As a part of the proceedings of the Eleventh Annual Meeting of the Board of Governors of the International Monetary Fund, an Informal Session on “Recent Developments in Monetary Analysis” was held on September 25, 1956. The three papers which were presented at that Session by Dr. M. W. Holtrop, President of De Nederlandsche Bank, Dr. Paolo Baffi, Economic Adviser to Banca d’Italia, and Dr. Ralph A. Young, Director of the Division of Research and Statistics, Board of Governors of the Federal Reserve System, are reproduced below, together with the background paper, “Monetary Analyses,” prepared by the Statistics Division of the Research and Statistics Department of the International Monetary Fund.


As a part of the proceedings of the Eleventh Annual Meeting of the Board of Governors of the International Monetary Fund, an Informal Session on “Recent Developments in Monetary Analysis” was held on September 25, 1956. The three papers which were presented at that Session by Dr. M. W. Holtrop, President of De Nederlandsche Bank, Dr. Paolo Baffi, Economic Adviser to Banca d’Italia, and Dr. Ralph A. Young, Director of the Division of Research and Statistics, Board of Governors of the Federal Reserve System, are reproduced below, together with the background paper, “Monetary Analyses,” prepared by the Statistics Division of the Research and Statistics Department of the International Monetary Fund.

Method of Monetary Analysis Used by De Nederlandsche Bank

Purpose of the method

The purpose of the method of monetary analysis which has been developed in the last few years in the Annual Report of the Nederlandsche Bank is essentially of a practical nature. It is meant to provide the Bank with a tool to help it in unraveling the mechanism of inflationary and deflationary disturbances and thus to aid the Bank in framing its policies.

I think that most of us will agree that it is one of the prime duties of central banks to prevent or at least to counteract—as far as is possible within the limits of their authority—any inflationary or deflationary developments of sufficient magnitude to create a threat to the long-run stability of the internal and external purchasing power of their monetary unit.

In order to be able to prevent or to counteract inflationary or deflationary developments, one must first be able to recognize them—and, if possible, to recognize them in their earliest stage. This may be done either by looking for the symptoms of their causes or for the symptoms of their effects.

Except in cases of gross monetary mismanagement, it has always been felt easier to recognize the effects of monetary disturbances than to clearly recognize their causes. We all agree that boom conditions, over-employment, increases in the price level, and balance of payments deficits—especially when showing up simultaneously—are indicators of internal inflationary disturbances, whilst underemployment, price falls, and balance of payments surpluses indicate deflationary conditions. Yet, when some of these symptoms contradict one another, we may feel less sure about the interpretation of our data, and even when agreeing about the observed effects we may find it difficult to agree upon their causes.

In the Netherlands, for example, the post factum analysis of the economic situation in 1953 led to very contradictory opinions about the monetary causes that had been at work. In the Annual Report of the Nederlandsche Bank, I myself concluded that a rather strong deflationary impulse emanating from the government sector had only partly been compensated by lesser inflationary pressures from the private sector, whilst their combined effect had been overcome by strong inflationary impulses from abroad, thus explaining the observed combination of mild boom conditions, increased employment, stable prices, and a rather big balance of payments surplus; however, Professor Witteveen, of the Rotterdam School of Economics, concluded on the basis of increased government expenditure and increased private investment that both government and the private sector of the economy had exerted a strong inflationary impulse, whilst the inflationary influences from abroad—judged by the increase in exports—had been rather negligible.

It is not difficult to imagine that the public showed itself rather flabbergasted by these contradictory opinions, and it took indeed some time before the core of the differences between the two authors had been thoroughly thrashed out in a very illuminating discussion, published in one of our leading economic periodicals.1

This discussion proved that, within the limits of their own definitions and methods of approach, both authors from a formal point of view had been right in their contradictory conclusions.

To understand how this was possible one must be conscious of the fact that any quantitative analysis of economic phenomena has to be based upon a set of simplified suppositions with regard to the inter-dependency of the different factors which are to be observed. This set of simplified suppositions is what economists nowadays call a “model.” The simplification lies in the fact that on the basis of some presupposed rules of behavior—algebraically laid down in equations—a quantitative relationship between different phenomena is established. By considering only a limited number of factors to be open to “autonomous variations” and the others to be “dependent variables,” one is able, with the help of such a model, to predict the probable consequences of assumed variations in the autonomous factors.

Also, post factum, one is able, by linking the observed variations in the dependent factors to the observed variations in the autonomous ones, to allocate the “causes” of the variations in the former, albeit that to explain the post factum quantitative relationships one may have to introduce also some “autonomous” changes in the actual rules of behavior compared with the assumed ones.

The fun, but also the trouble, of this method is that one is always technically right. Not of course in predicting the future, but always in explaining the past. It is for this reason that one should beware of the fact that a model is nothing but a piece of man-made machinery. One can never get out of it what substantially has not been put into it beforehand.

The post factum analysis can only show as “causes” the factors which have been introduced as “autonomous variables” when framing the model. If, post factum, the observed changes in the autonomous factors cannot fully explain, i.e., quantitatively do not fit in with, the observed changes in the dependent ones, such divergences simply have to be attributed to some “autonomous” change in the equations of behavior. Reality is always right. Any consistent model can technically explain everything. The point is whether the explanation has any relevancy.

These considerations prove the importance of choosing one’s model, i.e., one’s method of approach to a problem. My controversy with Professor Witteveen made it clear that by inflation and deflation he actually meant increase or decrease in national income. Consequently, he sought the ultimate causes of inflation and deflation in variations in a set of factors, which he considered to be the only autonomous determinants of changes in national income, viz., government expenditure, private investment, and changes in exports. These autonomous changes in expenditure are linked with their multiple effect on the national income by way of the income multiplier, a constant to be derived from the propensity to save, the propensity to import, and the rate of taxation.

Professor Witteveen’s method of approach thus proved to be fundamentally of a nonmonetary nature. In the frame of his “model,” monetary policy in the sense of banking policy and central bank policy cannot find any place whatsoever, the provision of finance to enable entrepreneurs to carry out their autonomous investment decisions, and to enable Government to carry out its expenditure decisions, being implicitly supposed to adapt itself to demand.

It is clear that such a model cannot fit the purposes of a central bank. If one analyzes monetary phenomena with the purpose of getting some guidance for monetary policy, one must necessarily use a model in which monetary policy can find its place. If we believe that by monetary policy we can exert an influence on the creation of money, and maybe also on the propensity of the business community to hoard or to dishoard, and if we further believe that the exertion of such influence will affect the course of the inflationary or deflationary process, then, for the exposition of our ideas, we must choose a model in which the creation and cancellation of money and the acts of hoarding and dishoarding are treated as autonomous factors.

It is the purpose of the Bank’s method to provide the data for such a model.

Background of the method

The line of thought on which the Nederlandsche Bank has based its analysis of monetary conditions starts from the proposition that the essence of monetary disturbances is to be found in the possibility, created by the use of money, of exercising effective purchasing power in excess of, or in deficiency of, current contribution to production. This can be done only by financing expenditure out of the creation of new money or by drawing on available liquid reserves, or, reversely, by hoarding money or taking it out of circulation. Such financing is, in the terminology of the Bank’s Report, called an inflationary or deflationary method of finance.

Any inflationary monetary disturbance must be accompanied by money creation or dishoarding, i.e., by inflationary financing; any deflationary disturbance, by hoarding or cancellation of money, i.e., by deflationary financing.

It is important to see that this way of approach brings the problem of monetary disturbance back to the individual households.2 Inflation is a problem of financing. It is the decision of individual households on how to finance their expenditure which is decisive for the occurrence or non-occurrence of a monetary disturbance. In a closed economy, such initial disturbance is connected with its multiple effect on production, income, and prices by way of the monetary multiplier; in an open economy also, the balance of payment effects have to be taken into consideration.

From the monetary point of view, these acts of spontaneous inflationary or deflationary financing must be considered as final causes. Even if, from a more general point of view, we may conclude that they are not quite autonomous, but that they themselves are motivated by other factors, we must consider them as final from the monetary point of view, because it is indeed the use of money that makes them possible and because it is our task as monetary authorities to concentrate on the problem of how to prevent, to restrain, to neutralize, to compensate, or, under certain very special circumstances, to stimulate them by the use of monetary policies.

Now we all know that, though banking statistics allow us to observe the sum total of the acts of creating and canceling money, we have no proper means of observing the acts of spontaneous hoarding and dishoarding. Worse still, even though, by observation of individual households, we may be able to observe spontaneous acts of hoarding and dishoarding, we may find it difficult to distinguish them from the acts of induced dishoarding and hoarding that are their necessary concomitants. As Robertson’s famous dictum says: All money that is anywhere must be somewhere. Newly created money, once introduced into the income stream, must be held by some household. How can we distinguish this induced increased holding of money, which forms a reaction to the inflationary process, from the spontaneous hoarding that must be interpreted as a deflationary impulse?

The analysis of the Nederlandsche Bank is based on the contention that by applying certain techniques we can indeed, to a certain extent, do so.

Any act of inflationary financing—and in order not to make my argument too involved I shall now leave out the case of an act of deflationary financing, which leads, of course, to reversed consequences—as I say, any act of inflationary financing leads somewhere else to an increase in income—which may be either real or only nominal—or to a temporary disinvestment. Both will be accompanied by an act of hoarding. But the type of hoarding will be different in these two instances.

The act of hoarding that accompanies a temporary disinvestment which takes place in reaction to inflationary impulses elsewhere is nothing but the expression of a delaying factor in the inflationary process. There is no reason why in a free market economy this type of reaction should be lasting. After a short period of transition, normal dispositions will again prevail. For the time being, this reaction may indeed impede the observation of the forces that are at work and lead us to underestimate the strength of the inflationary impulses. If our observations relate to a sufficient lapse of time we may, however, safely ignore this temporary reaction, unless it be stimulated by the application of direct physical controls. In the latter case, it will lead to the phenomenon of “latent” inflation which we well remember from the strictly controlled economies of the war years.

The acts of hoarding—in the sense of increase of average cash balances held—that accompany any increase of income and turnover are of a different type. They result from the increase in the need of money for transaction purposes which is the necessary concomitant of any increase in the real or nominal level of income and turnover. It is this absorption of money in the transaction sphere which eventually sets a limit to and consolidates the effects of the original inflationary impulse. Any new income, by being spent, tends to create additional income and would continue to do so if the money, created or released by the original act of inflationary financing, were not gradually absorbed by the need for increased cash balances.

It is this absorptive reaction to the inflationary process which is the only lasting one and which has to be separated from the total of observable impulses in order to gauge properly the strength of the inflationary forces that are at work. Such separation can very well be based on circumstantial evidence. If we see that during a period of expanding production the business community has been heavily relying on credit expansion and has, moreover, been running down its holdings of near-money, such as treasury bills and long-term bank deposits, we need not feel any doubt that any observed increase in its cash balances is not due to any autonomous hoarding, but is to be interpreted as a reaction to the existing inflationary development. On the contrary, we may have every reason to believe that a certain amount of autonomous dishoarding of inactive money has been adding to the inflationary impulses and has contributed to increase the amount of active money now being absorbed by trade.

A further problem which arises when observing the financing dispositions of the individual households is the question of the exact definition to be given to the notions of hoarding and dishoarding.

As soon as we recognize that the original monetary disturbance consists of the withholding of purchasing power by an act of hoarding or, contrarily, by the exercise of purchasing power coming from resources other than current income, we have to make up our minds about the interpretation of transactions in the financial field. There are three possible courses of action.

In the first instance, one may interpret any act of saving, if it is also accompanied by simultaneous financial investment, as an act of hoarding, and any financing out of funds obtained from others as an act of dishoarding. This interpretation would force us to call any and all saving deflationary, and any investment, except out of own current income, inflationary. In my opinion this terminology would be grossly misleading. The transfer of funds by way of the capital market from a party who chooses not to invest in realities himself, to another party who does, is so much part and parcel of the normal flow of funds, and has so little to do with what we recognize as actual or potential monetary disturbance, that it would definitely be misleading to interpret such transfer as a deflationary activity on the part of the lender and an inflationary activity on the part of the borrower that happen to compensate one another.

A second possibility would be to reserve the notions of hoarding and dishoarding to hoarding and dishoarding of money itself. This would mean that any transfer of purchasing power by transactions in the financial field would be considered as indifferent from the monetary point of view. At first sight this solution would seem perfectly logical.

On second thought we find, however, that this method of interpretation would have many disadvantages by covering up financing dispositions, which are of essential importance in the analysis of inflationary and deflationary processes, and by forcing us to attribute different meanings to financing dispositions which in the eyes of the individual households themselves are perfectly equivalent.

The Nederlandsche Bank has therefore chosen a third possibility, by applying the notion of hoarding and dishoarding—and consequently the notions of deflationary and inflationary financing—not only to the act of hoarding and dishoarding of money itself, but also to the act of accumulating or running down liquid reserves in the form of certain types of near-money, the so-called secondary liquidities, i.e., short-term claims on the Government, local public authorities, and money-creating institutions.

Its reasons for doing so are the following: In the first instance, one must recognize that secondary liquidities, although they cannot directly be used as a means of payment, and therefore lack one essential function of money itself, are, for all practical purposes, equivalent to money in its function as a store of value. Consequently, there is not much sense in applying the notions of liquidity preference, of hoarding for reasons of the precautionary or the speculative motive, etc., exclusively to money itself. We are much nearer to reality, i.e., to the considerations that motivate the individual households, by applying these notions to the sum total of primary and secondary liquidities.

For a business concern of some magnitude, it is a matter of slight interest differentials whether to keep its liquid reserves in a current account balance, in a short-term bank deposit, or in treasury bills. If it decides not to reinvest for the time being the amounts accumulated on depreciation account—and that is one of the essential deflationary impulses that may originate in the private sector—then it may decide on either one or the other. On the other hand, it would not dream—at any rate not in the Netherlands—of investing its liquid reserve in bonds or in the stock market.

