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Published online by Cambridge University Press: 07 November 2014
The purpose of this paper is to examine the behaviour of the rate of increase in the money stock as a leading indicator of the Canadian economy over the period 1924–58. The study was suggested by work done by Milton Friedman for the United States showing that changes in the rate of increase in the stock of money lead changes in economic activity. Section I presents the theoretical framework underlying the concept of “leading monetary indicator.” Section II presents the specific cycles of the seasonally adjusted rate of change in the Canadian stock of money and the relation of this series to Canadian reference cycles. Section III presents the conclusions. An appendix discusses the sources of the Canadian stock of money and its components.
The quantity theory of money is the theoretical framework underlying the “leading monetary indicator” approach. This theory argues that the stock of money is an important determinant of economic activity. On this view individual non-bank holders of money cannot change its nominal quantity, but they can in the aggregate change the real value of their cash balances. Thus, holders of money may decide that they are holding excessive cash balances which they may individually attempt to reduce by an increase in their rate of spending. In the aggregate, however, they cannot do so for the money disposed of by one holder will be acquired by another so that the nominal stock of money will remain unchanged. The attempts by holders of money to reduce their nominal cash balances will raise the flow of expenditures and so money income and prices.
I am indebted to Marshall R. Colberg for useful comments and suggestions and to Milton Friedman and Anna J. Schwartz for help in dating the specific cycles in the Canadian money stock. In addition, I am further indebted to Milton Friedman for a number of valuable observations regarding the similarity of American and Canadian experience that are incorporated in this paper.
1 Friedman, Milton, “The Supply of Money and Changes in Prices and Output,” US Congress, Joint Economic Committee, The Relationship of Prices to Economic Stability and Growth, Compendium (85th Cong., 2nd Sess. 1958), 249.Google Scholar
2 For a detailed discussion of the sophisticated quantity theory that underlies the “leading monetary indicator” see Sprinkel, Beryl W., “Monetary Growth as a Cyclical Predictor,” Journal of Finance, 09, 1959, 333–46CrossRefGoogle Scholar, and Friedman, Milton, “The Demand for Money: Some Theoretical and Empirical Results,” Journal of Political Economy, 08, 1959, 327–51CrossRefGoogle Scholar (also published by the National Bureau of Economic Research as Occasional Paper no. 68) and the essays in Friedman, Milton, Studies in the Quantity Theory of Money (Chicago, 1956).Google Scholar
3 Friedman, , Relationship, 249.Google Scholar
4 Moore, Geoffrey H., Statistical Indicators of Cyclical Revivals and Recessions, NBER Occasional Paper no. 31 (New York, 1950), 20.Google Scholar
5 Ibid., 21.
6 For a discussion of these eleven characteristics see ibid., 21–2.
7 See Sprinkel, “Monetary Growth.”
8 See Friedman, , A Program for Monetary Stability (New York, 1960), 87 Google Scholar; and US Congress, Joint Economic Committee, Hearings, Employment, Growth and Price Levels, Part 4 (86th Cong., 1st Sess., 1959), 615–16.Google Scholar For a critique of Friedman's position see Culbertson, J. M., “Friedman on the Lag in Effect of Monetary Policy,” Journal of Political Economy, 12, 1960, 617–21.CrossRefGoogle Scholar
9 Chambers, Edward J., “Canadian Business Cycles Since 1919: A Progress Report,” this Journal, 05, 1958, 172.Google Scholar
10 Ibid., 180.
11 For a discussion of Canadian war finance see McIvor, R. Craig, Canadian Monetary Banking and Fiscal Development (Toronto, 1958).Google Scholar
12 See n. 8.
13 Chambers, , “Canadian Business Cycles,” 186.Google Scholar
14 See Shiskin, Julius and Eisenpress, Harry, Seasonal Adjustments by Electronic Computer Methods, NBER Technical Paper no. 12 (New York, 1958).Google Scholar
15 For the period 1924 through 1929 all data pertaining to chartered bank notes, deposits, and Dominion notes are from Curtis, C. A., Statistical Contributions to Canadian Economic History (Toronto, 1931).Google Scholar Curtis compiled his estimates from the monthly supplement to the Canada Gazette. The statistical information on chartered banks and Dominion notes for the period from 1930 to 1958 is from the monthly supplement to the Canada Gazette. All estimates are for the end of the month.
16 Canada Year Book, 1955 (Ottawa, 1955), 1208 ff.Google Scholar My own correspondence with members of the Research Department, Bank of Canada, confirms this observation.
17 Ibid., 1954, p. 1130.