Paul Samuelson, Thermodynamics & the Velocity of Money

[alice wellintown]

On Wed, Aug 24, 2011 at 11:03 AM, David Morris <fqmorris at gmail.com> wrote:
> More and better jobs would be a better thing.  Money's best when it FLOWS...

Quoted from Paul Krugman's NYT " Samuelson, Friedman, and monetary policy"
2009, Dec. 14 NYT

But here’s Paul Samuelson, from pages 353-4 of his 1948 textbook:


Today few economists regard Federal Reserve monetary policy as a
panacea for controlling the business cycle. Purely monetary factors
are considered to be as much symptoms as causes, albeit symptoms with
aggravating effects that should not be completely neglected.

By increasing the volume of their government securities and loans and
by lowering Member Bank legal reserve requirements, the Reserve Banks
can encourage an increase in the supply of money and bank deposits.
They can encourage but, without taking drastic action, they cannot
compel. For in the middle of a deep depression just when we want
Reserve policy to be most effective, the Member Banks are likely to be
timid about buying new investments or making loans. If the Reserve
authorities buy government bonds in the open market and thereby swell
bank reserves, the banks will not put these funds to work but will
simply hold reserves. Result: no 5 for 1, “no nothing,” simply a
substitution on the bank’s balance sheet of idle cash for old
government bonds. If banks and the public are quite indifferent
between gilt-edged bonds — whose yields are already very low — and
idle cash, then the Reserve authorities may not even succeed in
bidding up the price of old government bonds; or what is the same
thing, in bidding down the interest rate.

Even if the authorities should succeed in forcing down short-term
interest rates, they may find it impossible to convince investors that
long-term rates will stay low. If by superhuman efforts, they do get
interest rates down on high-grade gilt-edged government and private
securities, the interest rates charged on more risky new investments
financed by mortgage or commercial loans or stock-market flotations
may remain sticky. In other words, an expansionary monetary policy may
not lower effective interest rates very much but may simply spend
itself in making everybody more liquid.

….

In terms of the quantity theory of money, we may say that the velocity
of circulation of money does not remain constant. “You can lead a
horse to water, but you can’t make him drink.” You can force money on
the system in exchange for government bonds, its close money
substitute; but you can’t make the money circulate against new goods
and new jobs. You can get some interest rates down, but not all to the
same degree. You can tempt businessmen with cheap rates of borrowing,
but you can’t make them borrow and spend on new investment goods.