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Means of Payment and Prices in Canada, 1900-461
Published online by Cambridge University Press: 07 November 2014
Extract
That the quantity of money in use by the community tends to rise and fall as the level of prices does, is (I believe) universally admitted. “The Quantity Theory of Money,” said J. M. Keynes in his Tract on Monetary Reform, “states that the amount of cash which the community requires, assuming certain habits of business and of banking to be established, and assuming also a given level and distribution of wealth, depends on the level of prices.” He might perhaps have added, as a summary of the discussion which with these words he introduces, “and vice versa.” Lord Keynes's own formulation of the dependence, n = p(k + rk′), expresses by way of a snapshot what Fisher's celebrated equation, MV + M′V’ = PT, expresses by way of a moving picture; that, the community's business and banking habits being assumed on the one hand, and on the other, the extent and distribution of its wealth, the quantity of money and the level of prices are proportional to one another. Open to argument remain such details as: how to define the quantity of money; and, whereby to measure the level of prices; and, how to judge of such changes in business and banking habits, or in the extent and distribution of wealth, as may change the quantity of money though prices were to stay constant, or raise or lower the price level though the quantity of money were kept unchanged.
- Type
- Articles
- Information
- Canadian Journal of Economics and Political Science/Revue canadienne de economiques et science politique , Volume 13 , Issue 2 , May 1947 , pp. 197 - 207
- Copyright
- Copyright © Canadian Political Science Association 1947
Footnotes
1
This paper stems from an inquiry into the prospects of costs and prices in Canada, in progress since the autumn of 1945, on the part of G. E. Jackson and the present writer. In December, 1945, the concept was arrived at, of “Means of Payment in the Hands of the Public,” here proposed as a serviceable definition of the “quantity of money.” (It differs from the D.B.S. “Money Supply,” chiefly in excluding Dominion government and certain other deposit items.) The idea of an index to represent the general level of prices, so as to include as far as possible everything that is for sale, was suggested in March, 1947. An unweighted index of living costs, wholesale prices, and common-stock prices was found to fluctuate more or less in conformity with the per capita means of payment, especially from 1913 to 1936 (no index of Hiving costs being available on a regular basis, earlier than 1913). From this start, the “Blended Price Index,” designed to include these indexes and to be as nearly as possible proportional to per capita means of payment, was developed; it is here presented as a workable approximation to a general price index. (Bond-price and bond-yield indexes, in-eluded in the course of experiment, were omitted from the finished product.)
References
2 London, 1923, pp. 41-2; italics as in original.
3 Ibid., p. 77.
4 The Purchasing Power of Money (New York, 1911).Google Scholar
5 The most recent figure comparable with this is $6,844 million as at Mar. 31, 1947.
6 That is to say, the chartered banks, the Bank of Canada (and, before its time, the Department of Finance as issuer of notes), and the mint.
7 Under Subsection 15 of Section 91 of the B.N.A. Act, which invests the parliament of Canada with exclusive jurisdiction over banking, incorporation of banks, and the issue of paper money.
8 On this principle, when the government of Canada issues a cheque, it puts means of payment into the hands of the Canadian public; and when it receives means of payment (in taxes or otherwise) and banks them, they cease to exist with regard to the Canadian public.
9 Unfortunately the accounts of the Foreign Exchange Control Board cannot be consolidated with those of the banking system of which it might be entitled to be considered a part; simply for lack of adequate statistics. This creates difficulty, with respect to both net assets abroad and bullion and coin.
10 If, of such cheques, the portion not issued by the government of Canada could only be segregated, and the extent of the duplication, within the total of means of payment as here defined, thus known, this duplication could properly be deducted from deposits to the credit of the Canadian public; as it is, the entire amount must be shown as an asset item.
11 This formula was reached by working out a multiple regression for per capita means of payment on the three price indexes. Calling the former Y, and the blended price index I, the regression equation may be written: Y′ = 1.700 I + 34.49. Though the absolute term differs from zero, the result of disregarding it and using I as a deflator was thought to justify doing so.
No inference should be made from the weights here assigned to the component price indexes, to the manner in which the Canadian public distributes its means of payment among the goods and services and claims whose values these represent. It is merely that these weights were so calculated to give the best fit possible; thus the relationship between the per capita means of payment and the blended price index may be called a put-up job; but what is surely significant is that, over twenty-four such years as 1913 to 1936, so good a put-up job is possible.
12 That is to say, .6745 times the root-mean-square. For comparison the same test was applied to quarterly data—omitted to save space—for the war and post-war years 1914-22; the corresponding “probable value” of the percentage deviation from the average was only ±2.42 per cent, but that average itself—$198.80 in constant dollars per head—was 2.18 per cent lower than the 1913-36 average of $203.23.
13 The fact deserves emphasis, that the change in proportion between means of payment and the price level, though commonly thought of as a product of World War II, was under way years earlier, though in a much less marked degree; one is tempted to ascribe it to the cheap-money policy of the late nineteen-thirties, and even to the deficit financing of the earlier thirties.
14 Such a statement may at first seem harsh. But if the government of Canada, after first appealing to the patriotism of, say, a shipyard worker to turn some of his unaccustomed means of payment into Victory Bonds, then (in the name of a cheap-money policy) in effect guarantees him against loss on his bonds when he decides to take them to his chartered bank to get cash to buy an old car on the black market, the result is the same as if the patriotic shipyard worker had not figured as an intermediary in the transaction.
15 Mention should be made here, among unindexed price increases, of black-market transactions, whose magnitude cannot be known since they remain outside the statistical system though inside the economy; and of diamonds, Old Masters, etc. (and, for that matter, real estate), never embraced in price indexes, which have been bought on a large scale during the war, in the hope of hedging against inflation. (Prices of diamonds are said to have gone up 400 per cent since pre-war times.)
16 To run a surplus at the present time must surely commend itself to all advocates of the “compensatory economy.”
17 P. 62.