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For release at 7:00 p.m.
Central Standard Time
November 9, 1961

Remarks of George W. Mitchell
Member of the Board of Governors
of the
Federal Reserve System
before the
Chicago Chapter of the
American Statistical Association
Chicago, Illinois
November 9, 1961

Monetary Analysis a n d Monetary Statistics
Monetary theories are numerous and wide-ranging.

As you

know, this is a field that has always been particularly attractive
to crackpots or so-called monetary cranks, each of whom invariably
has discovered a cure for most of the world's ills in his particular
monetary scheme.

Leaving the crackpots aside, all who advance

monetary theories and believe that monetary factors influence output
and prices need a better understanding of how the economy uses money.
Vie may distinguish two general approaches to monetary theory.

A monetary analyst may emphasize changes in the stock of money as the
prime determinant of changes in aggregate economic activity.


approach leans heavily on some observed statistical association
between changes in money supply, or changes in its rate of change,
and movements in total output as measured by gross national product.
Another monetary analyst may look to the obverse of deposit
money, bank assets, and examine changes in their aggregate and composi­

Here the monetary influence is traced directly in the flow of

bank credit to consumers, government, and businesses and indirectly
in the impact of bank credit expansion on interest rates and other
borrowing terms.

Robert Solomon, Chief of the Capital Markets Section of the Board1s
Research and Statistics Division, contributed substantially to the
preparation of this paper.


One need not choose between these two general approaches
in order to appreciate the importance of a more precise understanding
of monetary behavior; that is, of changes in the way in which the
existing money supply is used.

The "how" and '»why" of money use is

relevant to both theoretical approaches as changes in velocity can
counteract changes in the stock of money or in the availability of

It is the variations in velocity that make for a looser

linkage than would otherwise exist between credit or money outstand­
ing and total spending.
How can we go about getting at a better understanding of
money use and holding?

It is m y belief that progress in this direction

depends upon disaggregation of monetary statistics so that we can
focus separately on major economic groups that behave with some degree
of homogeneity.

We need to get beyond the stage of confining monetary

analysis to leading or lagging differences in change or momentum in
the aggregate money supply.

Clearly, for analytical needs, we should

be providing a great deal more data? such data as would enable us to
sector money holdings and inflows and outflows according to major
economic groups.
Transactions and Liquidity Uses of Money
Monetary theory has conceived of money holdings for two
uses, corresponding to the two major functions that money serves:
the medium of exchange or transactions use, and the store of value or
liquidity use.

The first category, the transactions use, involves



holdings of currency and deposits that are necessary to the ready
flow of receipts and payments.

The transactions balances that

individuals and businesses need to hold is closely related to the
coincidence in timing of their total receipts and expenditures.
The greater the disparities in timing between receipt and
expenditure the larger the transaction balance required for any size
of flow.
The other category of money use involves balances to
accommodate current anticipations of some future need for liquidity.
It encompasses the "rainy day" balance and an accumulation of funds
for future expenditure or investment.

It also reflects more or less

unconscious accretions to or dissipations of balances arising from
changes in the relationship between income and expenditure.


these balances will mirror uncertainties in the timing of investment
whatever the current incentive to turn to interest bearing near­
money alternatives.
The distinction between transactions and liquidity balances
is not ordinarily apparent by simple observation as neither
individuals nor corporations keep these balances in separate accounts.
Although this does not invalidate the distinction as a useful analytical
construct, it does obscure its application.

Further clouding

this conceptual approach is the fact that the function served by
money held as liquidity balances can also be served quite satis­
factorily by other types of financial assets.

While money, as usually



defined to include demand deposits and currency, is the unique
transactions medium, it is far from unique as a store of liquidity,
for that function is also performed by a host of other assets, such
as time and savings deposits, savings shares, and short-term
The shifting reliance on money to accommodate liquidity
needs is one of the major reasons why velocity is cyclically vari­
able; that is why there is not a rigid relationship between aggregate
spending and the money supply, in the short run.

In the longer run,

institutional practices, changing financial instruments, and tech­
nological improvements in processing financial records are operating
to economize on the money supply needed for any given level of
Constancy of velocity would mean that there was a rigid
link between the size of money balances the public needed and the
amount of total transactions.
The fact is, however, that households and businesses do
not have such a rigid mode of behavior in regard to their money

They hold money not only to finance recurrent transactions

but to provide themselves with liquidity for a variety of reasons.
And they are prepared to alter the size of their balances, as a
proportion of their receipts and expenditures, in response to a
variety of influences.

It is the net of all such changes that shows

up in the measure of aggregate velocity.



A good deal of monetary analysis has attempted simply to
explain changes in aggregate velocity; that is, to account for the
relationship of GNP to money supply.

Recently this type of analysis

has been taking more account of the liquidity changes in the economy
and looking to the role of money substitutes and the effect of their
availability on the demand for money.

