On Finding Determinants of Money-Stock Cycles

Abstract

THE PUBLIC CAN ALTER the money stock by exchanging currency for bank deposits or bank deposits for currency. In a study that is related toA Monetarw History by Friedman and Schwartz [3; 2, p. xxvii] and that is still cited in reference to the determination of money-stock cycles, Phillip Cagan found that these actions by the public regarding its currency and bank deposit holdings were an important source of cycles in money stock [2, p. 26]. For all eighteen money-stock cycles he analyzed, movements in the currency ratio accounted for 46 percent of cyclical money-stock movement. For six nonwar cycles from 1918 to 1953, it accounted for 56 percent of that movement. Given the stress that Cagan placed on currency as a cause of money-stock cycles, it is intriguing that other studies of money-stock determination since Cagan's have not concluded that the public's currency-deposit decision is a major source of money-stock instability [ 1, 4, 5, 6, 7]. There are at least three possible reasons for this discrepancy. First, many of Cagan's results are based on data from 1865 to 1953. It may be that there were shifts in the public's currency behavior as a result of institutional changes such as the establishment of the FDIC; thus, Cagan reported a phenomenon that is no longer important. 1 Second, it may be that currency plays an important role in cycles of the