It is therefore quite proper to register the accumulation of money, of bank deposits, or of treasury bills as one and the same act of hoarding. Of course, if the accumulated treasury bills do not come out of the stock of treasury bills held by the banking system, in which case a clearly deflationary cancellation of money takes place, but are directly bought from the Treasury, and if the Treasury uses the money thus obtained for current expenditure, then indeed there need not be any net deflationary disturbance. In that case, however, it is much more illuminating, and therefore more relevant, to interpret this joint transaction as a deflationary development in the private sector, compensated by an inflationary development in the government sector, than to pass it over as a transaction that, from the monetary point of view, could be considered indifferent. For even if no actual monetary disturbance has taken place, a potential one has been created. When, some time later, the private sector decides to reinvest and forces the Treasury to repay its short-term debt, the Treasury in all likelihood will have to fall back on the banking system to meet its liabilities.

It is important to recognize that the impulse for this creation of money has originated in the private sector, even though we may find it necessary to insist that it is up to the Government to compensate this inflationary impulse by some deflationary financing of its own.

A second reason for the Nederlandsche Bank’s extension of the notion of hoarding and dishoarding to secondary liquidities follows from the first. It is the fact that this interpretation allows a better, i.e., a more illuminating, allocation of the responsibility for inflationary and deflationary developments to the separate sectors of the economy.

A possible objection to the applied method is that, though it may be admitted that it is indeed difficult to draw a clear line of distinction between money and secondary liquidities, the same holds true for the distinction between the claims we do and those we do not include in the notion of secondary liquidity. Why, one might ask, include treasury bills in the first category but not short-term treasury bonds? The answer is that this objection is perfectly correct but that not too much importance should be attached to it. There generally are no sharp lines of distinction in practical life. Yet we have to draw them the best we can, the distinction of categories being an indispensable tool for any analytical thinking.

It may indeed very much depend upon local circumstances where the line has to be drawn between what is to be considered as secondary liquidity and what is not. The essential point is that only short-term debts of Government and money-creating institutions can properly be considered as falling in this category. For the essential difference between secondary liquidities and other relatively liquid claims is that the latter can be converted into actual money only by withdrawing purchasing power from the debtor or from some party who is willing to substitute himself for the creditor, whilst the owner of secondary liquidities can, for all practical purposes, force the debtor to create new money, because that debtor is either a money-creating institution, which has only to credit the owner of the claim on current account, or the Government, which would rather find some way to create new money than default on its debts.

Technique of the method

After these preliminaries about the basic ideas behind the method of analysis of the Nederlandsche Bank, the method itself is easily described. It consists of splitting the economy into separate sectors, so as to get as near as possible to what is happening in groups of individual households, and then to register the use of inflationary or deflationary methods of finance in each sector separately. Thus the Bank distinguishes (1) Central Government, (2) Local Authorities, (3) Institutional Investors and Miscellaneous Funds, (4) Capital Market and Sundry Items, and, finally, as a residual item (5) Private Individuals, Trade, and Industry. By using sample survey techniques, which the Nederlandsche Bank so far has not done, one might carry this sectional split still further, particularly for distinguishing between private households and entrepreneurs.

For each separate sector, the total amount of ascertainable net deflationary or inflationary financing is calculated. This total finds expression in the ascertainable liquidity surplus or liquidity deficit of the group. In a closed economy, the sum total of all liquidity surpluses and liquidity deficits must of necessity be zero. In an open economy, the sum total is equivalent to the national liquidity surplus or deficit, i.e., the balance of payments surplus or deficit. This surplus or deficit can again be interpreted as a deficit or surplus of a sixth sector of the economy, namely, the sector Foreign Countries.

Now, for most sectors, the ascertainable liquidity surplus or liquidity deficit can be taken as a direct measure of the net deflationary or inflationary impulse that has originated in that sector. For all practical purposes it is only in the sector Private Individuals, Trade, and Industry and in the sector Foreign Countries that the difficulty arises of properly distinguishing between financing dispositions that have to be interpreted as autonomous causes of the inflationary or deflationary processes and those dispositions that have to be interpreted as the unavoidable effects of such processes.

As I have explained before, it is—when observing a period of sufficient length—only the increase or decrease of cash holdings as a result of the transaction motive which has to be separated from the other acts of inflationary or deflationary finance and has to be interpreted as a reaction to, instead of as a cause of, the inflationary or deflationary process. Now, practically, we can say that this reaction will take place only in the sector Private Individuals, Trade, and Industry, where almost all the transaction money is being held. It is only in this sector, therefore, that the observed liquidity surplus or deficit has to be corrected for the likely change in transaction cash balances in order to arrive at an estimate of the net inflationary or deflationary impulses that have originated in this sector. Circumstantial evidence will easily give us a clue, if not to the exact magnitude, then at any rate to the direction of this reactive factor.

A second field in which we have to beware of the impulsive or reactive character of the observed liquidity surplus or deficit is in relation to foreign countries. The national liquidity surplus, i.e., the balance of payments surplus, can be just as well a reaction to the sum total of deflationary impulses that have been active internally as a measure of the inflationary impulses that have been working on the country from the outside. Here again, circumstantial evidence will have to help us in determining and interpreting the exact character of the observed facts.

The value of a scientific tool, such as an analytical method, can be judged only by the use that can be made of it. It is only when it helps us to understand better the relationship of things, to come to relevant conclusions about their interaction, and, if possible, to devise improved rules of conduct, that we have reason to prefer one method of description to another.

In this connection, it is important to know that the Nederlandsche Bank has not arrived at its method of analysis out of some theoretical deduction, but that this method has grown out of dissatisfaction with the results obtained from a previous analytical approach. This previous approach was the well-known technique of determining the causes of the changes in the volume of money from the combined balance sheet of the banking system. This technique was followed by the Bank up to 1950. But especially in the year of the Korea crisis with its terrific inflationary pressures, it proved itself quite inadequate both to explain clearly what was happening and to provide monetary policy with proper rules of conduct. It was therefore in 1951 that the Bank started with what is considered an improved analysis, which was then further developed in the ensuing years.

To give a simplified example of the type of situation with which the Netherlands was faced in 1950, let us assume that the analysis of the causes in the changes in the volume of money provides the following data for a certain period:

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A customary explanation of this situation would be to say that the increased indebtedness of the government and the private sectors to the banking system indicates inflationary conditions in both sectors. One might feel surprised at the combination of these inflationary conditions with a drop in the volume of money, but would probably be satisfied by explaining this drop as the effect of the large balance of payments deficit to which one would be apt to attribute an autonomous character.

The picture completely changes, however, when, after splitting the economy into sectors and taking into consideration the movement of secondary liquidities, we find that the Government has been repaying its floating debt to the private sector to an amount of 500 units—half to institutional investors and half to the rest of the private sector—and that both institutional investors and the rest of the private sector have been spending these funds on long-term investment and on real expenditure, whilst they have also been running down their cash balances for the same purposes.

It then becomes clear that the inflationary impulse has originated completely in the private sector, that the Government in its own sphere even had a liquidity surplus, which was, however, strongly overbalanced by the inflationary financing in the private sector, this latter being fed not only from credit expansion but also from the liquid reserves in the hands of entrepreneurs, the public, and institutional investors.

Further considering the necessary increase in cash balances for transaction purposes, which must necessarily have been connected with the increase in national income resulting from boom conditions and price increases, we would rightly conclude that the drop in total cash balances in the hands of the private sector was actually giving only a feeble expression to the magnitude of the inflationary impulse exerted by the financing of new expenditure out of available cash reserves.

This example will show why the Nederlandsche Bank believes that its method of analysis, even though it cannot claim to give an exact quantitative measure of the monetary impulses that are at work, yet enables one to obtain a better insight into their origin, their character, and their approximate magnitude.

Use of the method in monetary policy

As a guide to monetary policy, it is particularly important to recognize clearly the origin of both actual and potential monetary disturbances. Minding the old adage that prevention is better than cure, it must be considered the prime task of monetary policy, where possible, to prevent disturbances from arising at all. Trying to compensate for disturbances that have once developed is only a poor substitute for prevention. And yet, we have to be alive to the fact that some of the possible monetary impulses are definitely beyond the control of monetary policy. In this connection I feel that the method of the Nederlandsche Bank has the advantage over other types of analysis of better bringing home to us the enormous importance of the volume of liquid claims in the hands of the public.

Monetary policy, by the use of discount policy and other techniques, can exert a relatively strong influence on the volume of money newly created to finance new expenditure. It can exert no influence, or very little influence, on the recourse of the public to available cash reserves in the form of ready cash. Neither, however, can it exert any important influence on the recourse the public has to its reserve of secondary liquidities, and the less so, the shorter the average maturity thereof. It is almost impossible for the central bank not to accommodate the debtors of the secondary liquidities if they are faced with nonrenewal. No increase in the rate of discount can force them to default on their obligations. And the possible indirect ways of compensating an inflationary impulse which originates from a recourse to secondary liquidities are difficult to find and still more difficult to carry out.

There is much talk by economists about the compensatory anticyclical budget policies that governments ought to pursue. There is, alas, in practical politics very little to show in this field, especially in periods of inflationary boom.

These conditions may indicate that the fight against inflation has to be fought much earlier than we usually think. Much more attention may have to be given to the building up of the inflationary potential during periods of all-over monetary equilibrium by the too easy creation of secondary liquidities.

In an open economy, these conditions also have their consequences for the desirable level of foreign exchange reserves. These must be sufficient to carry the load of any irrepressible spontaneous internal inflationary development, including the possible recourse to secondary liquid resources. One of the practical applications of the use of its method of analysis in the field of monetary policy is to be found in some arrangements that exist between the Nederlandsche Bank and the Netherlands Treasury. These arrangements are partly of a formal character and partly no more than a general understanding about some basic rules which the parties have accepted as a guidance for their policies.

Fundamentally, these arrangements are based upon the idea that indeed the liquidity surplus and the liquidity deficit of the Government, as defined by the Nederlandsche Bank, are proper measures of the deflationary or inflationary influence of government finance on the economy. As, generally, i.e., except under conditions of deflation, an inflationary influence of government finance should, of course, be avoided, the Treasury has on principle accepted the policy of not financing any expenditure by an increase of short-term debt, either in the hands of the banking system or in the hands of the public at large. On the other hand, the Nederlandsche Bank has recognized that the purpose for which the Treasury wishes to have recourse to the Bank is far more important than the fact that it should wish to do so at all. Consequently, the Bank has been willing on several occasions, e.g., in 1951, when the private sector of the economy fell back heavily on all available liquidities, to accommodate the Treasury by a direct purchase of treasury bills in order to enable it to repay short-term debt to the banks, but not to finance its own expenditure. Such recourse of the Treasury to the Bank has been called in the Bank’s Annual Report a noninflationary recourse.

Also, in the conduct of its open market policy, in as far as the latter is based on the portfolio of treasury paper which the Bank obtained when the Government took over from the Bank the wartime Reichsmark claim of 4½ billion guilders, the Bank has been willing to agree to certain restrictions on its liberty of action and even to a formal obligation to accommodate the Treasury under certain circumstances, both, however, under the condition that the Government should not indulge in any inflationary financing in the aforementioned sense. In that case the Bank has regained its full liberty of action.

These examples illustrate that the analytical method we are discussing has been not only of theoretical use, but also positively helpful in coming to a sound and fruitful working relationship between the central bank and the Treasury.

The fundamental rules on which this working relationship is based follow directly from the underlying principles of the method of analysis that have just been set out. They might be summarized as follows:

  • (1) Borrowing by the Treasury from the central bank for the purpose of repaying debt to the banking system is by itself, i.e., apart from its indirect influence on bank liquidity, not of an inflationary character.

  • (2) Borrowing by the Treasury from the central bank for the purpose of repaying short-term debt to the public is by itself not of an inflationary character if the public entrusts these funds to the banking system.

  • (3) If, however, the public uses the released funds for financing new expenditure, such borrowing will indeed be indicative of an inflationary process. The origin of the inflationary impulse must then be attributed to the private sector of the economy.

  • (4) Borrowing by the Treasury from the commercial banking system for the purpose of financing expenditure has, by itself, exactly the same inflationary character as borrowing from the central bank.

  • (5) Borrowing by the Treasury from the public by issue of short-term debt for the purpose of financing expenditure can be actually, and is at least potentially, of an inflationary character. Such borrowing can fundamentally be justified only if serving to counteract the undesirable deflationary effects of spontaneous hoarding in the private sector of the economy.

Mr. Chairman, I am very grateful to you that you have taken the initiative for this panel discussion and that you have been so kind as to ask me to tell this illustrious gathering something about the methods the Nederlandsche Bank has been using to unravel the mystery of inflationary and deflationary developments. I do not claim that this method gives any final answer to the problem. I do believe, however, that it can be instrumental in attaining a better understanding of the strictly monetary aspects of the inflationary and deflationary process. Thus it may, perhaps, be helpful to both central banks and treasuries in better adapting their policies to fighting that curse of slow but persistent inflation that seems to be upon our present day world and to the lifting of which all our efforts should be dedicated.

Monetary Analysis in Italy

Italy was an early starter in the field of monetary analysis. The statement about the flow of savings and the money supply, presented below in Table 49 (pp. 398–99), was first published in the Bank of Italy Report for 1948, and included figures for 1946 and 1947. Our progress since then has, unfortunately, been slow; we have been unable to extend our coverage from “capital” to “current” transactions or to increase the sectorization. The data on lending activities are presented by class of financial institution, but we have no details concerning the ultimate lenders, and the classification of borrowers is still limited, in the table, to the division between the central Government and the rest of the economy. In order to be able to improve the sectorization, some of the things we need are an analysis of bank deposits by ownership, which is made difficult by the existence of a large volume of anonymous deposit accounts, and a regular collection of data on installment credit, about which only a couple of sample inquiries have been carried out so far. We also need readier availability of the accounts of local authorities and social insurance institutions.

