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Salient. Official Newspaper of the Victoria University Students' Association. Vol 41 No. 21. August 28 1978

Problems in the Proposal

Problems in the Proposal

Do these arguments stand up to scrutiny?

Table 1 shows the relationship between money supply, GNP, and the velocity of circulation. It shows clearly that there has indeed been a decrease in the ratio of M1 to GNP accompanied by a corresponding increase in the velocity. However, the figures for GNP are expressed in 'current dollar' terms. If inflation is taken into account, the relationship of GNP to money supply takes on an entirely different aspect, (see Table 2)

M1 has only increased about half the speed as GNP (current) but it has actually increased considerably faster than the real output of goods and services in the economy. In that case, even without an increase in the velocity of circulation, money has been becoming relatively more plentiful over the last twenty years. To maintain a stable price level it would be necessary to increase the money supply slower, not faster, than is presently happening.

Table 1. Money Supply (M1) as a percentage of GNP
March M1, $m GNP $m M1, as % of GNP Velocity Inflation Rate
1955 571 1860 30.7 3.26
1960 665 2463 27.0 3.70
1965 745 3530 21.1 4.74
1970 764 4809 15.9 6.29
1974 1298 8638 15.0 6.65 9.4
1975 1332 9452 14.1 7.10 11.8
1976 1596 10914 14.6 6.84 15.7
1977 1690 12786 13.2 7.57 16.0
Table 2
Year M1 (money supply) GNP (current prices) GNP (constant, 1965-66 prices)
1955 571 1860 2369
1974 1298 8636 4864
% increase 227.3 464.3 184.3

ROLL UP NOW FOR THE GREAT MONEY MAKING MACHINE

It is also incorrect to assert that there is any definite relationship between the size of the money supply and the rate of inflation. Looking at the rates of inflation over recent years, it can be seen that in 1975-76 there was an increase in M 1 as a percentage of GNP coupled with a drop in the velocity of circulation, but rather than inflation decreasing (as SC theory would lead one to expect) it in fact jumped from page 11[unclear: 11] to 15.7%. In contrast, in 1976-77, [unclear: the] was a substantial drop in the monet[unclear: ary ase] and a corresponding increase in [unclear: the locity] but inflation only marginally [unclear: edg up.]

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