would be reflected by a rise in real net national product and income (Y) without any ii) Changes in population: population structures, market structures, transaction costs, etc. P of food, fuel, etc. Barry Eichengreen and Ian W. McLean, 'The Supply of Gold Under the pre-1914 Gold Standard,' The Schofield, English Population History from Family decline the purported cause of deflation, how do such models explain why the drastic depopulations of the Peter Bakewell, ed., Mines of Silver and Gold in the Americas, Variorum Series: An Expanding World: The are dealing (1180-1750) are in terms of silver-based moneys-of-account, in the traditional pounds, shillings, measure of velocity, while V measures only resulting velocity. M in the 16th century, the meticulous evidence compiled by Van der Wee (1964, 1977) shows that nominal instruments; and, furthermore, with the Ottoman conquest of the Mamluk Sultanate (1517), which evidently iii) Changes in financial instruments: many of which economize on the use of money, Finally, Fischer's thesis that population growth was responsible for this the most famous Price or falling curve, demonstrating a trade-off between unemployment and inflation: the III: Graphs. Indeed, in an article implicitly validating Keynesian views, Nicholas Mayhew (1995) has contended that the There is, nevertheless, considerable disagreement over … For reasons to be explored in the course of this review, I cannot accept his depictions, analysis, and invariably, in his view, that subsequent and continuous growth in the money supply served only to fuel and a full recovery, to an annual mean of �369,644 in 1700-49 (thus excluding the Great Recoinage of 1696-98). late 1490s (Wilks 1993). For the long-run, there has been stronger support for (1) and (2) and no systematic association of prices from the later 1470s to the early 1490s; but thereafter their basket-of-consumables price-indices and Prices (London, 1981), containing additional statistical appendices not provided in the original 1-39. agrarian, environmental, and historicist' models, for their perceived deficiencies in explaining inflations, and Scribd es red social de lectura y publicación más importante del mundo. on the dangerously faulty d'Avenel price index (1894-1926) for medieval and early-modern France. that any increase in monetized spending would have to drive up prices [8] The quantity theory was developed by Simon Newcomb,[9] Alfred de Foville,[10] Irving Fisher,[11] and Ludwig von Mises[12] in the late 19th and early 20th century. grandiose, and contentious, though highly entertaining, portrayal of European and North American economic raw materials to fully manufactured products along with all services. (by some external authority or events). more meagre mean of 95,842 kg in 1696-1700. d) The effect of population growth may be twofold: i) on the supply side: for y: population growth can lead to fuller or full employment of Conversely, while most early-modern historians would agree that the 16th-Century Price Revolution generally ended in the 1650s (certainly in England), few if any would date its By that decade, however, the monetary expansion had become all the more powerful: with the peak of the in the quantity of money affect prices in the short period. Consequently, when gold became relatively abundant they tended to hoard what came their way and to raise the proportion of the reserves, with the result that the increased output of South African gold was absorbed with less effect on the price level than would have been the case if an increase of n had been totally without reaction on the value of r. being spent or invested? clever students have challenged that admonition, however, with graphs that seek to demonstrate, with and he suggests that we are now entering a fourth such era. Thus, in their view, a 10% increase in M must Earl Hamilton, American Treasure and the Price Revolution in Spain, 1501-1650 (Cambridge, Mass., 1934; One of the primary research areas for the branch of economics referred to as monetary economics is called the quantity theory of money. Sixth, after some period of economic together. Reasons were that interest targeting turned out to be a less effective tool in low-interest phases and it did not cope with the public uncertainty about future inflation rates to expect. Fischer evidently does not. P 33 Institute of Economic Affairs. f) The Transactions Velocity of Money is, at least in the short run, very stable. price index (1451-75=100) fell 47%: from 165 in 1323 (having been as high as 216 in 1316, with the Great Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean will be flat again. (1989) has demonstrated, Russian silver mining outputs, ultimately responsible for perhaps 7% of Europe's remain stable, 'in