commerceand BusinessAdminis-
tration,Universityof Alabama: 1970. Pp. xiii+ 132.
Possiblyno aspect of state and local government financehas been the object of
morepublic debate in recentyears than use of tax-exemptindustrialdevelopment
bonds (IDBs) to attractprivateindustry.The growthof theseinstruments in the
last fewyearshas been trulyphenomenal.As recentlyas 1960, new publicissues of
IDBs totaledonlyabout $47 million,but by 1968 sales of IDBs had soared to $1.6
billion.However,respondingto strongcriticismfromorganizedlabor, segmentsof
the businesscommunity, and manyeconomists, Congresspassed a seriesof measures
in 1968 severelylimitingthe tax-exempt statusof thesebonds.BeginningJanuary1,
1969, only IDB issues of less than $1 millionwere grantedtax-exemptstatus,al-
thoughunderspecial circumstances $1-to-5millionissues could also be exempted.In
addition,the SEC requiredthe listingof all public IDB issues exceeding$300,000.
The impact of these restrictions upon the volume of IDB financingshas been
dramatic.New publicissuesfellto only$48 millionin 1969, the lowesttotal forany
singleyearsince 1960.
The studyby theAlabamaBusinessResearchCouncilis an attemptto refuteseveral
criticismscommonly leveledat the IDB technique,based upon the resultsof a small
surveyof privatefirmsand local governments in Alabama.Amongthe more-common
criticismstargetedby theauthorsare that: (1) the availabilityof IDB financing is a
relativelyunimportant factorin plant-location
decisions; (2) IDB-financedfirmsare
generallyless desirablethanconventionally financedfirmsand are frequently marginal
operations;(3) use of thetechniqueresultsin a netloss of tax revenuesand weakens
local government; and (4) the techniquerepresents an inappropriateuse of public
funds.
The book is dividedinto seven chapters.The firstcontainsa summaryof findings
and thesecond,a briefhistoryof industrialbondfinancing. Later chapterssummarize
the resultsof surveysof Alabama businessfirmsand communities-bothusers and
nonusersof IDBs.
The availabilityof IDB financing is frequently regardedas a secondaryinfluence
on plant-location decisionswhencomparedto the availabilityof raw materials,mar-
kets, transportation, etc. The authorsargue,however,that the availabilityof IDB
financingcan be a pivotal factorin inducingnew industry,especiallywhen other
factorsare roughlyequal. Their surveyof Alabama firmsusing the IDB technique
foundthat approximately one-thirdof the respondentswere heavilyinfluencedby
the availabilityof IDB fundsin choosingAlabama fortheiroperations.Similarly,in
assessingthereasonsforchoosinga particularcommunity withinthatstate,about 60
per centof thefirmssurveyedplaced a highratingon thewillingness of local govern-
mentsto use IDBs.
The authorscontendthe annual rate of returnboth to Alabama and to the U.S.
 Book Reviews 1223
fromuse of IDBs has probably been"extremely favorable" whenimproved living
standards and multipliereffects
on incomeand employment are considered.At the
local level,theirsurveyof 28 Alabamacommunities-all frequent usersof IDBs-
showedno directevidencethatan excessive burdenhad beenincurred
financial by
thesecommunities fromusingindustrial bondswhengainsin incomeand property
valuesweretakenintoaccount.An impressive majority of local officials
surveyed
arguedthat: (1) taxeswerenotraiseddue to theentrance of IDB-financed firms,
and (2) thecommunity governmentswere"definitely" or "probably" in a stronger
position financially
becauseof thelocationof IDB-financed firms.
Unfortunately, thesamplesizesusedin thestudyare quitesmall,suggesting that
it wouldbe hazardousto expandthestudy'simmediate findingsintosweeping con-
clusions.Moreimportant, theauthors'relatievely
myopic viewofthesituation-based
almostentirely on Alabama'sexperience-leads themto ignoreseveralbroadques-
tionswhichmustbe considered inanycomprehensive appraisaloftheIDB technique.
For example, whileit maybe truethatIDBs inducemoreincomethanis foregone
-at leastin theshortrun-thepossibility of retaliationfromotherlocalitiesmay
outweigh any potentialincomegains.Secondly, whilelocal tax revenues mayrise
morethanexpenditures, IDB financings wouldappearto generate net benefitson
a nationalscaleonlyifsignificantfrictional
elements existwithin theprivatealloca-
tionprocess.Finally,the textfailsto considerthe potentialimpactfromincome
redistributionwhichnecessarilyresultsfromthesubstitution of state-subsidized
ac-
tivityforprivateactivity.
Whiletheselimitations shouldnotbe overlooked, thebookis persuasively written
and highlights thestrongarguments whichexiston bothsidesof theIDB contro-
versy.For thesereasons,the workof the AlabamaBusinessResearchCouncilis
wellwortha hearingby specialists in local economic development.
PETER S. ROSE
FederalReserveBankofDallas

