Money and Business Cycles

PpT HE subject assigned for this session covers too broad an area to be given even fairly cursory treatment in single paper. Accordingly, we have chosen to concentrate on the part of it that relates to in fluctuations. We shall still further narrow the scope of the paper by interpreting monetary factors to mean the role of the stock of money and of changes in the stock thereby casting the market as one of the supporting players rather than star performer and by interpreting economic fluctuations to mean business cycles, or even more exactly, the reference cycles studied and chronicled by the National Bureau. The topic so interpreted has been rather out of fashion for the past few decades. Before the Great Depression, it was widely accepted that the business cycle was phenomenon, a dance of the dollar, as Irving Fisher graphically described it in the title of famous article.' Different versions of theories of the business cycle abounded, though some of these were really theories misnamed, since they gave little role to changes in the money stock except as an incident in the alteration of credit conditions; and there was nothing like agreement on the details of any one theory. Yet it is probably true that most economists gave the money stock and changes in it an important, if not central, role in whatever particular theory of the cycle they were inclined to accept. That emphasis was greatly strengthened by the course of events in the twenties. The high degree of stability then achieved was widely regarded as consequence of the effectiveness of the policies followed by the only recently created Federal Reserve System and hence as evidence that were indeed central factor in the cycle. The Great Depression radically changed attitudes. The failure of the Federal Reserve System to stem the depression was widely interpreted-wrongly as we have elsewhere argued 2 and elaborate below to mean that were not critical, that real were the key to fluctuations. Investment which had always had prominent place in business cycle theories received new emphasis as result of the Keynesian revolution, so much so that Paul Samuelson, in the best selling textbook in the country, could assert confidently, All modern economists are agreed that the important factor in causing income and employment to fluctuate is investment. 3 Investment was the motive force, its effects spread through time and amplified by the multiplier, and itself partly or largely result of the accelerator. Money, if it entered at all, played purely passive role. Recently, revival of interest in money has been sparked less by concern with business cycles than with concern about inflation. Easy money policies were accompanied by inflation; and inflation was nowhere stemmed without more or less deliberate limitation of growth of the money stock. But once interest was aroused, it naturally extended to the cycle as well as to inflation. In the United States, indeed, there has been something of repetition of the I920's. A high degree of stability has been accompanied by large measure of talk about an active policy, and the authorities have often been given credit for playing an important role in promoting stability. As the experience of the twenties suggests, this fair-weather source of support for the importance of money is weak reed. Examining the present state of our understanding about the role of money in the business cycle, we shall first present some facts that seem reasonably well established about the cyclical behavior of money and related