When all this is said, it remains true that we have not fully exploited the possibilities of such data as we possess by fitting them into elaborate models similar to those evolved in other countries, the Netherlands being an outstanding example. Some of the descriptions of what the Dutch have been doing and debating look rather forbidding by reason of their conceptual subtleties and their arrays of equations; but the basic magnitudes are defined in simple terms and should not prove difficult to establish in countries provided with good budget and balance of payments accounts. I venture to say that in several countries, including mine, such aggregates as the surpluses in income, finance, and liquidity, as defined in the Dutch documents, are already calculated for the country as a whole and for the government sector, in balance of payments and budget surveys, but so far they have not been organized for the purposes of monetary analysis. I trust that a result of the present meeting will be to speed up progress in this direction.

Having in mind the limitations under which we have been working in Italy, I assume that I should especially address myself to those of you who come from countries that are still taking their first steps along the path of monetary analysis, and that I should aim at covering the ground which lies immediately ahead of you, leaving to the other speakers the task of spurring on those who are already halfway toward the more ambitious goals so far attained by only a few. I shall, accordingly, try to exemplify the use of our type of flow-of-funds survey by applying it to the description of monetary developments in Italy (see Table 49).

The Italian survey of the flow of savings and the money supply has grown out of the analysis of central bank transactions which was made in earlier Bank of Italy reports. The purpose of this analysis was to trace the increase in the note issue to the central bank’s transactions with the Government, to its transactions with the banks, and to Italy’s transactions with foreign countries. The paper prepared by the Fund staff would seem to indicate that monetary analysis in a number of countries is still in this initial stage.

The second step was to move on from an analysis merely of currency movements to one including the entire money supply, by visualizing as a whole the monetary system formed by the central bank and all other banks. From our detailed statement it may be seen that, against the change in assets of the banks and savings banks, we set three sources of finance: (1) the accumulation of funds in savings and time deposit accounts; (2) the creation of bank money as reflected in current accounts; (3) the creation of central bank money, as reflected in the balance of transactions of the banks and savings banks with the Bank of Italy. By taking this second step, we were obviously extending the analysis from activities which are entirely money-creating, such as those of the central bank, to others for which savings accounts in addition to money creation are a source of finance.

A further step was made by bringing into the framework of our statement the activities of long-term credit institutions and of the capital market which consist entirely of the investment of savings and have no money-creating effect. Security issues are shown in the statement both gross and net of bank investments.

The first row of totals in Table 49 shows the distribution of funds between the Government and the private sector and the contributions of the various sources. The area covered by this row of totals is coterminous with the jurisdiction of the monetary authorities under the Bank Control Act and the statutes regulating the issue of securities. It is therefore a matter of some interest, from the point of view of monetary management, to follow the movement in these totals through time and to compare it with changes in certain relevant aggregates drawn from national income statistics, such as those for gross and net investment, as well as to follow the change in the relative size of the various elements composing the total stream. Thus, in the Annual Report of the Bank of Italy for 1955, attention was drawn to a tendency for the flow of funds to decrease in relation to the flow of investments, owing to increased government saving and to the large volume of self-finance in the fields of housing and business investment.

The Bank of Italy’s transactions with the Government and with the Exchange Control Office, which have as their only counterpart the creation of central bank money, are listed below the first row of totals. The list of these flows serves to complete the picture of central bank money creation and to establish the total of treasury cash drawings other than those derived from taxation and government property, namely, the Government’s finance deficit.

So much for the nature and the presentation of the data. If we examine the total flow of funds just described, we see that it is characterized by well-defined movements, especially when we adjust the figures for seasonal changes and relate them to periods covering fluctuations in general economic conditions, rather than to calendar years. We are in a position to do this since all our data are available on a monthly basis.

The periods which may be distinguished since the time from which our analysis starts are set out in Table 1. The first period for which we have complete data runs from October 1946 to September 1947 and covers a year of rapid inflation. The second is a period of mild deflation continuing up to the close of 1948. The third is “neutral”; it concludes with the outbreak of the Korean war in June 1950. It is followed by the Korean boom, which represents a second but milder inflationary period extending to June 1951. The fifth period, one of gently deflationary readaptation following the Korean boom, lasted until the autumn of 1952. From that time on, the movements in the flow of funds do not correspond to any very distinct fluctuations in the level of output and prices and we have therefore divided them simply by calendar years. We have thus two complete cycles of inflation and deflation divided and followed by neutral periods. It should be pointed out that all periods were marked by an expansion in the money supply, deflationary periods being defined with respect to price and production trends.

Table 1.

Analysis of Italian Data

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The figures for the flow of funds are derived from the “detailed statement” (Table 49) by adding the second total in the last column to the first total in the second and third columns from the right.

This figure, relating to a period which is otherwise outside that which we treat, is included merely to demonstrate that the figure for October 1946 to September 1947 is a low minimum.

In order to evaluate the significance of the movements, we must of course consider them in relation to the magnitude of the total volume of bank lending and security issues outstanding. In other words, we must relate the flow of funds to the stock of financial assets outstanding at the beginning of each period. When we make this comparison, we find that the ratio of the flow of funds to the stock reaches high points during the deflationary periods and relatively low ones in the inflationary phases.

Corresponding movements are observed if we relate the flow of funds to the volume of domestic investment, either gross or net, as it is estimated in the national income statistics. The ratio of the flow of funds to net investment is shown on the first line of Table 1. It appears that an absolute minimum (0.76) was reached during the Korean boom, and that a relative minimum (0.88) was reached in the earlier inflationary period of 1946 to 1947. Over the whole period of nine years, the ratio shows a tendency to fall. The low points are mainly connected with the higher profits of industry under inflationary conditions, i.e., with the larger proportion of total investment covered by self-finance.

The relative magnitude of the elements composing the total flow of funds is subject to trend and cyclical movements. This applies to the factors influencing the money supply, to its composition, and its relation to the total flow of funds. I shall take up these various points in succession.

First, as to the factors of change in the volume of money: Central bank transactions in foreign exchange exerted a contractive influence during the two inflationary periods and a highly expansive influence during the periods of deflationary readaptation (as well as during the “neutral” period from January 1949 to June 1950). Transactions of the monetary system with the Treasury exerted at all times an expansive influence, which was stronger during the inflationary periods. The same applies to transactions with the private sector. Central bank finance of government deficits and foreign exchange provided the base for the expansion in bank deposits and exempted the banks from substantial borrowing at the central bank.

Second, as to the distribution of the expansion in the money supply between deposits and currency: When deflationary conditions prevailed, the accumulation of foreign exchange holdings was generally associated with a faster increase in business deposits with the commercial banks and with larger investments by the banks in government securities, allowing the Treasury to reduce its use of central bank finance. (The same applies to the “neutral” period from 1949 to 1950.) As a result, the accumulation of foreign exchange was reflected only in part in increased bank deposits with the central bank, and exerted almost no influence on the note issue. In fact, at all times the expansion in the note issue followed very closely its trend line. This near absence of cyclical movements would seem to reflect the institutional limitations to changes in the income velocity of currency as well as an apparent stability of habits concerning cash holdings on the part of the nonbusiness public. During the inflationary periods, when transactions in foreign exchange exerted a contractive influence, the offsetting processes just described worked in reverse.

The greater steadiness in the development of the note issue, compared with that in deposits, is reflected in marked cyclical swings in the ratio between the two. The second line in Table 1 shows movements in the ratio of the increment in bank deposits to that in currency in circulation; and the third line shows the ratio of the increment in total deposits (including postal savings) to the increment in currency in circulation. In spite of the very sharp upward movement that is due to the trend, we notice that the two inflationary periods are marked by two clear minima (1.5 and 2.5 in the first series; 1.6 and 3.6 in the second series). It is perhaps desirable to give a word of explanation for the very high figures recorded for the fifteen months preceding October 1946. These are due to the return to the banks of the large stocks of notes previously held by various classes who had profited from the conditions of scarcity and social disintegration of the preceding period of war and foreign occupation. It is also worth pointing out that the ratios reached toward the end of the period of nine years are high, approaching much closer than during the earlier part of this period the ratios recorded in the more highly developed western countries.

The elimination of the trend movement in these two series gives the cyclical values shown as lines 4 and 5 in Table 1. Here the movement we have just referred to is still more visible, with marked negative deviations from the trend during the two inflationary periods. We should keep in mind, in this connection, that the holdings of currency are mainly in the hands of the nonbusiness public, and that the fall in the ratio of deposits to currency during the inflationary periods doubtless reflects the comparative lack of responsiveness of this part of the public to price movements and opportunities for profit, at least so long as inflation has not reached an extreme stage. Thus the public absorbs cash in a manner which exerts a dampening influence on the inflationary process, for, by decreasing to this extent the liquidity of the banks, the public in effect lowers the coefficient of expansion applying to the funds available to the banking system at the central bank. The use of average coefficients of expansion therefore seems inappropriate in the analysis of the credit cycle, whenever currency is an important part of the money supply. I shall adopt this as my first conclusion.

The last twelve months of the period also show a negative deviation from the trend in the ratio of the increments in deposits to those in currency; this deviation is most likely due to the shift out of bank accounts and Post Office savings accounts following the reductions in the rates paid on such accounts by the Post Office after October 1953 and by the banks after the coming into force of a new cartel agreement in February 1954.

This shift was toward the capital issues market, as is shown by the last two series in Table 1. Series 6 represents the ratio of net security issues (exclusive of the investment of bank reserves) to the flow of funds. In series 7 security issues are measured exclusive of all bank investments. In both series a strong upward trend is noticeable and a comparison between the two, which gives an indication of the “voluntary” investments of the banks, shows that these investments are high in periods of deflation and of relatively weak demand for bank credit, and low in periods of inflationary boom. This seems to show that, in times of low demand for bank credit on the part of customers, the banks are less active in soliciting subscriptions to security issues from their customers and prefer to take up themselves increasing amounts of securities, thus contributing toward building up the volume of inactive deposits during such periods.

Taking into consideration the various facts and figures which I have mentioned, I would suggest, as a second conclusion, that cyclical deviations from trend in the volume of deposits are not as a rule positively associated with conditions of active inflation. Taking the monetary system as a whole, the counterpart of an increase in deposits is sometimes to be found in an accumulation of foreign exchange, possibly expressing an improvement in the liquidity position of an open economy as a whole. To the extent that government revenue is affected by deflationary conditions and government expenditure by anticyclical policies, the increase in deposits may reflect an improvement in the liquidity position of the private sector matched by a deterioration in that of the Government, in which case the increase in deposits will be balanced by larger bank lending to the Government. It may also happen that increased deposits are the outcome of a disturbance in the normal distribution of liquidity inside the private sector, as between households, traders, and manufacturers. The disturbance may arise from reduced sales, a lower profitability of industry, and an involuntary accumulation of stocks in certain sections of the productive and distributive system. In this case the larger deposits will be met by larger advances.

I hope that some of you may find the validity of these remarks worth testing on the data of other countries.

Federal Reserve Flow-of-Funds Accounts

The rediscovery of central banking as an indispensable tool of economic policy is commonly viewed as a notable feature of the postwar epoch. Accompanying this rediscovery has been a re-examination on the part of the public of functions proper to central banking, and on the part of central banks themselves of normal operations appropriate to their functions.

This re-examination has underscored again central banking’s urgent need for objective norms of reference—quantitative norms in the form of statistical statements of approximate reliability. Re-emphasizing this imperative has given fresh impulse to central bank intelligence activities and to experimental attitudes in developing new facts and organizing data into new patterns of relationship.

The Federal Reserve flow-of-funds accounts for the United States economy are the product of this postwar climate. The experimental form of the accounts needs to be explicitly stressed. The accounts must meet the pragmatic test of central bank intelligence needs. They must be adaptable to new types of data. And they must be capable of modification to provide for observed changes in the functional and institutional features of the economy. Limitations in the accounts, for any of these reasons, may give rise to minor or even major redesign of the experiment.

The experiment has had to be on a scale consistent with the complexities of the task. Both scale and complexities have made the job arduous. The work began about ten years ago, but the developmental stage of the accounts is not yet over. The accomplishment to date is an accounting structure on an annual basis from 1939 through 1955, and we are now engaged in putting the structure in quarterly form. An interval must elapse before quarterly data can be estimated regularly. Until the accounts can be maintained on a current quarterly basis, their usefulness for central bank intelligence will be limited.

Broad objectives

What impelled the Federal Reserve to launch this quantitative experiment? What have been, and continue to be, our intelligence goals? These are simple questions, but the answers are not simple.

The United States economy has had available for some years now a vast quantity of statistical data pertaining to its varied nonfinancial as well as financial activities. These data have been systematized and summarized in a variety of indices, in various aggregates, and in such relationships as the international balance of payments, the monetary reserve elements, the input-output accounts, and the national income-product accounts.

What has not been available is a sweeping organization of data that would demonstrate the primary fact that, in a market economy, the flow of credit and money affects all activities and, in turn, all activities affect the flow of credit and money. In other words, what has been lacking in the economy’s armory of information has been a single statistical panorama of both nonfinancial and financial activities—a record which would connect the money surface of things with the product surface. Such a pattern would furnish a moving picture image of the quantities that, in combination with market prices and interest rates, are generally subsumed under the term “the credit and monetary situation.”

Filling this need, we felt, would throw into new perspective the many problems which must concern any money management directed toward general stability of money purchasing power and orderly economic growth. It would help, for example, to clarify contemporary money functions by distinguishing more effectively between the store of value work, exchange of wealth work, and technical work that money and credit do. It would help further to delineate the role and functions of the various financial institutions.

In addition, it would tell which economic groups purchase the current national output as well as which groups purchase existing wealth and claims to wealth. It would show where the credit or money comes from to make both output and asset purchases, and would make understandable the changes which occur in cash balance and debt positions. And it would aid in tracing the flow of savings from surplus to deficit units, and would indicate the forms in which these savings flows occur.

