Allan H. Meltzer, Is There an Optimal Money Supply?: Discussion, The Journal of Finance, Vol. 25, No. 2, Papers and Proceedings of the Twenty-Eighth Annual Meeting of the American Finance Association New York, N.Y. December, 28-30, 1969 (May, 1970), pp. 450-453

ALL financial institutions in the United States are regulated to greater or lesser extent and are encumbered with restrictions that range from regulation of entry to restrictions on the purchase of particular assets and of the rate of interest paid on particular liabilities (Gies, Mayer, and Ettin, 1963). The owners of financial institutions are, in part, compensated by special treatment under the tax laws (Keith, 1963), so that the net effect of governmental laws and decisions on the volume of assets invested in financial institutions—as well as the relative effect on the various specialized institutions—is difficult to calculate. The effect on resource allocation of these restrictions and tax shelters is unknown also.

THIRTY years have passed since anyone wrote a book exclusively—or even largely— devoted to an analysis of the supply of money. Phillip Cagan's Determinants and Effects of Changes in the Stock of Money, 1875-1960 (1965)1 would be welcome, therefore, if it did no more than intensify interest in a subject that lay dormant until recently. The book does much more, however. Cagan patiently examines the multitude of factors that influence the principal determinants of the money supply and hence the money supply itself. He then extracts from his data information about the perennial questions: Do changes in money cause the subsequent changes in output and prices? Or, is the stock of money pulled up and down by secular and cyclical changes in prices and output so that movements of money may be regarded as of little or no causal significance

MR. SYRING (1967) suggests that I relied on assertion rather than evidence or proof to support my statement that "little bias results from the exclusion of human wealth from the measure of wealth used to test the [demand-for-money] hypothesis" (Meltzer, 1963, p. 234). Further, he finds nothing in the empirical evidence to support my assumption that the ratio (d) of income from human wealth ( y h ) to the stock of human wealth ( w h ) is constant in the long run, although he recognizes that the assumption may be correct. In this note I will show that the estimated elasticities of real money balances with respect to real income and real non-human wealth are quite consistent with my assumption that d is constant in the long run. I will then discuss the more general problem that he raises, namely, whether it is possible to distinguish empirically between income and wealth as constraints on the demand for money.

IN AN earlier article in this Journal and in several other places, evidence has been presented supporting a theory of the demand for money that is a part of the "wealth adjustment process." The posited demand function has successfully passed a large number of tests in competition with more than a dozen alternatives, representing the bulk of substantive work on the demand for money in the past thirty years. Though no series of tests is "definitive," the evidence from tests against alternatives is of crucial importance in establishing the economic relevance of the particular demand function. I regard such tests as preliminary to —and far more important than—"Chow tests," "Theil-Nagar tests," "Durbin-Watson tests," and other sophisticated statistical procedures for establishing the relevance of particular hypotheses.4 However, the accumulating evidence suggests that the use of refined statistical procedures may now be desirable. I welcome the opportunity presented by the comments of Courchene and Shapiro to present some of the available evidence on the points that they raised.

THE arguments or variables that enter the demand function for money, and the definition of the quantity of money appropriate for the demand function, have received substantial attention in both the recent and more distant past. For present purposes, it is useful to distinguish three separate disputes about these variables. First, there is the question of the constraint that is imposed on money balances-whether the appropriate constraint is a measure of wealth, income, or some combination of the two. A second dispute has centered on the importance of interest rates and price changes as arguments in the demand function. Third, the question of the definition of money balances has often been raised. Is a more stable demand function obtained if money is defined inclusive or exclusive of time and/or savings deposits, and perhaps other assets that have value fixed in money terms?