The Demand for Currency Relative to Total Money Supply

By Phillip Cagan | Go to book overview

THE DEMAND FOR CURRENCY RELATIVE TO THE TOTAL MONEY SUPPLY1

PHILLIP CAGAN

University of Chicago

THE public's demand for currency as a fraction of the total money supply has long interested economists as well as bankers. Under fractional- reserve banking, a withdrawal of deposits in (non-bank) currency reduces bank reserves and, unless reserves were previously in excess of the desired level or are otherwise replenished, forces a multiple contraction of earning assets and deposits. A deposit of currency augments bank reserves and allows a multiple expansion of earning assets and deposits. Thus the public's conversion of its cash balances from one form to the other, if not offset by other factors, alters the aggregate amount of the money supply as well as its composition. This effect on the money supply, unlike changes in bank reserve ratios or issues of Treasury and Federal Reserve money, is not subject to direct control by the monetary authorities. However, it can be offset by appropriate open market operations of the central bank and so is an important consideration in planning monetary measures.

There has been a good deal of speculation about the factors that underlie the demand for currency, but empirical inquiry has been limited chiefly to seasonal variations in demand because adequate data covering a long period were not available. New estimates of the United States money supply since 1875 remedy this deficiency.2Figure 1 shows the ratio of currency to the total money supply3 annually from 1875 to 1955. This article deals with the behavior and determinants of this ratio, mainly in the long run. A separate study of its short-run cyclical movements is in preparation.

The currency ratio has varied considerably. It was above 30 per cent just after the resumption of gold payments in 1879 and gradually declined to just over 7 per cent by 1930. Subsequently it rose to 20 per cent during World War II and

____________________
1
This study is part of a project of the National Bureau of Economic Research under the over-all direction of Milton Friedman. His suggestions guided the work in its initial stages and helped greatly to improve the final product. Generous help was also received from Anna J. Schwartz, whose extensive knowledge of this material made her comments especially useful. Solomon Fabricant, Edward J. Kilberg, Morris Mendelson, and George J. Stigler also made useful comments. Not all these people entirely agreed with the interpretation of some of the findings, and it should not be assumed that they accept the conclusions without reservations.

The paper has been approved for publication as a report of the National Bureau of Economic Research by the Director of Research and the Board of Directors of the National Bureau, in accordance with the resolution of the board governing National Bureau reports (see the Annual Report of the National Bureau of Economic Research). It is reprinted, with the addition of an appendix on data and sources, as No. 62 in the National Bureau's series of Occasional Papers.

2
These estimates were developed by Milton Friedman and Anna J. Schwartz. See The Supply of Money in the United States, a forthcoming publication of the National Bureau of Economic Research.
3
Currency is defined as the hand-to-hand notes and coin issues outside banks of the United States Treasury, Federal Reserve banks, and (until 1935) national banks. The total money supply is currency plus the demand and time deposits of all commercial banks held by the non-banking public.

-1-

Notes for this page

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this book

This book has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this book

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this page

Cited page

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited page

Bookmark this page
The Demand for Currency Relative to Total Money Supply
Table of contents

Table of contents

Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this book

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen
/ 38

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Author Advanced search

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.