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m m t im <u What la the policy with respect to the voluat* of money? the policy of thft Federal Reserve System In this respect is to pro m t * a gradual growth in the money supply ia seeping vith the grovth ia the monetary needs of the econosay. this does ar t mean th&t the money ©apply must necessarily grow precisely la proportion to the growth in the total output of goods and services ia this country, &s changes in tha rat® of as* or turnover of money affect the aaount of aoney needed. that is especially true over short [periods, but is also true over longer periods, the rate of use of aoney has 'been subject ia the past to fairly wide fluctuations, These changes in money turnover prob&hly refleet a variety of influences, including especially general eccnonic conditions and the level of interest rates. For example, in period* of depressed business conditions «nd extremely low interest rates, such a s the ' thirties, aaay individuals and business concerns tend to hold idle aoney in preference to accepting the low rates o f return or the risks o f investing their funds fully. Consequently, the a v e ra g e rat® of use of money tends to be very low and % relatively large isoney supply is needed to do the *»or»ey~wor!c* of te e econossy. On to e other h a n d , in boom periods, when the dem ands f o r fund* a r e heavy and interest rr.te® tend t o fee relatively high, the general tendency i s for individuals snd business concerns to employ their fund® ftore fully, the average r a t * o f turnover o f m oney te n d s to Increase, and the aoaey supply need not expand proportionately with the expansion in business activity. The latter type of situation is particularly likely to develop after a period in vhich the growth in the aoney supply tea outrun the grovth in the output of the country* For example, at the ©ad of the war th? Increase ia the ao&ey supply had eeaaitierably outrun the grovth la the gross national product, sad b©th ladividuals and busineea eonceras held substeati&l &aouata of Idl* m m y «r*lfctag opportuaitie* to use It la meting the backlog ©f deaaad for various types of goods that had &«eu&ulat*d during the m r . 1 repld iaersa** la th® rat® o f « m o f i»on*y feAlws* daring the e a r ly postwar years, n d d o sp ito the comparatively em«ll growth la th* aoa*y supply (less th«a 9 per sent J» four y e a r # ), the amount ofaoney available proved aufficieat aot o n ly to finance & strong growth la phyaicsil production, but a ls o to permit a eensiderabl* price in fla tio n * Because ©f f lu e t u a t io a s lift th# r a te o f use of -aoaey, th erefor® , i t i s to b* exp ected th a t th* aoaey supply w i l l fr e q u e n tly vary l e s s nrldsly fr« a year to y e a r ttean th* t o t a l output ©f th® cou n try. la th* lo n g rua, however, i t i a a reason ab le e x p e c ta tio n th a t the aaouat o f aoaey needed v l l l *'rpv i a proportion to the lo a f* t e r n grovth ©f th e economy. 1 tiott is su b je c t to some r e s e r v a tio n s . roughly But even t h is g en era l!a a ~ for sxsjapl*, a peralstMtt t#ati#asy t®w*rd in te g r a tio n ia in d u str y ©r toward ait&pli floatio n of distributive chanaela m ight reduce the washer of s te p s by which goods p&ss fr c * the production of raw M a teria ls t* th® delivety of finished goods to th e finel oosiomr* Such tsaseatsle® alght grad u ally r t t e e * th* bm 4 for mummy i a relation to th e aggregate volume of pro d u ctio n . Oa the other hand, la e r e a s ia g c o a p le x ity of products sad g r e a te r s p e c ia l is a t io n , in v o lv in g aware w ide-spread su b co n tra ctin g , might in c r e a se g ra d u a lly the voluift* ©f momp tr a n s a c tio n s r ^ la tiv * to t o t a l production, and hence the um4 fo r oioaey. At th e o p p o site correspondence between production or ia th* «x^ « m , changes fo r period® as sh o r t as » fev month*, a© © lose in th e m m j supply sad changes in the volume o f gen era l economic activity is to be ex p ected , th ere are f a i r l y -3- regular s«&scnal variations in the d m su a A for b&ak credit, and consequently ia the saoisey supply, which do not oorrespond closely to v&riation* ia aggregate production. A redaction in the aoney supply during tha first few aonths of the year is usual, even la period* of rising business activity# while an inere&se ia the money supply practically always occurs ia the latter part of the year, even ia period* of declining business activity. The reduction ia the aoney supply daring the first few months of If53, vhish was the subjaet of soae consent in view of the continued rise in production at that time, of till# seasonal tendency. m mm Illustrative the rate of turnover of money then v*s high, there less than the usual seasonal contraction in bsnk loans (the redaction in the privately owned stoney supply at that tiae being attributable mainly to reduced bank investments in Governaent securities), »od there vaa no evidence that the aoney supply v&s insufficient to carry ©a the large volume of business activity at that time* Conclusion For these various reasons, although it is the general policy of the Federal Reserve Systws to proaote e. growth in the asone/ supply in keeping- with the long-tern growth of the eecaoay, it is unnoessary and impracticable for tha Systew to attempt to enforce * change in the m nBj supply aontb-by-n-iianth, and year-by-year, either precisely parallel to the changes in over-all ecoao«aio activity, or at a rate of growth equal to the assumed or expected long-tern growth of the eeonoaiy.
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