Concept
Quantity theory of money
Overview
The quantity theory of money (QTM) is a hypothesis within monetary economics which states that the general price level of goods and services is directly proportional to the amount of money in circulation (i.e., the money supply), and that the causality runs from money to prices. This implies that the theory potentially explains inflation. It originated in the 16th century and has been proclaimed the oldest surviving theory in economics.
According to some, the theory was originally formulated by Renaissance mathematician Nicolaus Copernicus in 1517, whereas others mention Martín de Azpilcueta and Jean Bodin as independent originators of the theory. It has later been discussed and developed by several prominent thinkers and economists including John Locke, David Hume, Irving Fisher and Alfred Marshall. Milton Friedman made a restatement of the theory in 1956 and made it into a cornerstone of monetarist thinking.
The theory is often stated in terms of the equation MV = PY, where M is the money supply, V is the velocity of money, and PY is the nominal value of output or nominal GDP (P itself being a price index and Y the amount of real output). This equation is known as the quantity equation or the equation of exchange and is itself uncontroversial, as it can be seen as an accounting identity, residually defining velocity as the ratio of nominal output to the supply of money. Assuming additionally that Y is exogenous, being independently determined by other factors, that V is constant, and that M is exogenous and under the control of the central bank, the equation is turned into a theory which says that inflation (the change in P over time) can be controlled by setting the growth rate of M. However, all three assumptions are arguable and have been challenged over time. Output is generally believed to be affected by monetary policy at least temporarily, velocity has historically changed in unanticipated ways because of shifts in the money demand function, and some economists believe the money supply to be endogenously determined and hence not controlled by the monetary authorities. While it is called the Quantity Theory of Money, as James Tobin pointed out in his debate with Milton Friedman it should be called the Quantity Theory of Prices or Inflation, since it is a theory of the inflation rate, and not of the money growth rate.
The QTM played an important role in the monetary policy of the 1970s and 1980s when several leading central banks (including the Federal Reserve, the Bank of England and Bundesbank) based their policies on a money supply target in accordance with the theory. However, the results were not satisfactory, and strategies focusing specifically on monetary aggregates were generally abandoned during the 1980s and 1990s. Today, most major central banks in practice follow inflation targeting by suitably changing interest rates, and monetary aggregates play little role in monetary policy considerations in most countries.
Overview adapted from Wikipedia (CC BY-SA 4.0; see the article history for authors).
Possible passages
Found by search and not yet checked by a person; they may only mention the idea in passing.
Thorough and minute English investigations have demonstrated e. g. that in the early stages of a dearth of grain in England the quantity of money in circulation increases, because the total price of the diminished supply of grain is greater than the former total price of a larger supply of grain, while the circulation of the other commodities continues undisturbed for some time at their old prices. At a later stage…
Karl Marx, A Contribution to the Critique of Political Economy
The author is tied to Quantity theory of money in the knowledge graph.
Of this nature is the fallacy in what is called, by Adam Smith and others, the Mercantile Theory in Political Economy. That theory sets out from the common maxim, that whatever brings in money enriches; or that every one is rich in proportion to the quantity of money he obtains. From this it is concluded that the value of any branch of trade, or of the trade of the country altogether, consists in the balance of…
John Stuart Mill, A System of Logic, Ratiocinative and Inductive
States what Quantity theory of money is; the author is tied to Quantity theory of money in the knowledge graph.
It is habitually assumed that whenever there is a greater amount of money in the country, or in existence, a rise of prices must necessarily follow. But this is by no means an inevitable consequence. In no commodity is it the quantity in existence, but the quantity offered for sale, that determines the value. Whatever may be the quantity of money in the country, only that part of it will affect prices which goes…
John Stuart Mill, Principles of Political Economy
The author is tied to Quantity theory of money in the knowledge graph.
Philosophers who discussed Quantity theory of money
Related ideas
- Friedrich Hayek
- John Stuart Mill
- John Locke
- Karl Marx
- Spring and Autumn period
- Labor theory of value
- Internet Archive
- Great Depression
- Milton Friedman
- University of Cambridge
- Jean Bodin
- Empirical evidence
- Nicolaus Copernicus
- John Maynard Keynes
- Monetarism
- Han dynasty
- A Contribution to the Critique of Political Economy
- Wiley-Blackwell
- Ludwig von Mises
- Taylor & Francis
- Guanzi (text)
- David Hume
- Ratio
- Encyclopædia Britannica
Place in the tradition
Part of History of philosophy in Poland.