The Effect of Income Expansion on the Quantity of Money

Abstract

T HERE IS AMPLE theoretical and empirical evidence that income expansion and inflation are often associated with increases in the money supply. Since, as a rule, monetary statistics are readily and currently available while inflationary pressure is a concept that is hard to measure, it has become customary to accept monetary statistics as reliable indicators of inflation and deflation, of expansion and contraction. When it is observed that the money supply in a country is rising, it is inferred that expansionary factors must be at work and that antiinflationary policies should be introduced. Likewise, when the money supply declines, it is inferred that contractionary forces are more powerful and that anti-inflationary policies can safely be relaxed or reversed. In its Annual Reports for 1951 and 1952, the Netherlands Bank has drawn attention to a different relationship between inflation and the money supply, with particular reference to countries with an open economy. "The course of events during 1950 and 1951 showed clearly that, in the conditions which exist in the Netherlands, a decrease in the volume of money may be a symptom of inflationary strains; while on the other hand an increase in the volume of money may show that there is a movement in the direction of disinflation."' More specifically, the period from the latter part of 1950 through the first half of 1951 was without doubt one of inflation in the Netherlands; but the money supply fell in the fourth quarter of 1950 and in the first two quarters of 1951. The economic position was reversed around the middle of 1951, and the second half of that year, as well as the whole of 1952, was characterized by disinflationary or mild deflationary conditions; during that period the money supply consistently rose. It appears, then, that the direction of change in the quantity of money