This is clearly a step for­

ward but still relies too heavily on aggregative analysis.


extending aggregative monetary analysis by, in effect, defining M
more and more broadly— until the velocity of the broader M is finally
stabilized statistically— tells us very little about economic behavior.
The Need for Sectoring and for Gross Flows
To understand and predict changes in velocity, it is neces­
sary to break down the aggregates and focus on different groups about
whose monetary behavior meaningful hypotheses can be advanced and

For changes in aggregate velocity or turnover may reflect

diverse and even offsetting changes in the rates of turnover of indi­
vidual sectors and subsectors.

To understand and explain variations

in velocity dependably, the variations must be related to plausible
behavior patterns x^rith regard to money use.

For example, business

management of cash balances is influenced by factors quite differ­
ent from those that influence individuals.

The motivations upon

which high-income individuals act may be quite different from those
of lower income individuals and these differences, in turn, can
make for different behavior in the holding and use of money.



Similarly, motivation and behavior can well vary by occupational
groups and regions of the country.

No better illustration comes

to my mind than how farmers' balance and expenditure patterns might
be obscured by aggregation if the accounts of all types of farmers
were merged.

On the receipt side alone the weekly check for the

dairyman, the once-a-year payment received by the cash grain farmer,
and the irregularly timed receipts from live stock sales, each
induces its own pattern of seasonal-cyclical money use and holding.
An analogy may help to point up the needs for sectoring
and gross flows.

To learn about a community's behavior with respect

to the use of water, it would not be sufficient to observe changes
in the level of water stored in the reservoir.

We would also want

a measure of flow into or out of the reservoir.

Even after we had

done this, however, we would not know why the rate of use had varied
over time.

In order to approach such an understanding— in other

words, to formulate a reasonable and dependable theory about water
use— we would want to relate the rate of use to at least two other
sets of variables:

those that determine the demand for a beverage

that quenches thirst (personal or industrial), and those that provide
an alternative means of meeting this demand.

At this point we might

well find ourselves disaggregating the water-using population as
between industry and families.

(While families may find beer a meaning­

ful alternative to water as a thirst-quencher, the availability of beer
does not affect industrial use of water.

Yet much of our monetary


analysis makes this type of assumption; as, for example, that Treasury
bills are not really a significant alternative to money in the asset
holdings of consumers.)

Beyond this we might well want to look at

different groups of families and industries if we felt that they
were subject to differing types of influences in their behavior as
consumers of water.
As a result of this method of analysis of money use, we
would be in a better position to understand which types of money
holders have been responsible for both the cyclical and the secular
movements in velocity that we have experienced since the end of
World War II.

Aggregate turnover of money has risen sharply in the

postwar period but this rise has been neither steady nor uniform
throughout the country.

It has been influenced by cyclical swings.

An immediate goal should be to disaggregate these secular and cyclical
movements and explain them in terms of the monetary behavior of
different types of economic groups.
In all probability, some of the cyclical variations in
aggregate velocity that we observe may, upon refined analysis, turn
out to reflect not changing ratios of expenditure to cash balances
for one or several sectors but mainly a cyclical change in the mix
of money holdings.

For since business turns over balances probably

8-10 times as frequently as individuals, if business expenditures
and cash balances fall more in recession than individual expenditures
and cash balances, aggregate velocity will decline even though neither
individual nor business turnover falls off.


Beyond this, however, we would want to explain the change
and momentum in sector velocities that we had succeeded in observing.
Such explanations would be in terms of factors that have meaning to
each particular sector.

For example, dividend rates paid on shares

at savings and loan associations may have an influence on how large
a cash balance middle-income consumers hold at each level of income.
But these dividend rates have little direct effect on corporate cash

We might also find that these dividend rates have rela­

tively little effect on lower income families.

It is quite likely

in fact that in the consumer sector, the lower the income level,
the larger is the proportion of money represented by transactions

In other words, a "crude" quantity theory might be valid

for consumers below some income level.

This would be one of many

hypotheses that might be tested if we organized our analysis and
statistics-gathering in the ways I am suggesting.
In attempting to measure changes in money use, we ought
to explore the possibility that changes in unused or minimum bal­
ances would, if inverted, mirror the changes in money use.

If this

turned out to be the case, substantial economies in compiling the
data would be realized.

There is the possibility, moreover, that

changes in minimum balances might be revealing in their own right.
Additional exartples could be cited of types of hypotheses
that need testing if we are to make more progress in monetary analysis.
In the main, we would be looking for explanations for changes in rate

of use of money balances in terms of variables that affect the
desire of major economic groups to hold both transactions and
liquidity balances.
Statistical Needs
Now if monetary analysis is to move in the direction I
have been indicating, we shall have to make energetic efforts to
coirpile appropriate data.

In fact this whole area bristles with

problems that the Federal Reserve and the statisticians have left

Two projects that have recently been completed merit
To give the aggregative analyst better raw material, the

Federal Reserve now publishes seasonally adjusted biweekly money
supply data based on average daily holdings instead of those as of
a given date.

