The Demand for Money: Some Theoretical and Empirical Results

IN COUNTRIES experiencing a secular rise in real income per capita, the stock of money generally rises over long periods at a decidedly higher rate than does money income. Income velocity-the ratio of money income to the stock of money-therefore declines secularly as real income rises. During cycles, to judge from the United States, the only country for which a detailed analysis has been made, the stock of money generally rises during expansions at a lower rate than money income and either continues to rise during contractions or falls at a decidedly lower rate than money income. Income velocity therefore rises during cyclical expansions as real income rises and falls during cyclical contractions as real income falls-precisely the reverse of the secular relation between income and velocity. These key facts about the secular and cyclical behavior of income velocity have been documented in a number of studies.2 For the United States, Anna Schwartz and I have been able to document them more fully than has hitherto been possible, thanks to a new series on the stock of money that we have constructed which gives estimates at annual or semiannual dates from 1867 to 1907 and monthly thereafter. This fuller documentation does not, however, dispel the apparent contradiction between the secular and the cyclical behavior of income velocity. On the contrary, as the summary 1 This paper reports on part of a broader study being conducted at the National Bureau of Economic Research by Anna J. Schwartz and myself. I am indebted to Mrs. Schwartz for extensive assistance and numerous suggestions in connection with the present paper. This paper has been approved for publication as a report of the National Bureau of Economic Research by the Director of Research and the Board of Directors of the National Bureau, in accordance with the resolution of the board governing National Bureau reports (see the Annual Report of the National Bureau of Econonmic Research). It is to be reprinted as in the National Bureau's series of "Occasional Papers." 2 See in particular Richard T. Selden, "Monetary Velocity in the United States," in Milton Friedman (ed.), Studies in the Quantity Theory of Money (Chicago: University of Chicago Press, 1956), pp. 179257; and Ernest Doblin, "The Ratio of Income to Money Supply: An International Survey," Review of Economics and Statistics, August, 1951, p. 201.