The Bureauof theBudget.By PERCIVAL 1FLACKBRUNDAGE. New York: Praeger,

1970.Pp. xviii+ 327. $10.00.
It is likelythatfewpeopleare awareof theimportance of the Bureauof the
Budget(BOB) in thedecision-making processof thefederal government.This book
provides a comprehensive of theBureauand its rolein thebudgetdeci-
exposition
sionsoftheExecutive branchofthefederal government.The authoris PercivalFlack
Brundagewhoservedfortwoyearsduringthe Eisenhower Administrationas Di-
rectorof theBureau.He utilizeshispastexperience as BudgetDirector, as wellas
more-recent contacts withhissuccessors to givethereadera thor-
in thatposition,
oughpictureof theorganizational structureand functionaloperationof thispresi-
dentialadvisory body.
Brundage, an accountant by profession,presentsan extremelydetailedcoverage
of thesubjectmatter fashion.
in a clearlywritten In general,thebookmaybe de-
in nature.In turn,thisinstitutional
scribedas institutional is supple-
presentation
mentedby a description of thehistorical
development of a formalExecutivebud-
getaryprocedure in theUnitedStates-a development thatoccurred muchlaterin
thiscountry thanin otherWestern nations.The bookdoesnot followa
industrial
basic"economic" approachto thebudgetas wouldbe trueof a studyin theoretical
publicfinance(public-sector economics).Instead,the primary focusin upon the
"financialmanagement" of thebudget,in a technicalsense,ratherthanuponthe
and stabilization/growth
distributional,
basic allocational, functionsof the public
1224 The Journal
of Finance
sector.Nonetheless,thosereferences that do relate to basic economicconceptsare
presentedin a competentmanner.The approachused by the authoris consistent
withhis trainingand experience. The book, of course,may servea numberof useful
purposesotherthan that of providingan analyticaleconoomic approach to federal
government budgeting.
The firsttwo chaptersrelate the historyof federalgovernment budgetingfrom
the beginningof the AmericanRepublicuntil the present.The thirdchapterpro-
vides an overviewof the role of the Bureau of the Budgetas it existstoday.Then,
Chapters4 through7 describetheoperationalnatureof federalbudgetaryprocedure,
and the role of BOB, in detail.This includesbudgetpreparationpriorto submission
to Congress(Chapter4); the management of the Bureau includingefforts to apply
the Planning-Programing-Budgeting (PPB) technique(Chapter 5); the interaction
betweenBOB and Congress(Chapter6), and the Bureau's coordination and use of
statisticalsourcesin Chapter7. Chapters8 through10 shiftattentionto a detailed
descriptionof the primaryexpenditure categoriesin the federalbudgetand the ac-
tivitiesof BOB relativeto each category.Chapter11 providesa discussionof Bureau
relationships withthe Executivecircleof the President,stateand local governments,
and thegeneralpublic.The last chapter(Chapter12) presentsan analysisof budget
trendsand concludeswith a set of "offthe cuff"policy recommendations by the
author.Finally, the book offersfourappendicesand a bibliographyof references
pertainingto BOB. The appendicesdescribe: (1) career opportunitieswithinthe
Bureau, (2) principalstatutesrelevantto the Bureau, (3) pertinentregulatory or-
ders,and (4) a list of Directorsof BOB sinceits inceptionin 1921.
This reviewer,thoughgenerallyaware of the extremecomplexityof the federal
budgetaryprocess,was deeplyimpressedby the documentation of this complexity
presentedin The BureauoftheBudget.Importantly, the enormousdemandsplaced
on the timeof the President,and the subsequentneed to screenthe ChiefExecutive
froma multiplicity of details,leads inevitablyto a strongdependenceon the recom-
mendationsof variousadvisorybodies withinthe ExecutiveOfficeof the President.
None of theseadvisorygroupsis in a morecentralpositionto influencebudgetary
policy than is the Bureau of the Budget.Indeed, top personnelof these advisory
institutionsare in a uniquepositionto influence policyprioritiesas well as the bud-
getarytechniquesemployedto attain policy goals. Yet, the criticalquestionmust
be asked: Are theseadvisoryinstitutions properlyresponsivein an objectivemanner
to the collectiveconsensusof the public on an issue, or mighttheyconceal undue
subjectiveevaluationin the condensedinformation that theyprovideto the Presi-
dent forhis decision?As this reviewwas written(mid-1970),a new Officeof Man-
agementand Budget was createdby PresidentNixon. This officeencompassesthe
Bureau of the Budgetand centralizesresponsibility, directlybelow the President,in
the Directorof the new office.Hopefully,this may allow a moreefficient meansof
appraisingsocietalpreferences on budgetaryissues.
In conclusion,this book presentsa detailedaccount of the formulation and im-
plementation of the federalbudgetby the Executivebranchof the government. The
writtenpresentation is at timestedious,due to an overlydetailedpresentation of
irrelevantfacts.Moreover,repeateduse of the firstpersonby the authormay ir-
ritatesome readers.Yet, the book accomplishesits purpose! That is, it providesa
comprehensive pictureof the operationof the Bureau of the Budgetin a financial
accountingsenseand, in addition,providesample evidenceof the policymaking role
of theBureau.Moreover,althoughthebook is extremely detailed,Brundagemanages
to extracta synthesisof the essentialpointsand issues involvedin the complexin-
stitutionalarena of federaldecision-making. The authoris direct,objective,and non-
 Book Reviews 1225
partisan.In short,the book shouldserveas a primaryreference forthoseinterested
in knowingmoreabouttheinstitutional natureof federalbudgetdecisionsin theExec-
utivebranch.
BERNARD P. HERBER
of Arizona
University

