The Contribution of a Monetary History of the United States: 1867 to 1960 To Monetary History

Abstract

in addition to Phillip Cagan's Determinants and Effects of Changes in the Stock of Money, 1875Money, -1960Money, (1965)), several journal articles including 'Money and Business Cycles" (1963b).The theoretical background of the project is the modern quantity theory of money (Friedman, 1956).Based on the interaction of a stable demand for money with an independently determined money supply, the key proposition of the modern quantity theory is that a change in the rate of growth of money will produce a corresponding but lagged change in the rate of growth of nominal income.In the short run changes in money growth lead to changes in real output.In the long run, monetary change will be fully reflected in changes in the price level.Long-run historical evidence for the modern quantity theory of money is provided in A Monetary History of the United States: 1867-1960, short-run cyclical evidence in "Money and Business Cycles" and long run econometric evidence in Monetary Trends.A Monetary History of the United States 1867-1960 (1963a) is a study of the quantity of money and its influence on economic activity in the U.S. economy over nearly a one-hundred-year span, marked by drastic changes in monetary arrangements and in the structure of the economy.The principal finding is that changes in the behavior of money are closely associated with the rate of change of nominal income, real income and the price level.Secularly a close relationship between the growth of money and nominal income, independent of the growth of real income is found.Cyclically a close relationship is isolated between the rate of change of money and of subsequent changes in nominal income.The authors also find a number of remarkably stable relationships between money and other economic variables.These include: (a) that velocity exhibits a steady secular decline of a little over one percent per annum until after World War II; (b) that the relationship between U.S. prices and prices in other countries, adjusted for the exchange rate, changed little over the period, evidence of the strength of the purchasing-power-parity theory.However, of most interest are the findings from history that the money- income relationship is invariant to changes in monetary arrangements and banking structure.These changes are captured in the arithmetic of the proximate determinants of the money supply.Over the long run, high-powered

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