Quantity Theory Of Money

By Author: STEPHANIE
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One of the oldest, widely accepted functions of government is control over the supply of money. The dramatic effects of changes in the quantity of money on the level of prices and the volume of economic activity were recognized and thoroughly analyzed in the 18th century, and monetary economics has ever since constituted one of the principal branches of economics. In the 19th century a complex and somewhat crudely formulated tradition grew up known as the "quantity theory of money", which held that any change in the supply of money can only be absorbed by variations in the general level of prices (the purchasing power of money). In consequence, prices will tend to change proportionately with the quantity of money in circulation. As the growth of fiat paper money gave governments increasingly effective Replica Tag Heuer control over the stock of circulating media, the quantity theory of money supplied an apparently simple rationale for the management of the economy: all that was needed to prevent inflation or deflation was to vary the quantity of ...
... money in circulation inversely with the level of prices.

One of the targets of Keynes's attack on traditional thinking in his General Theory of Employment, Interest and Money was this quantity theory of money. Keynes produced a different theory of the demand for money that implied that the impact of a change in the stock of money on the level of national income is weak and at best indirect; the effect on prices is virtually nil, he maintained, at least in economies with heavy unemployment such as prevailed in the 1930s. He put his emphasis instead on government budgetary and tax policy and direct control of investment. As a consequence, economists lost faith in monetary management and came to regard monetary policy as more or less ineffective in controlling the volume of economic activity.

In the 1960s there was a remarkable revival of the older view, at least among small but growing school of American monetary economists. They accepted much of Keynesian economics but argued that the effects of fiscal policy are unreliable unless the quantity of money is regulated at the same time. They refurbished the quantity theory Tag Heuer Carrera Replica of money and tested the new version on a variety of data for different countries and for different time periods, leading to the broad conclusion that the quantity of money does matter.

In the late 20th century the controversy was still raging. It is notable that this debate, unlike previous debates in the history of monetary economics, was characterized by disputes over empirical findings -- that is, it was focused on the testable character of different monetary theories rather than on the manner of their formulation. Progress was made slower by the political overtones of the controversy: in some countries, belief in the efficacy of monetary policy had become a kind of litmus test of political conservatism. Nevertheless, reconciliation between Keynesians and quantity theorists needed only Replica Omega Watches some agreement as to the magnitude of monetary forces and the degree of stability of the demand for money. Monetary economics seemed at last to be coming of age as an empirical discipline.