by theNATIONAL
ValueAddedTax (VAT). A report OF-
DEVELOPMENT
ECONOMIC
Office,1969. Pp. vi + 98. lls.
FICE. London: Her Majesty'sStationery
This is the secondmajor studyof the value-addedtax conductedby the British
government.' VAT concernsitselfmuchmorewiththe unique fiscalsituationexist-
ing in GreatBritainthandid the firststudy.
VAT is dividedinto six chapters:
1. Introduction,summary, and conclusions;
of a value-added
2. Generalcharacteristics tax;
ofUK taxation;
3. Characteristics
4. VAT in Europe;
5. A value-added taxin theUK:
6. Industrialviews(Summary questionnaire).
of repliesto theindustrial
The discussionis basicallynontechnicalbut makesconsiderableuse of illustrative
schemesand examples.The major aim of explainingand illustrating the economic
impactof VAT under different assumptionsabout prices,wages and profits,taxes
replaced,and extentof coverageis kept clearlyin mind.Complicatedand vague in-
cidenceand economicflow-through analysesare avoided.Althoughgeneralreference
is made to the impactof VAT as introducedin WesternEurope, detaileddata are
not utilized.
The generalconclusionof the findings relativeto the use of VAT in the UK is a
weak "go ahead." The earlierRichardsonstudyhad recommended againstthe adop-
tionof VAT by the UK. It is generallybelievedthatif the UK entersthe European
EconomicCommunity(EEC), one requirement will be the adoptionof VAT within
a five-yearperiodat a rate of 10 to 15 per cent.
Althoughthe theoreticalconceptionof VAT allows for no exemption,and as a
matterof fact,only partial exemptionis possible under the administrative proce-
duresutilizedby Europeanusersof VAT, legislativeexemptions have been provided
in all countries.The exemptionlist is shortestin Denmark,Sweden,and Norway.
All nationshave exemptedthe liberalprofessions:accountants,architects,etc. The
major broad-sectorexemptionused by all nationsrelates to financialinstitutions.
These institutionsremainsubjectonlyto special taxesdevelopedin each nation.The
use of exemptionsand multiplerates increasesvery substantiallythe administra-
tive burdenof VAT. However,despitedifficulties arisingfrompoliticallyimposed
multipleratesand exemptions, "None of the European countrieswhichhave intro-
duced a VAT recentlyappear to have experiencedany insuperableadministrative
problems"(p. 33).
The Danish administrative proceduresare extremelysimple,and Danish VAT
coverageis also the most complete.The authorsfavorthe use of the Danish ap-
proach,whichincludestax and social-security compensation adjustmentsforlowest-
incomereceivers.
In discussingthe impactof the introduction of VAT on prices,it is pointedout