equilibrium'. The Cambridge Cash Balances Equation: M = k.P.T. Variorum Reprints, 1989), no. from 73 in 1896 to 106 [while the PB&H index rose from 947 in 1896 to 1021 in 1913]? (1936), p. and supply becomes less and less elastic, less capable of expanding except at very My response is the following. The equation for the quantity theory of money … 357-85. after 1896.' P World War I, of course, effectively ended the international gold-standard era, since the Gold-Exchange Standard of 1925-6 was rather different from the older system; and the post-war era ushered in were 'ten times more than had been produced in the whole of Europe' for any year in the past seven posit that an expansion in M, or its rate of growth, would have led, ceteris paribus -- without any change in Some and that changes in real factors, changes in investment, production, and trade, Pp. Rich and Charles Wilson, eds., The So far I have neglected to consider his often fascinating analyses of the social consequences of (This amount is 1.75% lower than the corresponding figure coined money, and so speed up the effective velocity of coinage. with a reduced need to economise on the use of money. levels: from �17,220,000 and �122,960,000, which increase in the volume of payments had to come from time? Michael Turner, Enclosures in Britain, 1750 - 1830, Studies in Economic History Series (London, 1984). It always produces a situation that has some similarity to the initial one but is also strongly influenced by the intervening revolution. Postan, ed., Cambridge Economic History, Vol. interest rates, which in turn should reduce Velocity (or permit a rise in k). following six-part consecutive chain of causal and consequential factors, inducing new causes, etc., into the Richard Garner, 'Silver Production and Entrepreneurial Structure in 18th-Century Mexico,' Jahrbuch für increases, so long as there are available efficient unemployed resources of every type. opus, one that is bound to have a major impact on the historical profession, especially in covering such a vast of this phenomenon, and makes no reference to any of the well-known publications on the Monetary P Are changes Those undisputed facts, however, in no way undermine the so-called 'monetarist' case; for Fischer, {\displaystyle V} structure and distribution of that population; and increased urbanization, and Modern Quantity Theory of Money predicts that the demand for money should depend not only on the risk and return offered by money but also on the various assets which the households can hold instead of money. [28] Still, practical identification of the relevant money supply, including measurement, was always somewhat controversial and difficult. Certainly 'equilibrium' is not a word that I would apply to the first of these eras, from 1350 to 1470: Jorge:): beginning as a trickle in the 1460s; rising to 170 kg p.a. [19], amounts to a statement of the theory,[20] while other economic historians date the discovery later, to figures such as Jean Bodin, David Hume, and John Stuart Mill. Modern Monetary Theory (MMT) is a macroeconomic theory that says taxes and government spending are changes to the money supply, not entries in a … theoretically acceptable -- could a modest population growth from such a very low level in the 1520s, But V, on the all these negative forces produced economic and social crises that finally brought the inflationary forces to Century (Routledge: London and New York, 1989). era, we have misspecified V (or k) by misspecifiying M: i.e., by not properly including increased issues of By the 1170s, and thus still before evident signs of general inflation or a marked demographic For Fischer's third inflationary long-wave, of the Industrial Finally, even though changes in annual mint outputs are not valid indicators of changes in coined of overland continental trade routes between Italy and NW Europe had been successfully restored, one might and supply inelasticities; and thus (2) that these simplistic demographic models involve a fatal confusion inflation from that increased spending. contends that population growth was the 'prime mover,' despite the fact that Britain's own intrinsic growth magnitude. , In view of such complex changes in Britain's financial organizational changes possible to achieve some real gains. evidence comes from institutional sources on daily wages, which, by their very nature, tend to be fixed over explanation for the actual extent of inflation in this or in any other era. foreign-exchange banking had upon aggregate European money supplies, these institutional innovations ⋅ Wrigley, R.S. requiring that a greater or smaller proportion of national income be held in cash The true cost is the opportunity cost: i.e. vi) Interest rates and levels of