The Behavior of the Consumer Money Supply since World War II

Abstract

HE object of this paper is to analyze the behavior since World l War II of the portion of the money supply owned by consumers and nonprofit organizations. Estimates of changes in currency and demand-deposit holdings of consumers, business firms, government and financial institutions have been incorporated into a relatively new system of social accounts whose main purpose is to integrate product and financial flows. The publication by the Board of Governors of the Federal Reserve System in 1955 of annual, and in 1959 of quarterly, flow-of-funds accounts provides a tentative basis for a more detailed analysis of the behavior of the sectoral distribution of the money supply. The attempt by the Federal Reserve to disaggregate the money supply by institutional sector within a consistent and interlocking system of social accounts represents an important innovation in applied monetary analysis. Heretofore, monetary analysis has been conducted within the statistical framework of either a simple two-sector quantity equation model, the banking or monetary sector and the rest of the economy, or a multisector Keynesian model where the monetary sector is all but eliminated in the income accounts. Neither approach seems to have been conducive to a detailed description and interpretation of the ex post behavior of the money supply of a specific institutional sector. The first part of the paper will describe briefly the observed behavior of the consumer money supply since World War II. In the second, I analyze the determinants of the ex post behavior of the consumer money supply. In the final section I show that Friedman's grounds for rejecting a shock-absorber theory of changes in consumer cash balances are inadequate. I present an alternative shock-absorber theory and subject it to a crude test.