Sunday, June 20, 2010

There's Gold In The Mountains

This graph is a little faded, perhaps. But it is a key piece of the Arthurian puzzle. The graph shows the balance (or imbalance) between money in circulation, and savings.

The graph shows that the quantity of money in savings increased much faster than did the money that was circulating until there was about 80 cents in savings for every circulating dollar, and the Great Depression hit. Then the money in savings decreased relative to money in circulation, right up to the end of World War II.

Then the trend changed again, savings started growing faster, and we had our golden age. But by 1969, the last date shown on the graph, the quantity of money in savings had risen again and was climbing off the chart. And our little golden age soon ended.

Yeah, I didn't believe it myself. So I checked my numbers.

Year M1 M2 (M2-M1) (M2-M1)/M1
1915 12.48 17.59 5.11 $0.41
1930 25.76 45.73 19.97 $0.78
1945 99.23 126.63 27.4 $0.28
1969 201.77 385.17 183.4 $0.91
1970 209.98 401.29 191.31 $0.91
2008 1596 8154 6558 $4.11

The last column on the right has numbers comparable to what's shown on the graph.

The last row of data, the data for 2008, shows that the quantity of money in savings kept growing much, much faster than the quantity in circulation, and that by 2008 we had more than four dollars in savings for every circulating dollar.

Now, that's an imbalance.

The lesson for me in this graph, back in 1992, was that the imbalance between savings and circulating money reached a peak at the onset of a Great Depression, and that correction of the imbalance (as it happens, by means of an enduring slump followed by war, though there are better ways) was necessary to restore a healthy economy.

Growth is accompanied by the uptrend on this graph; but the uptrend eventually chokes off growth. Downtrend is necessary for recovery. And then renewed uptrend accompanies reinvigorated growth.

The lesson for policy in this graph is to choose a range on the graph, a range that is well-suited to "golden age" growth; and to create incentives and disincentives that keep the monetary balance in that golden range.

The data for M1 and M2 values are from series X 414 and X 415 of the Historical Statistics, Colonial Times to 1970, Part 2, Section X, for all data except 2008. Values for 2008 are from Table 1159 of the Statistical Abstract, 2010, Section 25.

Both are available online and free from the U.S. Census Bureau.

No comments: