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Money Supply: GRESHAM'S LAW, gresh'amz, in economics, is usually stated as "bad money drives out good." The law stems from the fact that money has a value both as money and as a commodity in the open market. The former value is set arbitrarily by law and is relatively fixed; the latter is determined by supply and demand and varies from time to time, "Good money" has a higher value as a commodity than as money and will disappear from circulation.
In 1959 the Radcliffe committe report on the British monetary system, basing itself on the experience of the 1950's, widened the concept of the supply of money to include the "state of liquidity of the whole economy." In particular, it was concerned with the power that the banks were found to possess of neutralizing and monetary squeeze that the authorities wished to exercise by selling treasury bills and other instruments of government short-term debt and thereby restoring their own liquidity and their ability to lend. The Radcliffe view on "general liquidity" was accepted by the authorities for some time, but by 1970 attention had again been focused on the importance, for short-term policies, of the actual money supply.
Money Supply and Investment. Monetary and fiscal policy is not held primarily responsible by most observers for this continuing inflation. Between 1950 and 1970, commercial bank deposits, for example, rose by less than 60%—a good deal less than prices. The ratio of net bank deposits to gross domestic product, which had been around 50% before World War II and as high as 65% in 1947, had fallen to around 30% in the late 1960's. Furthermore, currency supply rose less than incomes and can be shown to have followed, not led, their rise. |
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