Currency System and Money Supply

  • Y. C. Jao


In recent years there has been a growing interest in money supply both as an analytical concept and a policy variable. It is well known that in comparative static analysis, changes in money stock generate multiplier effects on nominal income, though the size of this may vary considerably according to the behavioural assumptions of the underlying model.1 In the long run money, whether treated as a factor input or consumer good, may produce non-neutral effects on the equilibrium growth path of the economy.2 Quite apart from the contemporary revival of the Quantity Theory, therefore, money supply is of great importance whether viewed from cyclical stabilisation or from secular growth. While the purely theoretical aspects of money supply cannot be treated here, it will evidently be of interest to analyse the determination of money supply in Hong Kong, its special characteristics and the role of the banking system in this process of determination. The present chapter is concerned with these problems.


Banking System Commercial Bank Money Supply Banking Sector Trade Credit 
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Notes and References

  1. 1.
    Some years ago I used a money supply equation in computing the nominal national income of Hong Kong for 1965–8. See Y. C. Jao, ‘Money Supply in Hong Kong, 1954–68’, Hong Kong Economic Papers (April 1970) pp. 24–48. Subsequent independent studies using alternative methods have yielded results quite close to mine.Google Scholar
  2. See Patrick Yeung, ‘Exports, Re-exports and Economic Growth: The Case of Hong Kong’, University of Illinois Faculty Working Paper (Sept 1971, mimeo)Google Scholar
  3. Laurence C. Chau, ‘Estimates of Hong Kong’s Gross Domestic Product, 1959–69’, Hong Kong Economic Papers (Sept 1972) pp. 11–32. The belated decision of the Hong Kong Government to begin national income accounting in 1971 has obviated the need for private estimates, but as noted by a leading monetary economist, the money supply approach is always useful as a checking device.Google Scholar
  4. See M. Friedman, ‘Monetary Data and National Income Estimates’, Economic Development and Cultural Change (April 1961) pp. 267–86.Google Scholar
  5. 2.
    For a sample of the more important contributions, see A. C. Enthoven, ‘A Neo-Classical Model of Money, Debt and Economic Growth’, in J. G. Gurley and E. S. Shaw, Money in a Theory of Finance (Washington, 1960) pp. 303–59Google Scholar
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  11. 3.
    For an excellent review of the current debate, see D. Laidler, ‘The Definition of Money: Theoretical and Empirical Problems’, Journal of Money, Credit and Banking, (Aug 1969) pp. 508–25Google Scholar
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  14. 4.
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  19. 5.
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  22. 9.
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  24. 11.
    United Kingdom Treasury, The Basle Facility and the Sterling Area, Cmnd. 3787 (London, 1968).Google Scholar
  25. 13.
    For a discussion of the sterling overhang in an international context, see B. J. Cohen, The Reform of Sterling (Princeton, 1969)Google Scholar
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    J. D. Khazzoom, The Currency Ratio in Developing Countries (New York, 1966) Chapter 5 and Appendix B.Google Scholar
  28. 16.
    R. T. Selden, ‘The Definitions of Income Velocity’, in M. Friedman (ed), Studies in the Quantity Theory of Money (Chicago, 1956) pp. 234–8.Google Scholar
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  30. 18.
    E. Doblin, ‘The Ratio of Income to Money Supply’, Review of Economics and Statistics (Aug 1951) pp. 201–13Google Scholar
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  32. 19.
    The distinction between ‘inside’ and ‘outside’ money was first made by J. G. Gurley and E. S. Shaw, Money in a Theory of Finance (Washington, 1960) pp. 72–3.Google Scholar
  33. It was however anticipated in E. Hicks, G. S. Dorrance, and G. R. Aubanel, ‘Monetary Analysis’, IMF Staff Papers, (1956–7) pp. 342 ff.Google Scholar
  34. 20.
    See, inter alla, G. L. M. Clauson, ‘The British Colonial Currency System’, Economic Journal (Apr 1944) pp. 1–25Google Scholar
  35. A. Hazelwood, ‘Sterling Balances and Colonial Currency System’, Economic Journal (Dec 1952) pp. 942–5Google Scholar
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  38. I. Greaves, Colonial Monetary Conditions, (London, 1953)Google Scholar
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  41. D. Stammer, ‘A Golden Standard’, Far Eastern Economic Review, (Sept 1966) pp. 420–2Google Scholar
  42. D. Stammer, ‘The Currency Issue’, Far Eastern Economic Review (19 Jan 1967) pp. 104–7Google Scholar
  43. D. Stammer, Money & Finance in Hong Kong, unpublished Ph.D. thesis (Australian National University, 1968) Chapters 3 and 7Google Scholar
  44. T. B. Lin, Monetary Behavior Under the Sterling Exchange Standard: Hong Kong as a Case Study (Hong Kong, 1971).Google Scholar
  45. 22.
    The use of this method to the analysis of money supply in Hong Kong for 1955–66 is contained in the unpublished World Bank report on Hong Kong dated Nov 1966. The estimates of money supply are seriously inadequate because the monetary liabilities of the ‘authorised’ banks only are included. For an earlier application of the same approach to money supply in Hong Kong, see F. H. H. King, Money in British East Asia (London, 1956) pp. 118–23.Google Scholar
  46. 23.
    J. J. Polak, ‘Monetary Analysis of Income Formation and Payments Problems’, IMF Staff Papers, Vol. VI (1957–8) pp. 1–50.CrossRefGoogle Scholar
  47. 24.
    See for example S. C. Tsiang, ‘The Role of Money in Trade-Balance Stability: Synthesis of the Elasticity and Absorption Approaches’, American Economic Review (December 1961) pp. 912–36.Google Scholar

Copyright information

© Y. C. Jao 1974

Authors and Affiliations

  • Y. C. Jao
    • 1
  1. 1.University of Hong kongChina

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