Beyond this, it would reveal more plainly the relationships between current account payments and capital account payments, and would contribute to the assessment of debt positions, including the soundness of debt. It would illuminate the decision-making process, and help identify the sector source of impulses in economic expansion and contraction.

Lastly, it would assist in differentiating between instabilities caused by defects in financial organization and other instabilities resulting from psychological disturbances in single markets, which then pass through the entire economy, at times convulsively.

The objectives of the experiment, therefore, were broad, multipurpose, and fundamental. They were pursued with the main prepossession of wearers of the central banking cloth—namely, that monetary and other financial variables are vitally important determinants conditioning economic behavior and shaping economic events.

Some pragmatic considerations

The Federal Reserve staff sought a structure of data that would yield utmost flexibility of application to its own uses and to the uses of others. While monetary and financial research is a prime responsibility of a central banking system, it is also an activity of other government agencies, of universities, of financial and business institutions, and of independent scholars. A central bank, being at or close to the source of flow of much economic information, has a responsibility to make data available in well-ordered form for other users—in return for which it gets the benefit of their outside studies and criticism. Furthermore, the data supplied will make their greatest contribution if they are organized in advance with a view to general analysis rather than narrowly to monetary analysis.

In developing its flow-of-funds accounts, the Federal Reserve staff conscientiously endeavored to provide an accounting structure that would be as free as possible from ties to any doctrinaire approach or single theory of economic causation. The staff, moreover, was careful to avoid handicapping its own or any other analyst’s freedom to select hypotheses for testing, or freedom to combine or correlate data in testing. This necessarily has meant maintaining a neutrality toward economic concepts whose general definition accountingwise is moot because they are subject to special tailoring in accordance with the analytic objective or problem in hand. Savings, investment, money, and liquidity are specific examples of such concepts. Data in the flow-of-funds accounts can be combined in several ways to derive alternative measures of these concepts.

Critics may say that the Federal Reserve staff has been too purist in this effort to attain neutrality of accounting structure and data treatment. But this staff itself wants experimental latitude in defining and applying concepts, since the quest for improved or more effective quantitative norms for central banking must constantly be pressed forward in a spirit and atmosphere of unhampered research. Accounting definitions of economic concepts must freely adapt to the purpose or problem of inquiry; they cannot be permitted to express merely the hardened dictate of convention or previous official sanction.

Essence of accounts

The Federal Reserve staff is often asked to put in a nutshell just what the flow-of-funds accounts are. In simple terms, the accounts divide the nation’s economic decision makers into institutionally homogeneous groups, called sectors. For each sector, the accounts show transactions in goods, assets, and credit and money in a consistently defined system of classification. Thus, each sector account identifies and measures the main sources of funds with which the sector makes payments and its principal uses of funds in making payments.

The flow-of-funds accounts closely resemble the international balance of payments statement. In international studies, we have long recognized that understanding of a nation’s changing position in commerce with other nations requires the recording in a single statement of both goods, services, and gold flows, and credit and capital flows. The flow-of-funds accounts employ a comparable approach in domestic analysis.

For each institutionally distinct group within a nation, the flow-of-funds accounts provide related measures of the flows of goods and services and of credit and money. The accounts, in effect, provide a balance of payments statement for each major sector of the economy vis-à-vis the rest of the economy. The separate statements thus afford a framework for observing the changing positions of the major economic groups within the nation and the interaction of these changes with those for other sectors. The whole system of balance of payments accounts for the sector groups is simultaneously derived in accordance with standard accounting rules and hence is statistically integrated.

Relation to national income-product accounts

The following question is frequently asked about the flow-of-funds accounts: What is their relation to the national income-product accounts? And more specifically, what is contributed by the flow-of-funds accounts that is not already provided by the income-product accounts?

Brief contrast of accounting structures. A brief contrast between the two accounting structures can serve two purposes. In the first place, it can make plain that the systems are not substitutes or competitors. They supply different views of an economy’s aggregate activities. Both are needed for empiric inquiry. In the second place, a contrast can show why the accounting logic and sectoring of the two systems differ in so many respects.

The national income-product accounts are aptly described as economy performance accounts. They undertake to measure in both current and constant prices the final product available to satisfy current economic wants plus the final product utilized to provide the tools by which wants will be satisfied in the future. The product measured includes that exchanged by barter and that which is produced and consumed without passage through a market place.

The income-product accounts emphasize productive activity and the allocation of product among various types of use. Consequently, the sectors of the accounts represent types of activity—production, consumption, investment—rather than types of institutional unit. The income generated in the productive process is distributed by economic function or factor of production—worker or employee, proprietor, shareholder, or creditor.

Financial transactions, such as those in cash balances, securities, and other financial instruments, are excluded from the income-product accounts for two reasons, one strictly an accounting matter and the other a purposive matter. First, when all financial and nonfinancial transactions are consolidated into a single summary account for the total economy, borrowing and lending activities within the domestic economy must cancel out since they are necessarily equal. Accordingly, they are not recorded in the final summary accounts.

Second, measurement of the value of current product and income is an intelligence goal of prime importance in itself. Since the exchange of financial claims is not a component of the nation’s current product, many students have felt that the goal of measuring output and income should not be compromised by putting these exchanges into the accounting picture. There are some who would go further and argue that financial transactions are fundamentally of a lower order of importance for use in observing and analyzing economic realities.

The flow-of-funds accounts have quite a different focus. Their purpose is to describe in current money units the total flow through markets of transactions in current product, existing assets, and financial claims. In their present form, they exclude as far as practicable barter transactions, imputed transactions, and bookkeeping transfers among the internal accounts of single transactors, such as capital consumption allowances. The accounts show only cash and credit transactions.

The accounts are focused on the main work that credit and money do in clearing markets and on the structure of financial assets and debts remaining after such clearance. Actions in these markets are by decision-making units responding to forces growing out of a variety of past commitments and a variety of current incentives for spending or investment. Hence, the economic unit of accounting must be the individual or institution that makes decisions. Furthermore, the transaction record of the accounts must include current and capital transactions and, as a minimum, changes in financial assets and liabilities.

Thus, the sectoring or allocation of transactions is on an institutional rather than an activity basis. Financial institutions, divided into as many subgroups as are deemed appropriate, are an essential feature of the account sectoring. The transactions classification is pragmatic, that is to say, transactions are grouped into categories that appear to be meaningful in terms of market processes.

The user of the flow-of-funds accounts is obliged to recognize that activity in markets is the outcome of decisions by many different individuals and institutions acting as economic units. The behavior of each unit must be observed through all of the transactions in which it may engage. For summary observation, their total behavior must be analyzed in the same manner. Stated another way, the meaning of a given group’s cash balance, liquidity, debt, or savings and investment position, however defined, cannot be adequately analyzed without reference to the group’s total receipts and expenditures, their composition, and other associated financing as reflected in asset and liability changes. Similarly, nonfinancial transactions must be studied in relation to each group’s financial position and activities. This is general equilibrium analysis in empiric form, and central banking must engage in such analysis to achieve its key intelligence need—a balanced objective view of the entire credit and monetary situation.

Examples of contrasting accounting treatment. The differences between national income-product accounts and the flow-of-funds accounts may be further clarified by a few examples of contrasting treatment.

The income-product accounts, for instance, record in separate activity accounts transactions for current consumption and transactions ordinarily thought of as investment in tangible assets. Thus, consumers’ purchases of homes are taken into the same account as landlords’ purchases of rental housing and business purchases of new plant and equipment. But in the flow-of-funds accounts these several transactions are recorded in at least three sectors: the consumer sector, the unincorporated business sector, and the corporate business sector.

The reasoning behind this institutional sectoring is to be found in the main purposes of the accounts, namely, to understand the interplay and interaction of market transactions by major groups of decision-making units. The purchase, say, of a home by a consumer household is influenced by factors recorded in the accounts, such as the amounts spent for current living, the receipts margin over current living, the cash and other financial balances previously set aside and on hand, and the amount of debt and debt service for which obligations have already been assumed. The home purchase decision is also influenced by factors external to the accounts, such as the cost and availability of home mortgage credit and the home purchase price. The market process for home purchases, or any other market process for that matter, may not be realistically summarized or seen empirically except in these terms.

There are other aspects of home ownership that bring out the difference in accounting rule applicable to the two systems of accounts. In the income-product accounts, the costs of home maintenance are recorded as an expenditure of the business sector; an imputed rental payment is recorded in personal consumption expenditures; and the excess of this imputed rental over costs of maintenance and depreciation is recorded in the personal income account. Since financial flows are excluded from the accounts, neither the incurrence of a mortgage nor the repayment of mortgage debt would be recorded anywhere. In the flow-of-funds accounts, imputed rents are excluded from the entries, but actual payments on home maintenance and debt service, as well as the net change in mortgage debt, are entered in the consumer sector account along with all other receipts and payments.

Another illustration of contrast between the two systems of accounts is in the treatment of unincorporated business establishments. The logic of the income-product accounts does not require a separate treatment of these units in special sectors. In the flow-of-funds accounts, a distinction between unincorporated and incorporated business is adhered to on institutional grounds, because the legal form of organization affects financial patterns of business and access to financial markets. And the financial patterns and decision making of the farm business are unique to that activity, so that incorporated and unincorporated farms are grouped together in a special farm business sector.

A final difference to be mentioned is one already underscored—the income-product accounts have no sector for financial institutions, whereas the flow-of-funds accounts have several such sectors. The flow-of-funds accounts are designed to throw light on financial as well as nonfinancial transactions. Since financial transactions are the primary function of financial institutions, their separate sectoring and subsectoring must be provided for to express this broader perspective.

An illustrative application, 1953–55

The Federal Reserve flow-of-funds accounts for the United States were first published in December 1955. Their wealth of detail has overwhelmed not a few consumers of statistical information. These consumers have asked: Can this rich quantitative record be put to work? Or is it mainly useful as a directory of statistical numbers—a sort of telephone directory?

Getting data organized and ready for analysis and applying them in analysis are successive steps in a research process. The accounts, as emphasized earlier, are constructed with general purpose objectives. Also, as emphasized earlier, application to many analytical problems thus far has been handicapped by the unavailability of the accounts on a quarterly basis. But some progress in this direction has been made. Using the preliminary quarterly data at hand, we will apply the accounts to a special purpose—a picturing of the credit and monetary situation in the United States over the years 1953–55, an interval marked by recession and recovery.

The illustration must necessarily be condensed and incomplete. A full explanation of the combinations of data employed must be reserved for footnotes to the charts presented, but every effort has been made to identify the curves in a self-explanatory way. One point of simplification may be mentioned in advance. The terms “credit” and “credit markets” are used to cover transactions in both debt and equity instruments.

Chart 1 portrays the total amount of funds—both debt and equity—raised in United States credit markets in each quarter of this three-year period. Note, first, the clear upward drift of financing demands, so that financing activity in the recovery months of 1955 moved above levels reached in the peak period of the preceding cycle. Note, secondly, the wide seasonal swing in financing activity. These wide movements highlight one of the principal, but little commented on, tasks of central banking operations, namely, that of moderating the market impact of fluctuations in credit demand within the year, caused by the seasonal swings in financing needs of consumers, business, agriculture, and government. They also suggest the complexities of the credit market problem when a cyclical upsurge in financing demand coincides with a peak in seasonal financing demand.

Chart 1.
Chart 1.

Funds Raisedin Markets

(In billions of U.S. dollars)

Citation: IMF Staff Papers 1957, 001; 10.5089/9781451960211.024.A001

In Chart 2, total funds advanced during the years covered are shown, together with a subdivision of the total into commercial banking and other sources. Here, the savings and time deposits of commercial banks are grouped with other sources. The picture emphasizes the role that commercial bank activity plays in absorbing seasonal increases and decreases in financing demand. It also brings out the increasing importance during the 1954–55 recovery period of sources of funds other than commercial banking.

Chart 2.
Chart 2.

Funds Advanced In Markets

(In billions of U.S. dollars)

Citation: IMF Staff Papers 1957, 001; 10.5089/9781451960211.024.A001

We must now look behind these totals to see what groups were taking and what groups were supplying funds. Chart 3 shows that the most volatile part of the demand for financing stems from the Federal Government. Seasonal swings in financing demands are dominated by those of the Federal Government. Behind this wide seasonal movement is the heavy concentration of personal and corporate income tax receipts in the first half of the year. One point of interest before leaving this chart is the gradual dampening of Federal Government financing demands over this short period. Government expenditures were cut in the early part of the period, and tax and other receipts rose in the latter part. Thus, as upswing in activity progressed, fiscal policy played an increasing countercyclical role.

Chart 3.
Chart 3.

Funds Raised, by Sector

(In billions of U.S. dollars)

Citation: IMF Staff Papers 1957, 001; 10.5089/9781451960211.024.A001

Chart 3 also brings out that consumer and business demands for financing were of about the same order of magnitude over this period, a fact no doubt surprising to many. Also, these two sources of demand accounted for most of the slackening of total demand in the 1953–54 recession and all of the increase in total demand which occurred during the recovery phase. The volume of funds raised by other sectors, mainly state and local governments, showed more seasonal and cyclical stability over the entire period. The volatility shown by consumer financing merits further attention.

The changing financial position of consumers during the period is traced on Chart 4, which shows the consumers’ surplus of funds on current account, their outlays for purchasing new homes and durable goods, the total of their funds advanced or lent to other sectors, and their borrowing. On the whole, consumer capital outlays were well maintained during the 1953–54 recession, with financing from their own funds displacing borrowing to an appreciable extent in one phase of the downdrift. Consumer capital outlays expanded sharply in the fourth quarter of 1954, and remained high during 1955. In this period, the difference between the current surplus and capital outlays narrowed markedly. The accompanying pressures on consumer resources are evidenced by the narrowing margin between funds advanced and funds borrowed.

Chart 4.
Chart 4.

