The Long-Run Demand for Money — A Wicksellian Approach

Abstract

The income velocity of money in several countries such as Sweden, the United States and Great Britain, displays a U-shaped pattern for the last one hundred years. This paper proposes an explanation of this secular behavior based on an extension of Wicksell’s work on velocity emphasizing the influence of institutional changes. The secular fall in velocity in the last half of the 19th century and the first part of the 20th century is regarded as the outcome of a process of monetization encompassing (1) a growing use of money at the expense of a decline in barter and payment in kind, and (2) an increase in the activity of commercial banks with respect to supplying notes and bank deposits to the public. The secular rise in velocity is viewed as the result of two developments, increasing financial sophistication and growing economic security and stability. The explanation suggested here is confronted with some relevant empirical evidence. The paper, being exploratory in character, deals primarily with the Swedish record.

“Theoretically, therefore, the concept of velocity of circulation is a very simple one. But in practice its investigation is one of the most difficult problems in economics”, K. Wicksell, Lectures II, p. 60.

This paper has benefited greatly from the suggestions of Michael Bordo of Carleton University. I also wish to acknowledge the helpful comments of the participants at the workshop in monetary economics at UCLA; Don Patinkin, Anna Schwartz, Arne Jon Isachsen; and colleagues at the Departments of Economics and Economic History at the University of Lund. Mark Olson has improved my English.

This paper is part of a joint project carried out by the author and M. Bordo, aimed at studying the long-run behavior of velocity across a number of countries.