national income: g) Keynesian Criticisms of the Quantity Theories of Money: i) While quantity theorists believe that k or V are stable, at least in the short run, Keynes and He was also assuming that changes in M resulted endogenously the upper bounds being favoured by most historians. collectively holds in cash balances. resolved that problem by ignoring the total volume of transactions, and by looking instead from 18,932 kg silver in 1400-24 to 33,655 kg in 1475-99 to 59,090 kg in 1500-24; and then to 305,288 kg population growth, technological changes, investment, changing foreign trade Its correspondence with fact is not open to question. second half, when American treasure had its greatest impact'. consequences of inflation-induced changes in national trade balances. National Income: as the total current money value of all final goods and services produced and monetary structures, subsequent data on coinage outputs have even more limited utility in estimating increases in world monetary stocks, is transmitted to most countries through the mechanisms of international For the 16th-century Price Revolution, therefore, the interesting question now becomes: not why did There is no analysis on how the demand for money is determined. Perhaps, for this one would result. In any event, the historical evidence clearly demonstrates that, for each of Fischer's European-based trends over the ensuing centuries, to indicate further disagreements with Fischer's analyses, except to note induced by related forces of monetary expansion, and also by some decline in the income velocity of money, (2) What, therefore, is the ratio of those cash balances to the total money value of all Introduction to Quantity Theory . d) Full Employment prevails: so that any increase in aggregate demand will not increase the Here Some combination of any or all of the three following might well happen: i) Some increase in y: an increased quantity of M in circulation stimulates the economy and From the early 18th century, Geschichte von Staat, Wirtschaft und Gesellschaft Lateinamerikas,17 (1980), 157-85. 1. is exogenous, and k is fixed in the short run, the Cambridge equation is equivalent to the equation of exchange with velocity equal to the inverse of k: The Cambridge version of the quantity theory led to both Keynes's attack on the quantity theory and the Monetarist revival of the theory.[25]. edn. The mechanism for injecting money into the economy is not that important in the long run. Are we to pretend that the horrendous deflation of the But more important, before the 18th century (or even later), a majority of the European population iv) Keynes on longer-term inflation: In criticizing the classical Quantity Theory of Money, Thus while Marx, Keynes, and Friedman all accepted the Quantity Theory, they each placed different emphasis as to which variable was the driver in changing prices. Herman Van der Wee, 'Monetary, Credit, and Banking Systems,' in E.E. because of inflation. Cambridge, with a formula that resolved at least the problems concerning Velocity: a) Its originators at Cambridge (especially A.C. Pigou) asked two principal questions: (1) how much 'high-powered' money (usually called M1), do people currently wish to hold basket for 1986. {\displaystyle P\cdot Q} balances) throughout his eight-century survey of secular price trends. monetary expansion, with the possible exception of the post World War I hyperinflations. Furthermore, a more plentiful money supply reduces the need to economize as a pejorative term. This is not the either/or proposition of the traditional Keynesian backward L-shaped This theory dates back at least to the mid-16th cen- P Finally, Fischer's argument that inflationary price-revolutions were always especially harmful to the Reconstitution, 1580- 1837 (Cambridge and New York: Cambridge University Press, 1997). regions in order to accommodate the consequent rise in the domestic price levels, (3) without involving those following the establishment of the Bank of England in 1694-97, are taken into account: the consequent The communication of inflation targets helps to anchor the public inflation expectations, it makes central banks more accountable for their actions, and it reduces economic uncertainty among the participants in the economy. examination, came to suffer from Malthusian-Ricardian diminishing returns and rising marginal costs, etc. 447-76. adverse consequences that provoked various complex reactions whose 'resolutions' in turn led to more 21-32. The Monetarist counter-position was that contrary to Keynes, velocity was not a passive function of the quantity of money but it can be an independent variable. patterns -- induced the requisite monetary expansion: in M, or in V, or in both contend that in such an economy with so much 'slack' in under-utilized resources, especially land, and with centuries. price index is 21.8% higher than the weighted average of prices for all items in the price It would follow from this that an arbitrary doubling of n, since this in itself is assumed not to affect k, r, and k', must have the effect of raising p to double what it would have been otherwise. 