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.Frank Steindl (1990) pointed out that Simons had referred to the oral tra-dition at Chicago in a review of a book on monetary conditions in the early 1930s byCurrie (Simons 1935).And George Tavlas (1998) showed that Friedman s approach wasanticipated in the work of Knight and Mints.Friedman s mathematical restatement of Mitchell s theoryFurther evidence of Friedman s deep understanding of Mitchell, and of the way thatthe Chicago emphasis on economic theory shaped that understanding, is to be foundin Friedman s (1950) essay Wesley C.Mitchell as an economic theorist.In this essay,Friedman provided a mathematical model of Mitchell s theory of the business cycle.If we look closely at this model, the starting point of the Monetary History is clear.Inwhat follows I have used the symbols that Friedman and Schwartz used in later workbecause these are likely to be more familiar, rather than the symbols Friedman used inhis original essay.I have also suppressed some of the non-monetary equations in theMitchell Friedman model.28 Friedman, for example, modeled Mitchell s conclusionsabout the important role of final product prices and costs in determining profits and thelevel of investment spending.Here, however, I shall concentrate on Friedman s attemptto model Mitchell s conclusions about the relationships between the monetary variablesand other sectors of the economy.I shall, however, consider three equations Friedmanincluded that describe a simple Keynesian multiplier model.The inclusion of these equa-tions was a precursor to Friedman s (1970) attempt to find a simple common model thatcould be specialized as a Keynesian or Monetarist model.Define the following terms:Y = total national income;C = consumption (induced expenditures);I = investment (autonomous expenditures);H = high-powered money (gold or paper money issued by the government) = C + R;pC = currency in the hands of the public;pD = deposits in the hands of the public;M = money = C + D;p 100 The Elgar companion to the Chicago School of EconomicsMd = money demanded;Ms = money supplied;R = bank reserves = currency held by banks;b = the bank s ratio of deposits to reserves = D/R;b* = the bank s desired ratio of deposits to reserves;p = the public s ratio of deposits to currency = D/C ;pl = a shift term for a financial panic; andi = the rate of interest.Let us start with the banks.By definition the actual ratio of deposits to reserves is:b = D/R.(7.1)Based on Mitchell s empirical observations, Friedman assumed the desired amount ofdeposits created by banks per dollar of reserves, b*, to be a function of the current levelof income, and the presence or absence of a banking panic:b* = f1(Y, l).(7.2)The variable l is my addition, a shift term introduced to clarify how a banking panicwould affect the economy.The partial derivative of b* with respect to income, f11, isassumed to be positive.When income increases in a cyclical expansion, lending oppor-tunities improve, and so banks reduce the amount of reserves they wish to keep behindeach dollar of deposits.The partial derivative of b* with respect to a panic, f12, is assumedto be negative: in a panic banks want higher reserves to protect themselves against runs,so they reduce lending.The interest rate, i, is assumed to be dependent on the relationship between the actualand desired ratios of the banking system:i = f2(b* b).(7.3)The derivative f21 is assumed to be negative.If the desired bank ratio exceeds the actualbank ratio, banks will increase lending, and increased lending will lower interest rates.Equation (7.3) is part of the bank-lending channel that Mitchell stressed, Friedman andSchwartz downplayed and recent research has again brought forward.There is also a demand for money equation.This relationship became central toFreidman and Schwartz s thinking about the role of money:Md = f3(Y, i).(7.4)Friedman adopts the standard assumptions that f31 is positive, because money is anormal good, and f32 is negative, because the interest rate is the cost of holding money.Inlater work (for example, Friedman 1956a and Friedman and Schwartz 1982), Friedmanand Schwartz (1963a) elaborated on this simple equation, and took into account wealth,the interest paid on deposits, inflation and other variables.The estimation of demand formoney equations for a time was a major cottage industry for economists. On the origins of A Monetary History 101The ratio of deposits to currency is a function of the level of income, and the panicshift term:p = f4(Y, l).(7.5)The partial derivative of p with respect to income, f41, is assumed to be positive asincome increases the demand for deposits grows relative to currency because depositsrequire more sophistication, but are capable of handling larger and more complex trans-actions.And the partial of derivative of b with respect to the panic shift, f42, is negative in a panic people want high-powered money [ Pobierz całość w formacie PDF ]
