A NOTE ON THE CAUSES OF INSTABILITY IN THE MONEY SUPPLY

Abstract

ECONOMISTS HAVE REPEATEDLY pointed out that the supply of money is inherently unstable because its major component, bank demand deposits, is determined basically by the volume of banks' earning assets. It has been suggested that a stabilizing force has been introduced by the shift over the past twenty years in the character of earning assets. Now that banks hold large amounts of government securities the money supply should be less unstable than under conditions where loans constitute the bulk of earning assets.' Postwar experience lends some support to this view. Loans of commercial banks expanded greatly, but adjusted demand deposits show a much smaller growth in part because of offsetting changes in bank investments in government securities. However, other forces are also at work. The supply of bank-created money is not governed precisely by the movements of the combined total of loans and government securities held by commercial banks. This may be shown by use of a new set of statistical data provided by the Board of Governors of the Federal Reserve System. These data, in the form of a Consolidated Condition Statement for Banks and the Monetary System, bring together all the factors operating to produce increases and decreases in the money supply.2 Although monthly data are currently published in the Federal Reserve Bulletin, in this note quarterly data have been used because published monthly data extend back only to April, I948.3 The purpose of this