% annual growth rate:
|M3 Nominal GDP|
|1960 – 2017||7.4 6.5|
|1960 – 1970||7.7 6.8|
|1971 – 1980||11.4 10.3|
|1981 – 1990||7.7 7.7|
|1991 – 2000||5.6 5.6|
|2001 – 2010||7.1 3.9|
|Seven years to 2017||4.1 3.8|
Sources: M3 from the Federal Reserve website up to March 2006 and from the Shadow Government Statistics subsequently. Nominal GDP from IMF database, as at October 2018.
The medium-term relationship between money and nominal GDP growth in the USA, 1960-2017
Five-year moving averages of annual % changes, with 1962 being the start of the first five-year period
Comment on monetary trends in the USA
The USA has had a remarkably eventful monetary history. But the link between money and movements in the price level has been an obvious and recurrent feature. Deflations (i.e., falling prices) were seen in the 1870s, as the USA sought to resume gold payments after the Civil War, and in the Great Depression of the early 1930s. These deflations were associated with falls in the quantity of money. By contrast, the major inflations – of the First World War, the Second World War and the 1970s – were all accompanied by unusually high growth of the quantity of money. This lesson was emphasized in Friedman and Schwartz’ celebrated study on A Monetary History of the United States, 1867 – 1960, and was applied by the central bank, the Federal Reserve, in checking inflation in the 1980s. The table above shows – very clearly – that broad money growth peaked in the 1970s and since then has generally been in decline. Indeed, in the last few years the annual rate of broad money growth has been under 5%, while the increase in nominal GDP has been the lowest since the 1930s.
Despite the evidence, the majority of the Fed’s economists are suspicious of the monetary theory of national income determination. Much of the trouble has stemmed from uncertainty over the meaning of money. Over the last 25 years or so money-like liabilities has been issued by many financial institutions that, strictly speaking, are not banks. In the Great Recession from 2008 these ‘shadow banks’ proved far more vulnerable to financial shocks than the fully-regulated banks. A collapse in the level of shadow banks’ money-like liabilities – which can be overlooked in the recognised money aggregates – was an important causative element in the crisis.