Consumer Sector: Sources and Uses of Funds

(In billions of U.S. dollars)

Citation: IMF Staff Papers 1957, 001; 10.5089/9781451960211.024.A001

Consumer borrowing is mainly for the purpose of financing capital outlays, so that a tolerably close correspondence in movement might be expected in the consumer capital outlay curve and the consumer borrowing curve. The dissimilarity in movement of the curves is, therefore, rather striking. However, if one adds to capital outlays the purchases of used durable goods and used houses, as in Chart 5, the pattern of movement of the two series becomes somewhat closer.

Chart 5.
Chart 5.

Gross Capital Outlays: Consumer Sector

(In billions of U.S. dollars)

Citation: IMF Staff Papers 1957, 001; 10.5089/9781451960211.024.A001

To show the shifting pattern of business finance, Chart 6 presents a condensed flow-of-funds picture for all business combined. The surplus on current account of the business sectors, calculated here after income tax payments, naturally shows sharp seasonal swings because of the tax payment schedule. Similar seasonal swings are shown in business funds advanced to other sectors, principally because business accumulates securities to provide for tax payments and then liquidates the securities to pay taxes.

Chart 6.
Chart 6.

Business Sectors: Sources and Uses of Funds

(In billions of U.S. dollars)

Citation: IMF Staff Papers 1957, 001; 10.5089/9781451960211.024.A001

Capital outlays and borrowing are of particular interest in Chart 6. Business capital outlays declined irregularly over the recession quarters and increased in 1955 but not to levels much above those of the preceding cyclical peak. As capital outlays decreased, borrowing first moved up and then went down. As an uptrend in capital outlays followed through 1955, borrowing rose. In the last quarter of 1955, business borrowing increased sharply, accompanying a bulge not in capital outlays but in funds advanced. This bulge in funds advanced reflected in part provision for taxes at rising levels of earnings, in part larger financing by the business sector of consumer capital outlays, and in part intrasector extension of trade credit.

So much for the demand side of the financing picture over the 1953–55 period. Let us look more closely into the supply side. Measures of the funds advanced directly to the credit markets are presented in Chart 7. The amounts traced are the net lending by major sectors through the debt and equity instruments issued by nonfinancial sectors. Wide seasonal swings are shown for the funds supplied by business and by commercial banks, and an upward trend marks the business lending curve. The volume of funds supplied by financial intermediaries—savings banks, insurance companies, savings and loan associations, credit unions, investment trusts, and pension funds—remained remarkably constant over the period. Funds supplied by consumers decreased from mid-1953 to the third quarter of 1954, and then, with business recovery in 1955, rose to about the level of the preceding cyclical high.

Chart 7.
Chart 7.

Funds Advanced in Markets, by Sector

(In billions of U.S. dollars)

Citation: IMF Staff Papers 1957, 001; 10.5089/9781451960211.024.A001

As Chart 8 shows, the direct advance of funds to the credit and capital markets is not the only supply contribution made by consumers. They also contribute indirectly by adding to cash balances and by channeling funds through financial intermediaries through deposits and shares in savings institutions and net premium payments to life insurance companies. Their advances to intermediaries were relatively stable, but their holdings of cash showed considerable variation, declining during the first phase of recession and increasing appreciably during the late phase of recession and early phase of recovery. After decreasing as recovery gained full swing, consumers’ cash balances showed little change in 1955. Many of these changes in consumers’ cash balances were inverse to the changes in their holdings of government securities.

Chart 8.
Chart 8.

Consumer Sector: Funds Advanced

(In billions of U.S. dollars)

Citation: IMF Staff Papers 1957, 001; 10.5089/9781451960211.024.A001

For business, in contrast, as Chart 9 illustrates, direct advances and changes in holdings of cash have moved together over this period. Beginning in mid-1954, however, business held more of its liquidity in securities, notably short-term government securities, than in cash—a development related to the rise in market interest rates accompanying the recovery movement.

Chart 9.
Chart 9.

Business Sectors: Funds Advanced

(In billions of U.S. dollars)

Citation: IMF Staff Papers 1957, 001; 10.5089/9781451960211.024.A001

The changing composition of funds advanced by all nonfinancial sectors together is pictured in Chart 10. Through this cycle in demands for financing, the flow of funds made available to nonbank financial intermediaries was remarkably stable. Response to both seasonal and cyclical fluctuations in demand for funds was primarily through changes in direct lending among nonfinancial sectors and in their cash balances. The heavy demand for funds which developed as spending activity increased in late 1954 and in 1955 was met to a large extent by direct lending on the part of the nonfinancial sectors and by more active use of cash balances.

Chart 10.
Chart 10.

Nonfinancial Sectors: Funds Advanced

(In billions of U.S. dollars)

Citation: IMF Staff Papers 1957, 001; 10.5089/9781451960211.024.A001

These charts have shown the wide quarterly fluctuations in borrowing and lending activities. The concluding chart, Chart 11, puts the quarterly flows of debt instruments in the perspective of the total of public and private debt outstanding. The main point to be observed is that consumer debt showed the most rapid rate of growth in this period. The debt of state and local governments also grew steadily and rapidly. Business debt rose more slowly through most of the period, but the rate of increase accelerated in the second half of 1955. The stability of federal debt over this period kept the rise in financing demands from other sectors from pressing unduly against the available supply of savings.

Chart 11.
Chart 11.

Total Debt, by Sector

(In billions of U.S. dollars; logarithmic vertical scale)

Citation: IMF Staff Papers 1957, 001; 10.5089/9781451960211.024.A001

This all too sketchy image of the shifting credit and monetary situation over an important fragment of recent history illustrates alternative responses that each of the major groups can make to changing pressures in financial markets and in their own financial positions. It is this diversity of response pattern that makes research for policy purposes complex and makes risky any generalization on merely a few elements in the economy.

At the outset, we stated that the single objective of this graphic presentation was to offer an experimental example of the analytic utility of the flow-of-funds accounts. If the combinations of data shown in the charts have been suggestive, they will have served their purpose.

Concluding observations

The need to construct a statistical bridge between the money surface of things and the product surface is one felt by economic observers in other countries as well as in the United States. Some have undertaken to meet the need by resectoring the income-product accounts and by adding, to the derived transactions record, measurements by sectors of exchanges of existing assets, transfers of claims to wealth, and changes in debtor-creditor positions. These undertakings have obviously been in the same direction as, and have a close family relationship to, the Federal Reserve flow-of-funds accounts.

The difference between them and the flow-of-funds accounts is partly a matter of approach and partly a difference in scale of experiment. Our own experimental drives led us to undertake a comprehensive rearrangement, reallocation, and supplementation of the income-product accounts so that a panoramic view of market processes within a single accounting framework could be achieved. This departure from the limitations of existing accounting structures represents, in fact, a central contribution of the flow-of-funds accounts. Admittedly, some qualified observers will say that the strangeness and complexity of the new accounting structure is too high a price to pay for this contribution.

Any rearrangement of data to achieve a general observational view involves difficult, at times delicately balanced, choices as to the stratification of data. The choices made by the Federal Reserve staff are at many points tentative and open to dispute. We do not urge these choices upon other statistical workers as the only reasonable solutions. But statistical workers in other countries should be urged to bridge the statistical record of the money surface of things and the product surface. Such a bridging obviously has to be done with a special eye to the distinctive institutional features of a particular economy. And it must be accomplished within the limitations of available data.

We can all learn much from one another’s experimental endeavors along these lines. But at this stage of intelligence, progress in the national accounting arts can be severely handicapped by standardizing the measurement of payments too quickly with a view to international comparability. It is not so important that we observe relations within the different economies on the basis of a uniform accounting pattern. But it is important that new analytic tools are developed which are effective in serving the vital need, recognized in all countries, of bridging the gap between money activities and product activities so that monetary and other stabilization policies are determined with as much public understanding as possible.

Notes to charts

The time series presented in these charts are special groupings of quarterly flow-of-funds data, and the following notes describe the groupings in terms of flow-of-funds sectors and transaction categories. The sectors and transaction categories themselves are explained in detail in Flow of Funds in the United States, 1989–68 (Board of Governors of the Federal Reserve System, 1955).

A general point to be made here is that the term “net change” in financial assets and liabilities in these notes refers to net flow—the excess of asset purchases or of borrowing over receipts from sale of assets or from retirement of debt. Capital gains and losses from changes in valuation of assets and liabilities are not included in either the data or the term “net change” as used here. It should also be stated that, for convenience of statement in the notes, the words “liability,” “claim,” and “borrowing” cover equity shares in corporations as well as debt instruments.

Sector groupings in charts

Commercial banking system covers all commercial banks, the Federal Reserve System, and Treasury monetary funds.

Financial intermediaries consists of mutual savings banks and the Postal Savings System, life insurance companies, self-administered pension plans, savings and loan associations, credit unions, investment trusts, and other miscellaneous financial institutions.

Business is the combined total of the corporate, nonfarm noncorporate, and farm business sectors of the flow-of-funds system.

Consumer and Federal Government are the two flow-of-funds sectors described in the Flow of Funds report.

Other sectors is the state and local governments sector and the rest of the world sector.

Nonfinancial sectors refers to all sectors except bank and financial intermediaries as described above.

Transaction groupings in charts

Chart 1. Funds Raised in Markets—the net change in liabilities of all non-financial sectors combined. The financial instruments covered are federal obligations, state and local obligations, corporate debt and equity securities, mortgages, consumer credit and other trade debt, and miscellaneous liabilities of the non-financial sectors. Trade debt as reflected in these charts is net trade debt owed by nonbusiness sectors to the business sectors.

Chart 2. Funds Advanced in Markets—funds advanced to the nonfinancial sectors (the same group of financial instruments as “funds raised” but from the asset rather than liability point of view). Commercial banking—an estimate of net funds advanced through the commercial banking operations of the banking system as distinguished from its savings deposit operations; it is measured by total change in bank credit less change in time and savings deposits. Other sources—all other advances to nonfinancial sectors; it covers funds advanced by financial intermediaries, those available through the savings deposit operations of banks, and funds advanced through direct lending and purchases of securities by investors in the nonfinancial sectors.

Chart 3. Funds Raised, by Sector—distribution by debtor sector of total funds raised in markets (Chart 1).

Chart 4. Consumer Sector: Sources and Uses of Funds—condensation of the flow-of-funds consumer sector statement. Current surplus—excess of current non-financial receipts over current nonfinancial expenditures, that is, the net of all nonfinancial transactions other than purchases and sales of tangible capital assets (homes and consumer durable goods) and premium and benefit payments in connection with private life insurance, annuity, and pension programs. Capital outlays—purchases of homes and durable goods less proceeds from sales of such assets. Funds advanced—net changes in consumer holdings of financial assets and growth in equity in assets of life insurance companies and private pension programs. Borrowing—net changes in total consumer liabilities, i.e., mortgages, consumer credit, security loans, and policy loans.

Chart 5. Gross Capital Outlays: Consumer Sector. Gross expenditures—purchases of new and used homes and durable goods. The series differs from the capital outlays shown in Chart 4 in that the latter is net of consumer sales of used homes and used durable goods. Borrowing—the same series as in Chart 4.

Chart 6. Business sectors: sources and uses of funds—a condensation and rearrangement of the combined statements of the three flow-of-funds business sectors. Current surplus—excess of total nonfinancial receipts over nonfinancial payments (including tax payments) in current accounts; it covers all nonfinancial transactions except purchases and sales of tangible capital assets. Capital outlays—purchases of tangible assets; it includes gross expenditures on plant and equipment and net change in inventories. Funds advanced—changes in holdings of cash, securities, and receivables net of payables. Borrowing—net change in all liabilities other than trade payables.

Chart 7. Funds Advanced in Markets, by Sector—distribution of total funds advanced (Chart 2) by sector group advancing funds.

Chart 8. Consumer Sector: Funds Advanced—distribution by type of asset of the total funds advanced by consumers (Chart 4). Cash balances—changes in holdings of currency and demand deposits on a holder-record basis. Advanced to intermediaries—net changes in consumer holdings of time and savings deposits in banks, shares in savings and loan associations and credit unions, net flows to investment trusts, growth in equity in private life insurance and pension programs. Loans and securities—changes in all other consumer financial assets, mainly government and corporate securities and mortgages.

Chart 9. Business Sectors: Funds Advanced—distribution by type of asset of total funds advanced by business sectors (Chart 6). Cash balances—changes in currency and bank deposit assets of business on holder-record basis. Loans and securities—changes in all other financial assets, including trade receivables net of trade payables.

Chart 10. Nonfinancial Sectors: Funds Advanced—net change during each period in the total financial assets of the nonfinancial sectors and the net premiums under private life insurance and pension programs distributed by type of asset. The types of advance are described in the above notes for Charts 8 and 9. The total here is closely related to the earlier series on funds advanced in credit markets (Chart 2) but differs from it in that it includes advances to banks and financial intermediaries rather than from them. The numerical difference between this total and the earlier total arises from gold flows, changes in cash balances held by financial intermediaries, changes in bank capital accounts, and changes in the currency and deposit float.

Chart 11. Total Debt, by Sector—total debt outstanding of each of the sector groups shown. The business debt series does not include corporate equity securities, tax liabilities, or business trade payables (netted against trade receivables in this presentation).

Monetary Analyses

The compilation of financial data for analyzing monetary problems and for the evolution of monetary policy has received widespread attention in recent years. Statements for these purposes, which may be called Monetary Analyses, are now prepared by a large number of central banks and other national authorities. In the Appendix to this paper, 58 analyses prepared by 41 countries are published and described; of these 58 analyses, 16 were published in their present form for the first time in 1955 or 1956. Some of the general questions of methodology raised by these statements may usefully be discussed here, by pointing out their similarities and contrasts.

