THE QUANTITY OF MONEY, GROSS NATIONAL PRODUCT, AND THE PRICE LEVEL: SOME INTERNATIONAL, COMPARISONS
| Date | 01 February 1961 |
| Author | A. E. Holmans |
| DOI | http://doi.org/10.1111/j.1467-9485.1961.tb00147.x |
| Published date | 01 February 1961 |
THE
QUANTITY
OF
MONEY,
GROSS
NATIONAL
PRODUCT, AND
THE
PRICE
LEVEL:
SOME
INTERNATIONAL, COMPARISONS
THE
Radcliffe Committee’s contention that
‘
the whole liquidity posi-
tion
’I
and not just
‘
the quantity
of
money
’
as conventionally defined
is what matters
for
monetary policy has been the most vigorously
criticised of all the contentions in their report. Their downgrading
of
the importance
of
the quantity of money was the more contro-
versial in that it followed a period
in
which emphasis on control of
the quantity of money had become very marked in the United King-
dom. Nowhere did this emphasis appear
more
strongly than
in
the
speeches
of
the then Chancellor
of
the Exchequer, Mr. Thorneycroft.2
The RadcliRe Committee’s view has been vigorously disputed both
by academic economists and by others who look on the quantity of
money as an economic variable which it is very important (and
in some views all-important) to control. This paper will examine the
way in which the quantity of money is believed to influence the volume
of
monetary expenditure, and in the light of this evidence consider the
view that control of the quantity of money
is
the most suitable formu-
lation
of
the task
of
monetary policy.
It
will also survey changes in
the quantity
of
money and changes in gross national product at current
market prices and the price level in twelve countries
of
Western Europe
and North America.
If
the quantity
of
money
is
the critical factor in
the determination
of
the general price level, there should be a fairly
close association between changes in the quantity
of
money and
changes in the price level and changes in
G.N.P.
at market
prices.
THE
VELOCITY
OF
CIRCULATION
Monetary policy operates on the level
of
aggregate demand through
influencing the volume
of
monetary expenditure. For control of the
quantity of money to be a useful technique
of
economic policy, there-
fore, and
still
more
to
be
the all-important control that Mr. Thorney-
‘Committee on the Working
of
the Monetary System,
Report
(Cmnd.
827),
para.
389.
aFor
example:
‘we
are not prepared
to
finance inflation. We do not
intend
to
supply the
cash
for
an upward spiral
of
costs
and prices.
We
have
planned to put a limit
on
the supply
of
money. Our policy
goes
to
the
root
of
the problem.
It
tackles themain source
of
inflation, which is the supply
of
money.’ Speech on
10th
October,
1957;
cited in
H.
C.
Deb.
Vol.
614,
col.
598.
28
THE
QUANTJTY
OF
MONEY
29
croft held it to be, the
link
between the quantity
of
money and
the volume
of
monetary expenditure must
be
reasonably stable or
predictable. This link
is
usually expressed in terms
of
the ‘income
velocity of circulation
’
or the ratio between the quantity
of
money
(as
conventionally defined) and the national income
or
(sometimes)
gross
national product
at
market prices. Total income and
final
expenditure
are measureable whereas
PT
(in
the identity MVrPT)
is
not. The
ratio designated as
V
is calculated
ex
post,
and
is
not
the less useful
on that account; all economic analysis working with numerical data
must necessarily be
ex
post.
On
the meaning and content
of
this
ratio,
which
is
another way
of
saying the connection between the quantity
of money and the flow
of
expenditure for goods and services, most of
the recent controversy has turned.
The Radcliffe Committee’s much-criticised rejection
of
the quan-
tity
of
money as the focus of monetary management arose from
‘
the
haziness
of
the connection between the supply
of
money and total
demand,’3 specifically the very wide variations in the velocity
of
cir-
culation
in
recent years. The Committee held that
V
is a purely
ex
post
statistical concept
‘
that tells us nothing directly
of
the motivation
that influences the level of total demand,’4 than is to say, that changes
in the
ratio
of total expenditure to the quantity
of
moneyhaveno causal
significance. Demonstration that
V
has risen may mean nothing more
than that monetary expenditure has gone
on
rising while the quantity
of money has risen less
or
not at all.
No
enlightenment has been gained
about why monetary expenditure has gone
on
rising, or about the ex-
tent to which the rise
in
monetary expenditure was greater than the
rise
in real output, and why.
The Committee’s view that
the
concept of velocity gives
no
insight
into the decisions to spend which account for the increase in monetary
expenditure was soon challenged. Sir Dennis Robertson wrote
:
D
‘the Committee omit to mention that the velocity, the ratio
-
M
(i.e. monetary demand divided by the quantity of money, or the
income velocity) is simply the inverse of the ratio
-,
the desired
ratio
of
money stock to income,
a
concept in terms
of
which most
English monetary theory from Marshall to early Keynes and be-
yond has been phrased
’.5
If
changes in the income velocity
of
circulation really do in any
meaningful sense reflect changes
in
the desired ratio
of
money balances
M
D
sConunittee on the Working
of
the Monetary System,
Report,
para. 523.
4
Op.
cit., para. 391.
6
‘A Squeak
From
Aunt Sally.’
The
Banker,
December 1959, at pp. 719-
20.
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