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.Frank Steindl (1990) pointed out that Simons had referred to the oral tra-dition at Chicago in a review of a book on monetary conditions in the early 1930s byCurrie (Simons 1935).And George Tavlas (1998) showed that Friedman s approach wasanticipated in the work of Knight and Mints.Friedman s mathematical restatement of Mitchell s theoryFurther evidence of Friedman s deep understanding of Mitchell, and of the way thatthe Chicago emphasis on economic theory shaped that understanding, is to be foundin Friedman s (1950) essay Wesley C.Mitchell as an economic theorist.In this essay,Friedman provided a mathematical model of Mitchell s theory of the business cycle.If we look closely at this model, the starting point of the Monetary History is clear.Inwhat follows I have used the symbols that Friedman and Schwartz used in later workbecause these are likely to be more familiar, rather than the symbols Friedman used inhis original essay.I have also suppressed some of the non-monetary equations in theMitchell Friedman model.28 Friedman, for example, modeled Mitchell s conclusionsabout the important role of final product prices and costs in determining profits and thelevel of investment spending.Here, however, I shall concentrate on Friedman s attemptto model Mitchell s conclusions about the relationships between the monetary variablesand other sectors of the economy.I shall, however, consider three equations Friedmanincluded that describe a simple Keynesian multiplier model.The inclusion of these equa-tions was a precursor to Friedman s (1970) attempt to find a simple common model thatcould be specialized as a Keynesian or Monetarist model.Define the following terms:Y = total national income;C = consumption (induced expenditures);I = investment (autonomous expenditures);H = high-powered money (gold or paper money issued by the government) = C + R;pC = currency in the hands of the public;pD = deposits in the hands of the public;M = money = C + D;p 100 The Elgar companion to the Chicago School of EconomicsMd = money demanded;Ms = money supplied;R = bank reserves = currency held by banks;b = the bank s ratio of deposits to reserves = D/R;b* = the bank s desired ratio of deposits to reserves;p = the public s ratio of deposits to currency = D/C ;pl = a shift term for a financial panic; andi = the rate of interest.Let us start with the banks.By definition the actual ratio of deposits to reserves is:b = D/R.(7.1)Based on Mitchell s empirical observations, Friedman assumed the desired amount ofdeposits created by banks per dollar of reserves, b*, to be a function of the current levelof income, and the presence or absence of a banking panic:b* = f1(Y, l).(7.2)The variable l is my addition, a shift term introduced to clarify how a banking panicwould affect the economy.The partial derivative of b* with respect to income, f11, isassumed to be positive.When income increases in a cyclical expansion, lending oppor-tunities improve, and so banks reduce the amount of reserves they wish to keep behindeach dollar of deposits.The partial derivative of b* with respect to a panic, f12, is assumedto be negative: in a panic banks want higher reserves to protect themselves against runs,so they reduce lending.The interest rate, i, is assumed to be dependent on the relationship between the actualand desired ratios of the banking system:i = f2(b* b).(7.3)The derivative f21 is assumed to be negative.If the desired bank ratio exceeds the actualbank ratio, banks will increase lending, and increased lending will lower interest rates.Equation (7.3) is part of the bank-lending channel that Mitchell stressed, Friedman andSchwartz downplayed and recent research has again brought forward.There is also a demand for money equation.This relationship became central toFreidman and Schwartz s thinking about the role of money:Md = f3(Y, i).(7.4)Friedman adopts the standard assumptions that f31 is positive, because money is anormal good, and f32 is negative, because the interest rate is the cost of holding money.Inlater work (for example, Friedman 1956a and Friedman and Schwartz 1982), Friedmanand Schwartz (1963a) elaborated on this simple equation, and took into account wealth,the interest paid on deposits, inflation and other variables.The estimation of demand formoney equations for a time was a major cottage industry for economists. On the origins of A Monetary History 101The ratio of deposits to currency is a function of the level of income, and the panicshift term:p = f4(Y, l).(7.5)The partial derivative of p with respect to income, f41, is assumed to be positive asincome increases the demand for deposits grows relative to currency because depositsrequire more sophistication, but are capable of handling larger and more complex trans-actions.And the partial of derivative of b with respect to the panic shift, f42, is negative in a panic people want high-powered money [ Pobierz całość w formacie PDF ]