1. Seereviewof Reportof theCommittee on TurnoverTaxationby theRichardsonCommittee,

Journalof Finance,September1965,pp. 569-570.
1226 The Journalof Finance
that in Germanyduringthe firstsix monthsof 1968 (the GermanVAT was intro-
duced on January1, 1968), pricesincreasedby 0.9 per cent and that this increase
"is believedto have had littleto do withthe introduction of VAT" (p. 40). In both
Denmark and The Netherlandsprices increasedsharplyafterthe introduction of
VAT. Because of income-taxconcessionsand increasedallowances,discontentwas
not seriousin Denmark.In The Netherlandsonly 1.5 per cent of the more than
5 per cent price increase"was thoughtto be directlyattributableto the VAT" (p.
40).
The Gini coefficientsof incomeinequalityaftertheimpactsof the presentUK tax
systemand benefitsare comparedwiththe situationthat would exist undera flat
10 per centVAT exempting food.It is concludedthat the additionalincomeinequal-
ity introducedcould be corrected"by way of quite small adjustmentsin direct
benefitssuch as pensionsor familyallowances"(p. 61).
A principaladvantageof VAT, particularly over the corporateincometax in the
area of international commercial transactions, is seen by theauthorsof VAT to arise
fromthe switchaway fromcountry-of-origin taxes
taxes to country-of-destination
which "changes the relative profitability, after tax, of home and export sales"
(p. 70). However,industry surveyscompleteddid not bringforthoptimistic industry
commentson the international-competition aspects of VAT. The generalcomments
elicitedremainedas pessimisticas thosereceivedfiveyears earlierby the Richard-
son Committee. It was the generalopinionof Britishindustrythat the introduction
of VAT (refundedon exports)wouldnot increaseexports(bordertax on imports)or
decreaseimports.Much of UK industrialists' unfavorableattitudetowardVAT arose
fromtheircomparisonof the desirability of introducing VAT or of keepingthe pur-
chase tax and the selectiveemployment tax (SET). The distributive tradesbelieved
it wouldbe easierto pass on VAT in higherpricesthan is truewithSET (p. 97).
In the reviewer'sopinion,it is to the creditof the authorsof VAT that although
theybenefitedfromindustryopinion,theydid not permitthis opinionto dominate
theirreportas it had thatof the Richardsongroup.For example,in additionto the
international-trade difference in opinion,the advantagesof a low-rate,broad-based
tax overa high-rate, narrow-based tax are consideredsympathetically despiteindus-
trydoubts (pp. 59-60).
The authorsexaminea VAT proposalsimilarto that recommended by an Amer-
ican businessgroup,i.e., low-rateVAT to permita modestdecreasein the corporate
tax rate.2For administrative reasonsand because the large unincorporated sector
and nationalizedindustrieswould not benefitfromthe reductionof corporatetaxes,
theyrecommend againstthis typeof action (p. 58).
The methodchosento administerVAT is of sufficient importanceto justifycon-
siderableattention.
EuropeannationsusingVAT employthe"invoice"method.This procedurerequires
the invoicingof VAT on each sale. The amountof VAT carriedon invoicesof pur-
chasesis deductiblefromVAT liabilityof a firm,and if greaterthanVAT liabilities,
the firmreceivesa paymentfromthe Treasury.This is also called the "tax from
tax" method.
The procedurefavoredby Britishindustryand used in Michiganin theirBusiness
ActivitiesTax (a typeof VAT) is called the "accounts"method.Under thisproce.
dure the tax is leviedon the difference betweenpurchasesfromotherfirmsand total
taxable sales. This is also called "sales less purchases"method.This procedurebe-
comescomplicatedor injusticesresultif some productsare exemptor taxed at lower

2. CommitteeforEconomic A BetterBalancein FederalTaxes on Business(New

Development,
York: CED, 1966).
 Book Reviews 1227
rates. It is also truethat it does not providethe built-inanti-avoidanceassistance
that existswhenonly the VAT includedin invoicesbecomesdeductible.The pres-
sure for tax-rateuniformity and completecoverageis also sharplyreduced,as is
the accuracyof the level of tax refundson exports.it is also true the "accounts"
approachdoes not providethewonderful economicdata thatcan be gleanedfromthe
"invoice"procedure.Nevertheless, whenand if VAT is adoptedin the UK and also
in the US and Canada, I am afraidour inexperience withturnovertaxes will result
in use of the less-desirable"accounts"method.
This Report'sanalysisof the value-addedtax is highlyrecommended foranyone
interestedin understanding a tax that is rapidlybecomingthe mostproductivein
the world.Also,I believethat the authoritative natureof this studywill finallyput
to rest the use of the acronymTVA (la taxJsur la valeurajointge) by English-
speakingpeople to representthe term,value-addedtax.
RicEAR W. LINDHOLM
ofOregon
University