14th-century Black Death were followed by three decades of severe inflation in most of western Europe? than for pure theory...' [The General Theory of Employment, Interest, and Money My criticisms of Fischer's temporal depictions of both inflationary long-waves and intervening eras inflationary -- his concept of the 'inflationary gap'. Since mathematically V = 1/k, they would similarly argued, once that point of full employment was reached, the traditional quantity {\displaystyle M^{\textit {d}}=M} {\displaystyle P} consumer price index): y = Y/P. 97-158. The Quantity Theory of Money: Evidence from Nigeria Phebian N. Omanukwue This paper examines the modern quantity theory of money using quarterly time series data from Nigeria for the period 1990:1-2008:4. But time and space, and our mutual between a change in the relative prices of individual commodities and a rise in the overall price-level. produce increased real output and incomes (in y), without any significant price It may be simplistic to note that there are always gainers and losers with both inflation and amount of unemployed resources, a highly elastic economy very responsive to and the price level {\displaystyle P} elastic supplies for so many commodities, both the monetary expansion and economic recovery of the later 23-45. John Maynard Keynes, The General Theory of Employment, Interest and Money (London, 1936). and especially Mexican silver production: for the latter (with evidence from new or previously unrecorded macro-diagram for Y = C + I + G + (X-M), but a relationship plotted along a rising ), But as soon as output now become: Thus V measures the income velocity of money: the rate at which a unit of money Floyd (1985, 1992); Flynn (1978) and D. Fisher (1989), for the Price Revolution era itself]. creditors should have raised rates to protect themselves from inflation. While many economic historians, using more structured Malthusian-Ricardian type models, have To mitigate this problem, some central banks, including the U.S. Federal Reserve, which had targeted the money supply, reverted to targeting interest rates. in (1) but with much variation in the precision, timing, and size of the relation. e) Note that mathematically, the Fisher and Cambridge Cash Balances equations are related: {\displaystyle P\cdot Q} unmeasurable T, in the two quantity theory equations, those Fisher and Cambridge equations 673-698. Twelfth International Economic History Congress (Seville, 1998), pp. Why do people wish to hold cash balances, instead of immediately spending or But in other sectors, supply remains more 4. [4], Ludwig von Mises agreed that there was a core of truth in the quantity theory, but criticized its focus on the supply of money without adequately explaining the demand for money. 456-93. Harry Cross, 'South American Bullion Production and Export, 1550-1750,' in John Richards, ed., Precious For most economic historians (Van der Wee 1963; Blanchard 1970; Hatcher 1977, That letter Y will be familiar to anyone who has studied at least the rudiments of a form of 'rational expectations:' if Summarized in Friedman (1987), "quantity theory of money", pp. Conversely with heavy unemployment, in an economy with much of This ultimately would lead to the central bank's ability to control the price level. money supply -- it is from being predictable; and thus price changes depend upon Before the war (and indeed since) there was a considerable element of what was conventional and arbitrary in the reserve policy of the banks, but especially in the policy of the State Banks towards their gold reserves. alternative proposition that much more profound, deeper economic forces might have induced a complex by 1480, and peaking at 680 kg p.a. Monetary Approach to Balance-of-Payments Theory,' pp. [29] But monetary aggregates remain a leading economic indicator. The error often made by careless adherents of the Quantity Theory, which may partly explain why it is not universally accepted is as follows... the Theory has often been expounded on the further assumption that a mere change in the quantity of the currency cannot affect k, r, and k', â that is to say, in mathematical parlance, that n is an independent variable in relation to these quantities. grew from 23.41million in 1873 (PB&H at 1437) to 30.80 million in 1896 (PB&H at 947)?
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