methods and institutions to cure the evils of monetary management. Some
experiments have also been made, but thought in this sphere, as in many others
in ...
October 9, 1954
THE ECONOMIC WEEKLY
Skeleton
D ISSATISFACTION
w i t h the way in w h i c h governments a n d central banks have managed monetary policies is of long standing. A n d this dissatisfaction has, over the last century certainly, provided an incentive to many active minors to t h i n k out novel methods and institutions to cure the evils of monetary management. Some experiments have also been made, but thought in this sphere, as in many others in economics, is many decades ahead of action. One such scheme that has never been tried out is the ' Commodity Reserve C u r r e n c y ' , first formulated in a methodical manner by Prof Grah a m almost three decades ago. Since then, it has been discussed by countless individuals and institutions but it is rather strange that the i m provements that have been made are of the nature of frills; the basic difficulties of the scheme do not appear to have been brought any nearer to solution. The United Nations report Commodity Trade and Economic Development has also devoted a f u l l chapter to this scheme, but it still appears as remote from practical politics as it was when Prof Graham formulated i t . W h a t is more, it is perhaps further removed from the realm of practicality w i t h the very considerable difficulties that inconvertibility presents today, a difficulty which d i d not trouble over much the monetary theorists of the twenties a n d thirties. T h e UN report goes into the matter at considerable length p o i n t i n g out the many drawbacks of the scheme as it is known today, but it is encouraging that the authors commend the scheme for further serious study by institutions, not excluding universities. As one of the world's most i m p o r t a n t producers of at feast four of the basic commodities w h i c h any scheme of Commodity Reserve Currency w i l l include in a l l probability, viz, rice, wheat, barley and cotton, the scheme should receive attention i n this country w h i c h i t has not done so far. In its fundamentals, the scheme envisages buying and selling, i n definitely, at a pre-determined price range, a " b a s k e t " of perhaps a dozen standardized commodities. T h i s w o u l d tend to keep the composite price of the basket w i t h i n the limits fixed, while it w o u l d leave
i n the C u p b o a r d
complete freedom for the prices of i n d i v i d u a l commodities m a k i n g up the basket to move up or down in response to supply-demand conditions affecting them in their respective markets. T h e objectives are many—- to stabilise the price of the basket would to a large extent tend to stabilise the income of the producers of the commodities included in the basket, and judging from the nature of those commodities, this is believed to have the potentiality of stabilising to a certain extent the incomes of a very large sector of w o r l d population. This in turn w o u l d tend towards a more regular buying of the products of other sectors of human activity, and those other products w o u l d also tend to have their prices less subject to cyclical variations. The authors of the scheme also felt that any measure w h i c h tended to reduce the swings of price and income in the primary producing sectors of the w o r l d economy w o u l d at the same time tend to i m p a r t a greater measure of regularity to capital format i o n in those sectors. Last, but not the least, by this scheme it is also hoped to rob the monetary authorities of some of their independence w h i c h is alleged to be responsible for many of our economic misfortunes. A Commodity Reserve Currency w o u l d at least be the coffin for managed currency though others w i l l have to be co-opted to drive the nails once a n d for all. T h e school of liberal thought can f o l d their hands up to heaven a n d say ' A m e n '. Prof F C M i l l s , the celebrated economic statistician, submitted a memorandum to the authors of the UN report on this scheme. It was a short note and restricted to t w o questions w h i c h were p u t to Prof M i l l s , namely, the possible effect of a stabilisation scheme ( a ) on the prices, in relation to each other, of commodities included in the stabilised basket, and ( b ) , a n the price levels—both absolute a n d relative— of other important p r i m a r y commodities not included in the basket. These questions were to be considered assuming that the scheme was adopted on an international basis, that the prices to be stabilised were prices in international trade and not necessarily domestic prices, a n d that the basket w o u l d include only some major agricultural products, and specifically the most i m 1119
portant grains a n d cotton, wool and sugar. Prof M i l l s gave a generally favourable verdict, and his conclusion was that both w i t h regard to cyclical as well as long t e r m trends, such a scheme w o u l d provide a healthy stabilising influence. It would of course be doing Prof M i l l s injustice if this short note were to be treated as being his considered opinion. But he drew on his long experience of research on price behaviour. It is here that a more cautious note could perhaps have been struck. I think it was Fellner who in his Monetary Policy and Full Employment made a very significant point which many statisticians have ignored, namely, that price behaviour, as we know f r o m the study of past periods, has been influenced predominantly by various cyclical and long term factors—the influence of major policies aimed at deliberately stimulating or depressi n g the workings of the economic system has been almost negligible. H o w prices w o u l d behave if such deliberate steps are taken is an issue on w h i c h , methodologically speaking, very little guidance can be had f r o m past experience. It is not as if a mere arithmetical subtraction of the cyclical or seasonal variations from the long term trends w o u l d leave other things more or less u n changed. This is a gap in our knowledge w h i c h is not often recognised. Ceteris paribus is a most dangerous assumption to make here. But that apart, the scheme has to be modified on three other scores— the lack of f u l l convertibility, wide variations in the elasticity of supply of the basket commodities, and the repercussions on the scheme of national stabilisation policies. Unless convertibility is achieved, t h e scheme cannot work except of course when it is financed wholly by dollars. T h e UN report goes i n t o a rather tortuous argument to show the feasibility of the scheme under national management. B u t this may not convince every one. T h e reference to the elasticity of supply arises from the fact that not only is the elasticity l i m i t e d by technical factors for certain commodities, but the wide variations of production caused by natural factors is also likely to influence the scheme in a manner w h i c h w i l l make us operation difficult. If prices of one or more commodities in the basket show very wide fluctuations and
October 9, 1954 their weightage in the total composition of the basket is not inconsiderable, such fiuc aations w i l l i n fluence the composite index of the basket and force the authorities, to enter the market when supply-dem a n d position of the other commodities docs not warrant such a step. This point connects up w i t h the t h i r d factor I mentioned above,
THE ECONOMIC WEEKLY namely, the national stabilisation measures. It is not possible to say unequivocally that national measures are prejudicial or otherwise to the running of the international scheme. Both Prof M i l l s and the UN report make certain references to the influence of the scheme w i t h regard to long term trends of prices and the allocation of economic re-
sources between different commodities. This is a very v a l i d enquiry, but I am sceptical of the economists and statisticians being able to say anything of much value on this point. Discussion at this stage can concentrate fruitfully on the repercussions of the scheme on cyclical price movements.