The statements may be discussed as a group because they have in common the use for monetary statistics of the principle of sector statistics. The economy is composed of several groups playing different roles and reacting differently to economic conditions. Social accounting, of which Monetary Analyses are a part, has been developed by compiling statistics that will measure transactions of and transactions between the several sectors—government, business, consumers, rest of the world, etc. Like the national income accounts, Monetary Analyses are made by dividing the economy into sectors. National income accounts measure the income of the sectors and the expenditure transactions between them, concluding with measures of each sector’s savings and each sector’s real investment expenditures. National income accounts do not explain how the sector’s deficits or surpluses were financed, and they tell nothing about money and the role of banks. Monetary Analyses measure either the borrowing and lending transactions of or between the sectors, or the amounts of each sector’s financial assets and liabilities. While Monetary Analyses have as a common basis the principle of sector statistics, there are wide differences among them, arising in part from the fact that the two financial questions left unanswered by the national income accounts cannot easily be answered in a single analysis. There is a conflict between the two primary purposes of Monetary Analyses: the measurement of intersector finance and the measurement and analysis of liquidity.

Sector statistics of either borrowing and lending or financial assets and liabilities would provide a matrix useful for the study of intersector finance. If some distinctions by type of lending or borrowing or by type of financial asset or liability were introduced, the matrix would also be useful for the study of the ownership of liquid assets and the causes of change in the volume of liquid assets. The available Monetary Analyses are such matrices, or parts of such matrices, and they serve in varying degrees both of these purposes.

Those Monetary Analyses which are addressed primarily to the study of the origins of liquidity may be called liquidity analyses. Most of them are derived from the asset and liability accounts of the institutions whose liabilities constitute liquid assets, and they are obtained by classifying the assets by the economic sectors indebted to the institutions, and the liabilities by the degree of their liquidity. The accounts of the institutions are almost always consolidated accounts, so that no question of intra-sector claims arises. The differences between the available statements of this type arise from differences in the selection of the liabilities to be “explained” and in the way in which “nonmonetary” liabilities of the institutions whose accounts are analyzed are handled. Because they are based on the accounts of only the money and banking system, or these plus the accounts of other financial institutions, they are necessarily incomplete matrices.

Those analyses which are complete matrices may be called intersector finance statistics. They could be matrices of intersector borrowings and lendings, i.e., transaction statistics measuring “who lent to whom” and “who borrowed from whom,” or they could be matrices of intersector financial assets and liabilities, i.e., statistics of claims, or changes in claims, measuring “who holds claims on whom,” and “who is indebted to whom.” The two matrices are not the same because one form of borrowing and lending is the transfer of marketable obligations of third parties. In either case, the data could be net or gross, i.e., the lendings of one sector to another (or its holdings of claims on the other) could be offset against its borrowings from the other (or against the other’s holdings of its obligations), or the two gross entries could be shown. In either case the entries could include intrasector relations or they could refer only to intersector relations. In either case they could show identical amounts in each related pair of cells, i.e., A’s lending to or claim on B could be shown as exactly equal to B’s borrowing from or debt to A, or, if data were available from the books of both A and B and should differ owing to problems of timing, valuation, and methods of bookkeeping, the pairs of entries could be permitted to differ so that each would be on an “own record” basis. In either case they could provide classifications for the major items in liquidity analyses, or they could include only a single entry for the relationships between any two sectors.

In all of the available statements made in the form of complete matrices, the data are data on financial assets and liabilities rather than data on lendings and borrowings. In most of them, the data are given as gross entries. In most the amounts shown in the paired cells are equal. In most the classifications are given for the major items of liquidity analysis. There are, however, many differences between the available intersector finance statements, because of differences in the ways in which the problems of relationship to the national income accounts have been resolved and of differences in the extent to which liquidity aspects have been sacrificed in the interests of a complete matrix.

In a sufficiently large matrix with subclassifications for types of asset and liability, both of these aspects of financial statistics could find expression, and both of the purposes for which Monetary Analyses are useful could be served. But the function of Monetary Analyses is also to consolidate the data in the interests of comprehensibility. In the process of such consolidation, the two purposes come into conflict: the sum of all intersector borrowings and lendings is zero, and its change from period to period is zero; the total of the community’s liquidity, however, is a positive and significant economic fact and its period-to-period change may be large and of great significance. In financing statistics, a financial asset offsets a liability; in liquidity analyses, a financial asset explains the origin of a liability. In financing statistics, the monetary system can be pictured as a “financial intermediary” as it is in national income statistics; in liquidity statistics, the monetary system is the essential element in the process of expansion or contraction.

Liquidity analyses—money and banking statistics

Money and banking statistics are the first source of Monetary Analyses. The money and banking system clearly plays a unique role in finance, not only because its financing transactions are large compared with the total of all intersector financing transactions, but also because the wide acceptability of its liabilities enables it to finance sector deficits that would not be financed directly by the other sectors. The accounts of the money and banking system are therefore the source of statistics on the supply of liquid assets and the source of statistics of a very important sector in intersector finance.

Monetary Analyses have been made from the accounts of the money and banking system in a large number of countries and in a number of different ways. Some analyses undertake to account for the liquidity-creating potential of the system; others undertake to account for the liquidity creations of the system. The first are analyses of actual or potential bank reserves; the second are analyses of money or of money and its close substitutes.

Analyses of reserve money

Analyses of bank reserves have been made for many years. In many countries, the central bank balance sheet alone constitutes such an analysis; in others, the treasury gold and foreign exchange accounts and currency issue also have to be included. The logic of such statements is, ordinarily, that increases in gold and foreign exchange reserves automatically create reserve money, and that increases in the public’s holdings of currency automatically absorb it. Hence the other accounts of the monetary authorities show the extent to which the central bank did or did not offset these forces so as to cause or prevent a change in bank reserves.

In Denmark and Sweden, where the central banks perform all the functions of the monetary authority, the central bank accounts alone are analyzed to “explain” the origin of reserve money, i.e., currency plus bankers’ deposits at the central bank. In the United States and the Federal Republic of Germany, the accounts of the various parts of the monetary authority are consolidated to “explain” the origins of bank reserves. This is the same as the analysis of reserve money, except that private sector holdings of currency are included as a negative element in the “explanation” rather than as a positive element in the figure “explained.”

The Norwegian statement is made on the premise that treasury bills are also bank reserves. It analyzes the origins of changes in currency, bankers’ deposits at the Bank of Norway, and treasury bills in the hands of banks or the private sector. Treasury bills are included in the analysis by consolidating government accounts with the accounts of the Bank of Norway. The statement obtained is used to calculate the effects of government and central bank operations on the “liquidity” of banks and the private sector. The Government’s cash deficit (or surplus) minus (or plus) its borrowings in forms other than treasury bills is its contribution to (or absorption of) liquidity. This, together with changes in Bank of Norway assets other than treasury bills, accounts for changes in bank and private sector holdings of currency, Bank of Norway deposits, and treasury bills. Denmark calculates a similar total of currency, bankers’ deposits at the National Bank, and treasury bills outstanding, but provides no analysis of the total.

Australia analyzes changes in commercial bank deposits rather than changes in the ability of the commercial banks to create deposits. The Australian statement may nevertheless be mentioned here since it is related in its objective to the analyses of reserve money. It analyzes the end-effect of reserve money rather than the amount of reserves or reserve money.

Analyses of money

Analyses of money are made in a large number of countries, with some differences in the selection of the items to be called money, with differences in the way in which nonmonetary liabilities of the monetary system are accounted for, and with differences in the meaning given to indebtedness to the banking system.

The share of the money and banking system in all borrowing and lending is so large in all countries that the classification of the accounts of the money and banking sector can provide much information on the borrowing and lending of the other sectors. Indeed, in the less developed countries, bank holdings of claims on the other sectors are in some cases good indicators of the total indebtedness of those other sectors. Also, the accounts of the money and banking system are more easily available than those of most of the other sectors and are more likely to be accurate. For all of these reasons, monetary statistics in almost all countries of the world have been recast in recent years into data analyzing the assets of the monetary system by the economic sectors indebted to the system. Accounts made in this way are given for 47 countries in International Financial Statistics (IFS).

The sectoring in the analyses based on the accounts of the money and banking system is not complete, however. The accounts of the banks and the monetary system do not divide the system’s liabilities to, or claims on, the private sector between business and consumers. This omission in the information available from banking statistics is perhaps the most important limitation on the usefulness of all money and banking statistics.

In Greece, the accounts of the Bank of Greece are analyzed to explain the origin of currency. Bankers’ deposits at the Bank of Greece are included as a negative entry in the “explanation” rather than in the item to be “explained.” The purpose is to study the origins of money rather than the origins of actual or potential bank reserves, and the analysis is limited to currency because deposits are not considered to be money.

Most countries include demand deposits in the definition of money, and many produce analyses of money so defined from the consolidated accounts of the whole money and banking system. This procedure raises a difficulty that does not arise in most cases when the accounts of the monetary authorities alone are analyzed. The banks that create deposit money also have other liabilities. These liabilities can be reported along with money in the liability side of the statement, with the result that there is no unique analysis of the causes of change in money; or the liabilities can be netted against selected assets (foreign liabilities against foreign assets; government deposits against loans to the government; and nonmonetary deposits against loans to the private sector), with the result that the changes in money supply can be said to have been “caused” by the changes in the remaining items on the asset side.

Net figures are used to the greatest extent in the accounts of a number of Latin American countries.1 By netting out all other liabilities, the money supply of these countries is allocated to two categories of asset: net foreign assets and net domestic assets, an amount equal to the first being described as “money of foreign origin” and the remainder as “money of domestic origin.” In most statements, the latter category is further subdivided into net credits to governments and net credits to the private sector.

Apart from the netting involved (of which that of nonmonetary deposits against loans to the private sector is probably the most open to question), the allocation of money according to “origin” is in principle identical with a distribution of assets and liabilities by economic sectors. The manner of presentation originated in 1946, in order to draw particular attention to the origin of the large increases in the money supply of Latin American countries which were associated with wartime export surpluses. The same categories have continued to be used since and, insofar as they are clearly related to assets and liabilities by economic sectors, have continued to be useful. But there may be some risk that the netting and the nomenclature used may lead to wrong inferences. Foreign assets (“money of external origin”) may change owing to internal as well as to external causes; the name should not predispose toward an analysis which recognizes only foreign causes of balance of payments deficits. Also, the connection between the two “types” of money should not be overlooked: the creation of “money of internal origin” (i.e., internal credit expansion) may lead to a reduction of “money of external origin” rather than to an increase in the money supply.

Most of the analyses of money resolve the problem of the nonmonetary liabilities of the banks by including them as a negative entry in the analysis, thus making the shifts from monetary to nonmonetary deposits an offset to increases in any of the assets of the money and banking system rather than an offset to increases in only one of these assets. The Belgian statement and the IFS monetary survey accounts report non-monetary liabilities as positive entries on the liability side of the statement and may be said to provide an analysis of money plus quasi money rather than an analysis of money. Statements like those of the United States, Germany, and Indonesia, given in the form of a consolidated balance sheet of the money and banking system, may be said to have a similar solution for the problem of nonmonetary liabilities.

A second difficulty with the sector analysis of the origins of money is that the accounts of banks normally record assets by their original obligors rather than by their previous holders. Hence private sector sales of government bonds to the banks appear in the statistics as increases in bank loans to the government, and other transactions in existing financial assets between the banks and others attribute the resulting inflationary pressure to the sector whose obligations are bought rather than to the sector that borrowed. All Monetary Analyses derived from asset and liability data (and this means all the statements in the Appendix to this paper) imply this explanation of inflationary pressure. If the accounts of the banks are accompanied by the accounts of the other sectors so that a complete matrix is provided, the measurements of “who lent” and “who borrowed” supplied by the row and column totals would be correct. With this information given in the row and column totals, it would be more useful to record in the cells “who holds claims on whom” rather than “who lent to whom.” But analyses of money are incomplete matrices. They fill only those cells of the matrix that involve transactions between the monetary system and others. There are no row and column totals to measure “who lent” and “who borrowed.” The data suggest that measurements of “who lent” and “who borrowed” may be derived from the figures on who borrowed from the banks, but owing to the problem of purchases from third parties, the cell entries do not measure “who borrowed from the banks.”

The Belgian statement and the statement of the Netherlands Bank avoid the problem by setting up a “capital market and sundry items” sector. Bank purchases of outstanding securities are recorded as purchases from that sector. This solution permits the user to read the data as measures of who borrowed from the banks, but does so at the cost of not classifying all bank transactions. So far as is known, no country reports bank assets by previous holder.

The incompleteness of the data also is responsible for a third difficulty in the sector analysis of the origins of money. The borrowings of the sectors as measured from the accounts of the banking system are incomplete. Hence by attributing increases in money supply to the increases in sector borrowings from the banks, the origins of monetary expansion are traced to the sectors that happened to borrow from the banks rather than, as would seem preferable, to the sectors that borrowed on overall account.

The accounts of the Netherlands Bank are constructed on the premise that the source of inflation may, to a considerable extent, be attributed to the sectors that borrowed from the banks, rather than to the sectors that borrowed on over-all account. But the Netherlands Bank argues that to make this attribution requires that the measurement of borrowing from the creators of liquidity be carried to its logical conclusion. It requires that account be taken of the facts that there are institutions other than the banks that create liquid assets, and that increasing one’s holdings of liquid assets is an offset to the act of borrowing from the creators of liquid assets. The Netherlands Bank measures, first, sector borrowings from the banks and sector holdings of money, and second, sector transactions in “secondary liquid resources,” such as treasury bills. The origins of inflation are analyzed on the basis of each sector’s borrowings from banks, issues of “secondary liquidities,” or reductions in holdings of money and “secondary liquidities.” It is of interest to note that, with this definition, money becomes a negative entry in the calculation of a sector’s inflationary contribution. Since all money is held by someone, all increases in money become negative entries. Hence the liquidity deficit or surplus for the economy as a whole becomes equal to the foreign balance.

Extended money and banking statistics

The extension of money and banking type statistics to cover the whole of the financial institutions sector and also the accounts of other sectors whose data are relatively easily available has provided a second source of Monetary Analyses. While the accounts of the money and banking system cover a large part of all borrowing and lending, any extension of the analysis to include the accounts of other sectors increases the possibility of deriving useful indications of the accounts of the remaining sectors. The sectors whose accounts are relatively easily available are the other financial institutions sector (i.e., financial institutions other than the money and banking system), the government sector, and the foreign sector.

