MONDAY, NOVEMBER 22, 1948. FINAL ECONOMICS AND FINANCE Price Inflation: The Monetary Approach By EDWARD H. COLLINS The committee on economic pol- Despite the drastic nature of cy of the Chamber of Commerce the United States has just issued this reduction in the money sup- forty-page study entitled "The ply, the expected drop in prices did not materialize. When the Economics of the Money Supply." It concludes, according to news operation had been completed, prices still stood, in round figures, summaries, that "a major cause of high prices in this country has at 272, compared with their pre- vious level of 274. As a result of been the increase- in the money supply." the Government's policy of grad- This is a question on which ually unfreezing the "surplus" money supply which it had taken petent The opinions and differ experienced experienced widely among authorities. an au- com- out of circulation, the volume of currency and demand deposits out- more such standing had again risen, as of stand he thority will be Why? is, found fact, taking he less dogmatic realizes likely in the June 30 of this year, to upwards a of 155,000,000,000 francs, but Because prices had soared almost to the that, as Allan Sproul, president of the New York Federal Reserve 400 mark, or 50 per cent above Bank, recently pointed out, this is their level of the summer of 1944. an issue which involves "a large element of the chicken-and-egg There is no basis, of course, in argument." In other words, except monetary theory for the notion where monetary inflation has that there is a direct and neces- reached the stage where the public sary correlation between the has lost confidence in the currency, money supply, on the one hand, it is seldom possible to say with and the index of commodity any assurance whether that expan- prices, as such, on the other. Even sion is preponderantly the cause or in its crude form the quantity the effect of high prices and high theory as stated by Fisher (PT- level business activity. MV) allows for the velocity of If the news summaries of this circulation on the money side and, study of the Chamber of Commerce on the price side, for the volume provide a fair sampling of its rea- of trade and production involving soning, then one is forced to con- money payments. This means that clude that it must be a pretty if We are to compare the money naive document. For its findings supply with anything, it would would seem to rest on the central have to be the gross national argument that in the last ten years product. Such a comparison re- the nation's monetary supply has veals a picture quite different from trebled, but the price level has that suggested by the Chamber of risen by only 74 per cent. Passing Commerce. The table below is not over the fact that the Chamber's a complete presentation because it economists have, for reasons which takes no account of the variable are not clear, used the cost of liv- rate of money turnover. However, ing index to measure the over-all apart from-that fact, it brings out level of prices, this reasoning the changes in relationship be- would seem to imply that prices tween the money supply and the can be expected to rise pari passu increasing size of the task the lat- with increases in the supply of cur- ter has been called upon to per- rency and bank demand deposits. form (the gross product) since If this were true, the situation 1940, would be gravely serious. For it (B) Gross would suggest that the only hope (A) Money National (A) As a Supply Product of averting a further enormous Year. Percent- (in billions) (in billions) age of (B) rise in prices and living costs lay 1940 $40.5 $100.5 40.4 * in a major operation looking to. a 1945 98.3 213.4 46.1 1946 108.0 reduction in the money supply. 209.3 51.8 1947 111.0 231.6 As a matter of fact, it seems 48.0 1948(Je30) 108.3 248.2 43.7 probable that business activity and rising prices are more fre- In sum, what has happened is that the money supply as of June quently the cause than the result of monetary inflation. The much 30 had risen to a figure 2.67 times discussed experiment undertaken that of 1940, while the gross na- tional product had expanded to 1944, the by the liberation for Belgian example, of Government that appears country to after 2.47 times the pre-war total-a in difference that can be dismissed as purely nominal. A plausible case argue in favor of such a conclu- might conceivably have been made sion. When the Government in for the thesis of the Chamber of Exile returned to Belgium in the summer of that year, it found that Commerce, say, three years ago, prices had risen from a level of when the money supply stood at 119 in 1940 to above 274 and that nearly 52 per cent of the gross the money supply had expanded product and when the wholesale from slightly under 50 billion Bel price index stood nearly 60 points below its June, 1948, level. For- gian francs to more than 160 bil- tunately or unfortunately, how- lion francs. As a first step the ever, most of the persons who are Government "froze" all monetary referring today to the hight cost stocks over and above a figure of of living as a purely monetary approximately 71 billion francs. phenomenon were too busily occu- The second phase of the program consisted in releasing the frozen pied aro that time explaining that secret of inflation- currency and credit a little at a contro the removal of price time as business recovery pro- restri qd the encouragement ressed and the economy expended. of fre Mfettered production.