This technique has eliminated many statistical aber­

rations in the series but further data and conceptual refinements
are needed*
Of more significance analytically are continuing studies
of money use that are being carried on at the Federal Reserve Bank
of Chicago.

That Bank now publishes seasonally adjusted data

monthly for several metropolitan areas, showing gross inflows and
outflows to savings accounts of individuals and unadjusted flows
for time accounts of corporations and for certificates and open
book accounts of individuals.

These data are supplemented for the

largest metropolitan areas with fragmentary comparable data on
other near monies held by individuals and with information on


competitive developments.


The project is an excellent illustration

of the advantages of analytical detail.

Elsewhere in the United

States a figure on net changes in total commercial bank time ac­
counts is all that is available on a weekly or monthly basis—
and there is no sectoring by corporate and personal accounts.
Without inflow or outflow rates, no one can tell if balances are
rising because of greater inflow or lesser outflow.

Nor can one

tell without the geographical detail what effect a dominant de­
pressed industry has on near-money flows.

At the Chicago Reserve

Bank, the sectoring, the inflow and outflow rates, the geographical
detail, along with evidence of competitive trends, permit the analyst
to say, not only what has happened to net time balances but, in
most instances, why.
I should also mention the Federal Reserve quarterly flow
of funds accounts.

As part of their integrated presentation, these

accounts provide estimates of the money supply holdings of a number
of sectors; these include, consumers and nonprofit institutions,
nonfinancial corporations, unincorporated business, various financial
sectors, governments, etc.

Our flow of funds experts use heroic in­

genuity in deriving these estimates.

The fact is, however, that the

statistical basis for dividing up the money supply among these var­
ious sectors is unsatisfactory.
What are the possibilities of obtaining the sectoring of
the gross flow data for money and near money that are needed to carry


our understanding of money use beyond a crude stage?

None too

good, unfortunately, if only because there has been too much dis­
position to ignore monetary data of this type or to be content with
theories that can be evolved from simple aggregates.

Moreover the

practical difficulties of obtaining gross flows by sectors are sub­

Using elementary statistical techniques the data-gathering

job is enormous and adapting more elegant methods to this particular
problem seems to have failed because of the lack of rapprochement
between the statisticians and the bankers or the banking theorists.
Some enthusiasts who espouse the sectoring approach expect that
electronic bookkeeping will produce all the sector or flow data
anyone could desire.

This might be possible but it is far from

likely without a major effort to persuade bankers to code accounts
and transactions with that end in view.
For a number of years, there have been just two nationwide
statistical series collected which bear on the question of money use,
and unfortunately each has been oriented to the service of other or
more minimal analytical objectives than those I have been describing.
The Federal Reserve System now compiles debits (outflow) data for
3UU metropolitan centers.

However, there is no sectoring by-product.

Moreover, scant attention is given sample consistency over time or
to making the national series representative of total transactions.
The regional data are used as measures of local business activity
and in some Federal Reserve Districts, notably Chicago and Minneapolis,
quite successfully.

The national data are used to construct seasonally

adjusted turnover rates for New York, six of the largest financial .



centers and 337 other reporting centers.
The System also makes an annual survey of the ownership of
demand deposits.

This survey sectors ownership as of one date toward

the end of January and is subject to possible timing aberrations of a
particular date due to the month or the day of the week or the posi­
tion of the date in the typical pay period.

Although the survey pro­

vides a rough indication of the level of holdings by several types
of owners, the timing problem and statistical shortcomings mean that
changes in ownership from one year to the next, inferred from this
annual measurement of level are unreliable»
It can be seen that the System has been working around
thefringes of the problem of measuring money use.
a more direct effort.

What is needed is

The basic problem is not one of measuring

level but of measuring change in money balances.

These changes should

be associated with the inflows (credits) and outflows (debits) of
various depositor groups.

The groupings should be dependent upon

economic characteristics that are relevant to money use.

The number

of sectors chosen would be a compromise between what is practical
and what is analytically desirable.

For individuals, a distinction

between employed and self employed would seem to be crucial and
further sectoring by income level would be highly desirable.
corporations, some breakdown by size would be called for.


As to

frequency of reporting, only some e:xperimentation will indicate the
best time interval— weekly, biweekly, monthly, or quarterly.

In any



case, it might be desirable to experiment with average balances
over each period and with minimum balances within each period.
These are only beginnings.

We are, in fact, so largely

ignorant of the area of money use that we cannot now write a set
of completely definitive specifications for adequate data collec­
tion in this field.

I can foresee, therefore, that when we have

advanced as far as the horizon of this paper, the added analytical
insights then gained will suggest still further refinements in the
flow of data.

We must not deplore this kind of "unfinished" data

It is rather the sign of a living data program, responsive

to the gradual evolution of our analytic powers.