Statistics of other financial institutions

In the developed countries, the assets and liabilities of insurance companies and other financial institutions are large, and it should be possible to use them to fill additional cells in a matrix of intersector finance. The statements of Mexico and Japan cover the accounts of a wide range of financial institutions; but since the accounts of the other financial institutions are consolidated with those of the money and banking system, the accounts of the latter, which are of greatest interest in liquidity analyses, cannot be read separately. The Bank deutscher Länder’s statement, “Formation of Wealth and Its Financing,” is perhaps the one that puts the greatest emphasis on the accounts of banks plus other financial institutions. The statement, however, is reconciled with the national income statement and includes its figures on saving and real investment; therefore, it is also related to the statements described below in the section, Matrices of intersector finance.

Government finance statistics

Statistics of the money and banking type have also been widened by including the available accounts of the government sector. In many countries, the treasury performs some monetary functions by issuing treasury currency, by holding gold and foreign exchange reserves, or in other ways. In the statements of almost all countries whose treasuries have monetary functions, the treasury accounts covering these functions are consolidated with those of the money and banking system. However, it is not the inclusion of these aspects of government operations that is referred to here as involving a widening of the scope of statistics of the money and banking type. The accounts of the banking system report its holdings of claims on the government; the accounts of the government report the total of government debt. By using these two sources, an estimate may be made of private sector (or private sector and foreign) holdings of government debt. The accounts of the banks and the accounts of the government are used together in this way in the statements of Finland and Canada.

Balance of payments statistics

The accounts of the money and banking system provide a measure of the accounts of the foreign sector insofar as changes in government and bank holdings of gold and foreign exchange and changes in government and bank liabilities to foreigners measure all financing transactions with the foreign sector. The balance of payments accounts organize the data on government and bank transactions with foreigners that are available from banking and government sources. Data on foreign borrowings and lendings by the private sector could be added if the data were complete and accurate. In the less developed countries, for which the accounts of the banks provide a measure of most domestic borrowing and lending, foreign borrowing and lending are sometimes large, and it might be helpful to use the balance of payments, together with the accounts of the banks and the government, to derive the accounts of the private sector. For many countries, the banking and government accounts of other countries provide information on the private sector’s financial accounts. In addition, the transactions of foreign direct investment companies, which may be available in tax reports, would provide an important part of the private sector’s accounts. Data on other private capital movements, however, are the weakest part of balance of payments data for the same reason that data which must be obtained from private sector sources are the weakest parts of Monetary Analyses: there are few sources of information.

Use of all three sources

The Italian statement is one that has expanded money and banking type statistics to cover all financial institutions, the government, and the balance of payments., The accounts of other financial institutions, the records of government and private capital issues, and balance of payments data on foreign borrowing and lending are used with the accounts of the banks to obtain a statement of intersector and some intrasector borrowing and lending. Private sector capital issues purchased by the private sector are an intrasector item. The issues of private businesses are entered in the account from the records of issuers; holdings already reported in the accounts of the banks and other financial institutions are subtracted; the remainder is entered as the purchases of the private sector. For the government sector, the financing accounts obtained in this way are reconciled with the government finance statistics on revenue and expenditure. The statement, while providing a picture of intersector finance, is organized as an analysis of the sources of change in the Bank of Italy’s note issue.

Matrices of intersector finance

The process of “horizontal” expansion of money and banking statistics—through the inclusion in money and banking type analyses of the accounts of all financial institutions, the financing accounts of the government, and data from the balance of payments—has led to the construction of financial statistics of very much the same type as those now being developed in a few countries through a “vertical” expansion of national income statistics. The compilation of national income statistics with income, expenditure, investment, and savings accounts for each of the sectors raises the question of accounting for the means by which sector deficits and surpluses are financed, and suggests the addition to national income accounts of intersector borrowing and lending statistics. The national income statement may be considered as the “top half” of a full statement of an economy’s transactions. The financial accounts may be considered as the “bottom half.” Data compiled as an extension of national income accounts may therefore be considered as the third source of Monetary Analyses.

Matrices of intersector finance constructed as vertical extensions of the national income accounts or in answer to the questions raised by the national income accounts are a recent addition to statistics. Data are available for France in the Ministry of Finance report, Accounts of the Nation; for the Netherlands, in the Central Planning Bureau’s Central Economic Plan; and two statements for Germany, in the Monthly Report of the Bank deutscher Lander and in the Quarterly Bulletin of the German Institute for Economic Research. The United Kingdom, in National Income and Expenditure, has taken some preliminary steps toward the compilation of financial data related to the national income accounts. In the United States, the flow-of-funds accounts of the Board of Governors of the Federal Reserve System have been compiled to account consistently for all financial and nonfinancial transactions in a single accounting system designed for that purpose. The Canadians are working on a slightly different system of flow-of-funds accounts.

The construction of intersector financing accounts consistent with the national income accounts raises problems, since there are several points at which the definitions that are useful in the measurement of income and consumption are not useful in the measurement of borrowing and lending. The “bottoms” do not easily fit the “tops” and a bridge is required. There are two principal problems.

The money and banking sector

Although the monetary system plays the largest and most interesting role in intersector financing, the national income accounts provide neither a monetary sector nor a financial institutions sector. In the national income accounts, the transactions of the monetary system are included partly in the business sector and partly in the government sector. Transactions between business and the banks and transactions between government and those parts of the monetary system included in the government sector cancel out. Financing statistics, however, must provide a monetary sector or a financial institutions sector if they are not to cancel in the mechanics of their construction a large and significant part of the lending and borrowing which they are intended to measure. It is difficult to take apart the “tops” to fit “bottoms” with an additional sector. The UN System of National Accounts concludes that its methods cannot lead to intersector financing data since “to produce meaningful results … would require a greater number of sectors including, in particular, a separate sector for banks and other financial intermediaries.”

The concept of sectors

In national income definitions, certain economic units are treated as having a “split personality,” i.e., of the transactions of these units some types are included in the transactions of one sector, while other types are included in the transactions of another sector. National income accounts include the business activities of government in the business sector and the income-producing activities of households in the business sector, and make similar splits in the accounts of individual proprietors and in the accounts of consumers who own houses.2 The splits are made by imputation, i.e., by entering into the accounts the transactions that would have occurred if governments and households did not engage in business or if no consumers owned houses. Useful intersector finance statistics, however, cannot make similar imputations. While it would be possible to impute the change in a sector’s net borrowing or lending that would be consistent with the national income account imputations, there would be no useful way to distribute that net figure between its gross counterparts, and no useful way to distribute the gross counterparts between the different types of asset and liability that intersector finance statistics must report. Financing statistics must refer to decision-making units; this requires that the accounts of the central government be consolidated (and include either the gross accounts or the net financing deficits or surpluses of government agencies) and that the accounts of individuals be placed as a whole in the consumer sector.

The statements so far available that present financing accounts consistent with income and expenditure accounts have not built completely satisfactory bridges between the two sets of accounts. The U.K. accounts are derivatives from the national income accounts (income minus consumption equals saving; saving minus real investment expenditures equals financing surplus or deficit). Only for the personal sector are entries made for changes in specific assets and liabilities, and the sum of these does not reconcile with the derived financing surplus or deficit. The monetary system is included in the business sector, and no account is taken of bank financing of business. In the U.K. accounts, there are fewer difficulties in using the national income calculation for financing statistics than there would be in some other countries, since the national income and expenditure accounts of the United Kingdom do not impute the production activities of persons to the business sector, and government enterprises are included as a separate sector.

The accounts of the Netherlands and France and both of those for Germany are made by bridging the differences between the national income accounts and financing accounts obtained from asset and liability statistics of the banks and other sectors. The bridge is made by adding the accounts of the financial institutions sector and then adding adjustment items to correct for the inclusion in the business sector of the business-type activities of the government and personal sectors.

In the Netherlands and Bank deutscher Länder accounts, the money and banking system is not added directly to the list of sectors. Rather, the accounts of the other sectors specify in their financing entries changes in holdings of money and quasi money or in indebtedness to the banks. This, in effect, includes the income and expenditure transactions of banks with the business sector and reports their money-creating activities as a separate sector. The solution amounts to splitting the personalities of the banks. While split personalities for the other sectors would destroy the usefulness of intersector finance statistics, treating the banks as if they had a split personality does little harm. The extent to which their loans are financed from accumulated earnings is very small, and the important differences between banks and other businesses that call for the setting up of a money and banking sector are differences in their asset and liability accounts and not differences in their income and expenditure accounts. The French accounts and the German Institute for Economic Research accounts set up a sector for banks and financial institutions and identify their creations of money in the financing entries of the tables.

While all four of the statements provide for a book credit entry to account for the accrual items in the national income accounts, these entries in the French statement are left blank. In the Netherlands accounts, a large discrepancy item remains.

The U.S. flow-of-funds accounts achieve consistency between the “tops” and the “bottoms” by compiling for that purpose a complete set of alternatives to the national income “tops.” The flow-of-funds accounts undertake to make income and financing transactions consistent by enlarging the national income system of accounting (which includes only those transactions giving rise to production and income) to include all transactions giving rise to payments in money or credit. The enlargement of the system makes it possible to maintain consistency in three ways. First, it transforms the accounts from accounts of the consumption and production sectors, i.e., from accounts representing the total of consumption and the total of production, to accounts of the consumer and business sectors, i.e., to accounts representing all transactions of the transactors classified as consumers or classified as businesses. This helps to make consistent accounts possible, because it is to the accounts of transactors that financing accounts can be reconciled. Second, it permits the inclusion of intermediate sales and purchases of goods in process of production and of transactions in second-hand goods. These transactions, when added to the national income entries, determine the amounts that any sector would have available to lend or would need to borrow. Third, it permits the inclusion of transactions that are financial transactions on both the buyer’s and the seller’s side. These transactions are needed for an explanation of changes in the sector’s holdings of types of asset or liability. Consistently with the criterion of including all transactions giving rise to payments in money or credit, though many of them are of little quantitative importance, the scope of the accounts is in other respects reduced, compared with the national income accounts, by eliminating imputations and transactions in kind. Imputations are entries in the national income accounts representing production or the receipt of income that occurred without any transaction, e.g., the value received and consumed by an individual who owns his own house.

The principle of including all transactions giving rise to a payment in money or credit is not followed everywhere. The accounts of farmers and the accounts of the proprietors of unincorporated businesses are split between their business and household components, in order to include the latter entries in the consumer sector; and, for reasons of practicality, only net transactions in each type of financial asset are included instead of the much larger gross transactions that occur and give rise to payments.

In constructing the “bottoms,” the flow-of-funds accounts have undertaken to put all entries on an “own record” basis insofar as possible. The principle of “own records” raises the problem of “float,” i.e., the problem of timing inconsistencies between the accounts of any two parties to a transaction. Float results from the facts that many bank transactions and many payments are made by mail and that the time required for delivery of the mail causes the records of banks to differ from the records of depositors and the records of sellers to differ from the records of buyers. As worked out in the U.S. accounts, the records of businesses are accepted as the measure of the amounts of consumer claims on and debts to businesses, but the records of banks are not accepted as the measure of the amounts of private sector deposits and debts to banks. Business records are used to determine the amounts of business deposits, and consumer deposits are estimated as total deposits as reported by the banks, minus total mail float as estimated on the assumption that mail float is equal to “bank” float, minus business deposits as measured from business records.

A study of money-flows accounts is also being made in Canada, where a suggestion has been made for accomplishing the purposes of money-flows accounts and at the same time preserving more direct comparability between financing accounts and national income accounts. It is proposed to enlarge still further the scope of the accounts so as to include most of the transactions that need to be included to ensure consistency either with national income accounts or with financing accounts, and to return to the use of split personalities in such cases as those of consumers who own houses. This would put the national income account imputations and transactions in kind back into the accounts and hence drop the criterion of “all transactions giving rise to payments in money or credit.” It is difficult to define the criterion that would remain, and it is difficult to see how the types of asset held by the sectors could be objectively and usefully distributed consistently with the imputations and split personalities retained in the “tops.”

IFS monetary statistics

Money and banking statistics are consolidated in IFS in statements called “Monetary Surveys.” These Surveys represent a horizontal extension of money and banking data beyond the limits of the monetary system proper, i.e., the accounts of the savings banks and other institutions whose liabilities are classified as “quasi money” are included. The assets of the money and banking system are classified by the economic sectors indebted to the system. The liabilities are classified by liquidity. The data are presented in a neutral form: all nettings (other than the netting of foreign liabilities against foreign assets) are avoided; all asset items and all liability items are shown on their respective sides of the account so that each side adds to “total assets equals total liabilities.”

IFS money and banking data are intended also to analyze the mechanics of the money and banking system. In addition to the consolidation of the accounts of the system, they give the separate accounts of the monetary authorities (the creators of reserve money), the deposit-money banks (the creators of deposit money), and “related institutions” (institutions other than banks that play a role in the monetary system because their liabilities are close substitutes for money). In these accounts, rediscounted items ordinarily appear as loans to the original obligors in the accounts of the deposit-money banks and as loans to banks in the accounts of the central bank.

The IFS accounts of the money and banking system are neither a record of intersector finance nor an explanation of the origins of liquidity. They do, however, provide a measure of the volume of liquidity and the accounts of the sector whose activities are of the greatest importance in finance and liquidity creation. They also permit the derivation of a large part of the data on intersector finance and of much useful information on the origin of changes in liquidity.

The accounts of banks also have a special usefulness that more elaborate statements cannot have. They are available more currently than most other data; they extend back through a long period of years; and, within their own definitions, they are accurately compiled. They have a special usefulness in the countries in which they are most needed, for in the less developed countries reliable data of other types are relatively scarce and the activities of banks constitute a relatively large part of all financial transactions.

