The Postwar Rise in the Velocity of Money: A Sectoral Analysis

The Postwar Rise in the Velocity of Money: A Sectoral Analysis

The Postwar Rise in the Velocity of Money: A Sectoral Analysis

The Postwar Rise in the Velocity of Money: A Sectoral Analysis

Excerpt

Except for brief and mild declines during business contractions, the velocity of money in the United States (i.e., the ratio of the volume of expenditures to the stock of money) has increased steadily since the end of World War II. This is true for concepts of money that include and exclude time deposits and for such differing concepts of expenditures as total non-financial payments, debits to demand deposits, and the several variants of national income. Further more, it is true for most other prosperous economies as well.1 By 1957, a measure of one income-velocity concept in the United States --the ratio of annual GNP to total demand deposits plus currency-- reached a level not experienced since 1931 (Chart 1).

A persistent peacetime rise in income velocity is unique in American history. Indeed, the trend of the income velocity of total deposits plus currency was clearly downward for several decades prior to World War II.2 Postwar velocity behavior is all the more puzzling because the major factor thought to be responsible for the earlier downward trend--advancing per capita real income--has continued to operate since the end of the war.3

This paper has two objectives: to explain the upward trend in velocity since 1946 and to develop a sectoral approach to velocity analysis. One way to pursue the first goal is to relate velocity to a few measurable variables, such as interest rates, yields on money substitutes, and real income per capita. In a study of the 1919-51 period, I computed relationships of this sort yielding high multiple correlation coefficients.4 However, these regression equations have performed poorly for later years.

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