The shortcomings of IFS money and banking data are not a proof of the deficiencies of money and banking statistics but rather of the fact that more information should be sought on liquidity and financing data for the other sectors. It would be very useful to add to the accounts of the monetary system the financial asset and liability accounts of the other sectors insofar as this can be done without loss of clear and current accounts of banks, money, and bank lending.

APPENDIX: Survey of Monetary Analyses

Graeme S. Dorrance*

Assisted by Gerard R. Aubanel*

The object of this Appendix is to assemble monetary analyses published by national authorities. The form and terminology used in the national publications have been followed as closely as possible. Analyses are described for the following countries:

  • Argentina

  • Australia

  • Austria

  • Belgium

  • Brazil

  • Burma

  • Canada

  • Ceylon

  • Chile

  • Colombia

  • Costa Rica

  • Cuba

  • Denmark

  • Dominican Republic

  • Ecuador

  • Egypt

  • El Salvador

  • Finland

  • France

  • Federal Republic of Germany

  • Greece

  • Guatemala

  • Honduras

  • India

  • Indonesia

  • Israel

  • Italy

  • Japan

  • Republic of Korea

  • Mexico

  • Netherlands

  • New Zealand

  • Nicaragua

  • Norway

  • Peru

  • Philippines

  • Sweden

  • Union of South Africa

  • United Kingdom

  • United States

  • Viet-Nam


A table, shown here as Table 2, analyzing the causes of changes in the domestic means of payment, including government deposits, is published by Argentina. This table combines data on transactions with changes in assets; it analyzes the banking system’s asset data on the basis of the purpose underlying the transactions rather than on the basis of the sectors obligated to the monetary system. Thus the credits of the monetary system to the private sector of the economy are included under three headings: (1) commercial credits; (2) mortgages (most of which are claims on the private sector); and (3) foreign operations (loans to exporters providing credit for payment of shipments are included along with foreign assets; the valuation of the latter is not stated). Claims on the Government are separated into those arising from ordinary operations of the Government, and those resulting from the nationalization and financing of public services. These two items together probably represent the major part of the financing of the Government’s operations. Direct loans to government agencies, however, are classified separately. The negative entries for “other items” consist largely of increases in savings and time deposits, securities issued by the banks, and capital accounts.

Table 2.

Argentina: Causes of Changes in the Domestic Means of Payment, 1951–55

(In millions of Argentine pesos)

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Source: Dirección Nacional de Estadística y Censos, Boletín Mensual de Estadística (Buenos Aires).


Recent Annual Reports of the Commonwealth Bank contain a table, shown here as Table 3, measuring the changes in the monetary system’s accounts that may be considered the counterparts of changes in trading bank deposits, including time deposits. The table is a consolidated statement of the accounts of the Commonwealth Bank and check-paying banks excluding the small state banks and savings banks. It is designed to demonstrate the factors leading to changes in the liquid assets of the trading banks and the magnitude of the banks’ reactions to these changes. The items in the table are classified according to the freedom of the banking system to alter their magnitudes. The net international reserves of the community and the total of treasury bills created by the Government must, in practice, be acquired by the banks. In Australia, practically no treasury bills are held by sectors other than the banking system, so that the Commonwealth Bank is under an obligation to purchase any bills that the Government decides to issue and that the trading banks do not acquire. The other net changes in the Commonwealth Bank accounts are the net of the other items, exclusive of accounts between the Commonwealth Bank and the trading banks. The sum of all these items is equal to the cash reserves of the trading banks, including “special” (compulsory) deposits, plus trading bank holdings of foreign assets and treasury bills. Changes in trading bank advances and government security holdings provide a measure of the two most important reactions of the banks to changes in their reserve positions. These items, together with “other factors” (which exclude accounts between the trading banks and the Commonwealth Bank), provide the immediate impetus leading to changes in deposits.

Table 3.

Australia: Movements in Factors Affecting Trading Bank Deposits, 1954 and 1955

(In millions of Australian pounds)

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Source: Commonwealth Bank of Australia, Reports and Balance Sheets (Sydney).

Includes a substantial reduction in liabilities of the central bank.


The Austrian Institute for Economic Research publishes a table, shown here as Table 4, analyzing the sources of money. The Austrian National Bank has provided an alternative table for this survey, which is shown here as Table 5. Both these tables are analyses of the changes in the accounts of the monetary system intended to explain changes in money.

Table 4.

Austria: Changes in the Money Supply and Its Distribution, 1951–55

(In billions of schillings)

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Source: Österreichisohe Institut für Wirtschaftsforschung, Statistische Übersichten zu den Monatsberichten (Vienna).
Table 5.

Austria: Money Supply and Factors Leading to Changes, 1951–55

(In billions of schillings)

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Source: Austrian National Bank.

The Institute for Economic Research table is a consolidated statement of the accounts of the monetary system and related institutions that includes a large unclassified entry for “other factors.” The National Bank table is a statement of the separate accounts of the National Bank and the credit institutions (the latter including related financial institutions other than banks). The cash reserves of credit institutions are excluded from the assets included in the table. Similarly, credit extended by the National Bank to the credit institutions is recorded as an increase in National Bank assets with an offsetting liability in the accounts of the credit institutions. Hence, in most years, the increase in the assets of the National Bank is larger than the increase in its liabilities included in money, and the net increase in the assets of the credit institutions is smaller than the increase in their monetary liabilities. In both tables, the 1955 entry for changes in foreign assets is not the change in the system’s foreign assets, but the change that would have occurred except for the transfer of 1.05 billion schillings of gold from the Government to the National Bank, i.e., it is a measure of the monetary effect of transactions by Austrian residents with foreigners. The offset to this transfer is included as an adjustment to the claims on the Government (included in the “other factors” in the Institute’s table). For the years up to 1953 the changes in foreign assets reflect arbitrary valuations. Savings and time deposits and the issue of long-term bonds are considered as contractive factors that reduce the expansion of money arising from the monetary system’s purchase of assets.


Two tables that provide an analysis of the factors leading to changes in money are published in Belgium. The first table, shown here as Table 6, is essentially a consolidated balance sheet of the monetary system (the National Bank of Belgium, the Currency Issue Department of the Treasury, the postal checking office, the deposit-money banks, the Crédit Communal, which holds the greater part of the deposits of government agencies and municipalities, and the National Institute for Credit to Small Enterprises and its affiliated organizations). The monetary liabilities to the private sector, and to local governments and government agencies, are placed at the top of the table and separated from the other liabilities that follow the analysis of the system’s assets (the Government operates with essentially no deposit holdings). The assets are analyzed by the economic sectors obligated to the monetary system (the foreign sector, the Government, including government agencies, and the private sector). The quasi money held by the private sector is largely in the form of time deposits and foreign currency deposits; that recorded as held by the Treasury is predominantly U.S. aid counterpart funds. It should be noted that only the quasi money issued by money-creating institutions is included. The liabilities of savings banks and similar institutions are not included.

Table 6.

Belgium: Consolidated Statement of Monetary Institutions, 1951–55

(In billions of Belgian francs)

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Source: Banque Nationale de Belgique, Bulletin d’Information et de Documentation (Brussels).

The second table, shown here as Table 7, combines data on changes in the accounts analyzed in the first table with some transactions data. It separates the changes in the foreign assets of the monetary system into (1) the capital transactions with, and donation receipts of, the Government from foreigners, and (2) the net change in foreign assets arising from other factors (balance of foreign transactions). The changes in the monetary system’s claims on Government are separated into (1) those arising from direct credit operations with the Government and (2) the purchase of outstanding government securities. The direct financing of the Government, and the purchase and sale of foreign exchange arising from government financing transactions, are combined to provide a measure of the monetary system’s financing of the Government (monetary financing of official agencies).

Table 7.

Belgium: Causes of Changes in the Monetary Stock, 1951–55

(In billions of Belgian francs)

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Source: Banque Nationale de Belgique, Bulletin d’Information et de Documentation (Brussels).


In Brazil, the Superintendency of Money and Credit prepares a table, shown here as Table 8, which analyzes the composition of money and the causes of its variations. The table is primarily an external-internal origin analysis of the total of money; in addition, it allocates responsibility for money creation to the monetary authorities and to the commercial banks.

Table 8.

Brazil: Means of Payment, 1954 and 1955

(In billions of cruzeiros)

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Source: Superintendência da Moeda e do Crédito, Boletim (Rio de Janeiro).

The money originating as a result of the action of the monetary authorities (in Brazil there are several agencies associated with the Bank of Brazil as monetary authorities) is defined as the total currency outside the monetary system, plus the deposits of the commercial banks with the authorities, minus their borrowings from the authorities. Money originating as the result of the action of the commercial banks is defined as the total of the deposit liabilities of these banks, plus their borrowings from the authorities, and minus their own cash holdings. Thus the responsibility for changes in money are allocated to the authorities and to the commercial banks primarily on the basis of whether the changes occur in the liabilities of the authorities or the banks. The consolidation adjustments for bank cash and intrasystem borrowing allocate changes in cash as a responsibility of the monetary authorities, and lending by the authorities as a responsibility of the banks.

The consolidated accounts of the monetary system are classified as foreign and domestic. The items of foreign origin are the monetary system’s foreign assets minus its foreign liabilities, including liabilities to residents that will be discharged in foreign exchange (e.g., advance deposits by importers for exchange purchases). The difference between the total money outstanding and the factors of foreign origin are considered to be the factors of domestic origin. The loans to the National Treasury and other government bodies are segregated from other factors of domestic origin to provide a measure of the system’s financing of the Government and government agencies (for the period covered by the analysis there were no government holdings of money, as the Government operated with an overdraft). The remaining difference is classified as “other applications” and is presumably to be taken as an indication of the changes in money arising from the financing of the private sector.


Two closely related tables, analyzing changes in money, are published by Burma. In the first of these tables, shown as Table 9 below, changes in money, excluding government deposits, are treated as originating in the net balance of transactions between the monetary system and (1) the foreign sector, (2) the Government, and (3) the private sector. For the private sector, the entries exclude changes in demand deposits, which are a part, rather than a cause, of changes in the money supply; changes in time deposits (increases being counted as negative) are entered separately from the net balance on other accounts (“bank credit”).

Table 9.

Burma: Factors Affecting Private Money Supply, 1953–55

(In millions of kyats)

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Source: Union Bank of Burma, Bulletin (Rangoon).

In the other table, shown as Table 10 below, changes in money, including government deposits, are analyzed. This table gives slightly more detail on the changes in the foreign exchange balances, distinguishing between changes in the balances of the monetary authorities and those of the commercial banks. It also separates changes in commercial bank loans and advances from other commercial bank transactions with the private sector, but includes increases in quasi money among the miscellaneous transactions covered by “other factors.”

Table 10.

Burma: Factors Changing Total Money Supply, 1953–54 and 1954–55

(In millions of kyats)

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Source: Central Statistical and Economics Department, Quarterly Report on Economic Progress in Burma (Rangoon).


The Bank of Canada publishes two tables analyzing changes in the financial assets of the private sector of the economy. The first of these, summarized here as Table 11, provides a measurement of certain liquid assets as defined by the Bank, and of the related factors that are the counterpart of the assets. The second table, shown here as Table 12, provides a direct measurement of personal savings in Canada.

Table 11.

Canada: General Public Holdings of Certain Liquid Assets, and Related Factors, 1951–55

(In millions of Canadian dollars)

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Source: Bank of Canada, Statistical Summary (Ottawa).

Excluding government deposits.

Table 12.

Canada: Direct Estimate of Personal Savings in Canada, 1951–54

(In millions of Canadian dollars)

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Source: Bank of Canada, Statistical Summary (Ottawa).


The Canadian authorities do not publish a total that they call money. The Bank of Canada includes currency and certain bank deposits in the total of “currency and active deposits.”1 This total is comparable to the total of money in the statistics of most other countries. The total of currency and active deposits plus the inactive chartered bank notice deposits is shown as a separate series entitled “currency and bank deposits.” Finally, this total plus the private sector’s holdings of Government of Canada securities is reported as the total of “certain liquid assets.” Since the statement analyzes changes in liquid assets, as defined by the Bank of Canada, rather than changes in money, or money and quasi money, it includes the private sector’s holdings of government debt in the consolidation and the entire net government debt (i.e., the total government debt, other than amounts held by the Government, less government deposits) in the counterpart side of the analysis. Because the Exchange Fund is part of the Government, the statement combines, in the figure for government debt, changes in liquid assets available to the public, arising from both the balance of government accounts and the balance of foreign payments.

In the table analyzing personal savings (Table 12), estimates are made of changes in the assets held by the personal sector; this sector is defined to include consumers, unincorporated business, private pension funds, and religious, education, health, and welfare institutions. The assets are analyzed as liquid, contractual, and other. The liquid assets include the “certain liquid assets” referred to above plus other items that are considered by the Bank to be liquid. Changes in liabilities are deducted from changes in assets to provide not only a direct estimate of personal savings but also a statement of the changes in the asset-liability structure of the personal sector. No data are provided, however, for total assets and total liabilities held by the sector.


The Central Bank of Ceylon publishes a table, shown here as Table 13, analyzing the counterparts to the money supply, excluding government holdings. The external assets are the sum of the net foreign exchange and gold holdings of the Central Bank and the commercial banks. The domestic assets are separated into (1) net assets of the Central Bank and (2) assets of the commercial banks. The Central Bank’s net assets are claims on the Government, less the capital and security indebtedness of the Bank, and less deposits of others than the Government and banks. The assets of the commercial banks are classified as government securities or claims on the private sector, the cash reserves of these banks being excluded in the process of consolidation. The quasi-monetary liabilities of the system and the Government’s monetary holdings are treated as separate and identifiable deductions from the system’s assets.

Table 13.

Ceylon: Analysis of Changes in Money Supply, 1951–55

(In millions of Ceylon rupees)

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Source: Central Bank of Ceylon, Bulletin (Colombo).