Quantity theory of money

“ There is nothing whatever in the plan itself which could not be accepted by those who reject the quantity theory altogether. On the contrary, the plan will seem simpler, I think, to those who believe a direct relationship exists between the purchasing power of the dollar and the bullion from which it is made—without any intermediation of the quantity of money—than it will seem to quantity theorists. ”

“ But on a subject so full of complexity as that of currency and prices, it is necessary to lay the foundation of our theory in a thorough understanding of the most simple cases, which we shall always find lying as a groundwork or substratum under those which arise in practice. That an increase of the quantity of money raises prices, and a diminution lowers them, is the most elementary proposition in the theory of currency, and without it we should have no key to any of the others. ”

“ The Quantity Theory of Money states that the42 amount of cash which the community requires, assuming certain habits of business and of banking to be established, and assuming also a given level and distribution of wealth, depends on the level of prices. If the consumption and production of actual goods are unaltered but prices and wages are doubled, then twice as much cash as before is required to do the business. ”

“ For the quantity theory, the fall will be in proportion to the increase. For the theory just outlined, the fall will depend on the elasticity of demand for gold in the arts, and on the elasticity of "demand" for money, meaning by demand for money simply the demand for the short-time use of money as a tool of exchange, a demand which governs directly, not the capital value of money, but rather the "money-rates." ”

“ In the statement of the quantity theory, the proviso is commonly made that all exchanges must be made by means of money, or of money and bank-credit. Barter is excluded by hypothesis. If resort to barter were possible, then people might avert the fall in prices due to scarcity of money, or increase in trade, by dispensing with money in part of their transactions, and the proportional decrease in prices which the quantity theory calls for would be lacking. ”

“ We see then, that the value of gold is determined in precisely the same manner as that of any other commodity, according to the equation between supply and demand."
In the consideration of this doctrine, let us note several points in which it differs fundamentally from the quantity theory proper, and from the situation assumed in the dodo-bone illustration. First, it is not a quantity theory of [Pg 326] money. Money is not regarded as a homogeneous thing, each element having the same influence on prices. Rather, token money is the child of prices. ”

“ The forces which a cross-section analysis reveals are not necessarily identical with those which a theory of origins sets forth. Once the thing is set going, the forces of inertia favor it. A new theory, fixed in the minds of the people, say the quantity theory itself, might give them such confidence in their money that its value might be maintained. A fiat of the government, making the money legal tender, supplemented by the loyalty of the people, might keep up its value. ”

“ There is, however, a group of writers who seem to feel that the quantity theory remains sufficiently vindicated if it can be shown that an increase in gold production tends to raise prices throughout the world, while a check on gold production tends to lower prices, and who rest their case on the necessity which bankers find of keeping reserves in some sort of relation to the expansions of bank-credit. ”

“ Now this is just what has always been true of money; its real value increases and decreases, just in proportion as those things which it professes to measure have increased or decreased in quantity. Instead of these things being exchanged or converted into something measured by as fixed a standard as they are, the attempt is made to measure them by something which constantly increases 22and decreases in representative capacity. In other words, a dollar is not at all times one and the same thing. ”

“ But the limiting case for the commodity theory is not the actual case. Standard money is also commonly a medium of exchange. Standard money is particularly desirable in bank and government reserves. Its employment in these and other ways is a valuable employment, and adds directly to its value both as money and in the arts. There is a marginal equilibrium between its values in the two employments. ”

“ All that is conceded is that there need not be a physical commodity as the basis of the money. Value is not necessarily connected with a physical commodity.
There is a disposition on the part of many quantity theorists to beg the question at the outset, to assume money as circulating, without realizing how much this assumption involves. The assumption involves the further assumption that there are causes for the circulation of money. But the same causes which make money circulate will also be factors in the determination of the terms on which it circulates, i. e., the prices. ”

“ That in the exchange value between commodity money and all other property, credit money does not add anything—it facilitates—makes convenient the transaction of business. Just as your wheat certificates add nothing to the exchange value of wheat, or the things for which wheat are exchanged; yet they facilitate its exchange.
"This commodity money is the measure of values. Its quantity becomes the measure, and each dollar is a part of that measure. Credit money adds nothing to its value, it only facilitates the transaction of business based on that measure of values. ”

“ When, however, new money, composed of some substance of supposed intrinsic value (as of gold) , is brought into the market, or when new notes are issued which are supposed to be deserving of credit, the desire to obtain the money will, under certain circumstances, stimulate industry: an additional quantity of wealth is immediately produced, and if this be in proportion to the new claims advanced, the value of the existing currency is undepreciated. ”

“ It will also maintain a certain current value, as long as its volume is kept within the quantity that would circulate in the form of specie and paper convertible into specie. But you must consider that the fiat money plan is brought forward by earnest inflationists, whose principal object is to make money plenty by issuing enough of it to keep all the boys in cash—and why should we not? it costs nothing, and we may just as well have much as little. ”

“ If a currency were undergoing rapid inflation, a fixed amount of invested money would represent a shrinking stock of capital goods. This stock would last always, but would grow smaller by a true standard of measurement. All that we are at present interested in knowing is that practical usage treats capital as a permanent fund of productive wealth, and most conveniently describes it as a fixed amount of money "invested" in goods of a productive kind. What is thought of as "money" abides. Of course the practical man does not regard it as actually composed of currency. ”

“ Intrinsically, a dollar bill is just a piece of paper, deposits merely book entries. Coins do have some intrinsic value as metal, but generally far less than their face value.
What, then, makes these instruments — checks, paper money, and coins — acceptable at face value in payment of all debts and for other monetary uses? Mainly, it is the confidence people have that they will be able to exchange such money for other financial assets and for real goods and services whenever they choose to do so.
Money, like anything else, derives its value from its scarcity in relation to its usefulness. ”

“ Thus, then, the real working power or worth of the currency is founded on the entire sum of the relative estimates formed by the population of its possessions; a change in this estimate in any direction (and therefore every change in the national character) , instantly alters the value of money, in its second great function of commanding labour. But we must always carefully and sternly distinguish between this worth of currency, dependent on the conceived or appreciated value of what it represents, and the worth of it, dependent on the existence of what it represents. ”

“ To produce this effect it is not however necessary that paper money should be employed: any cause which retains in circulation a greater quantity of pounds than would have circulated, if commerce had been free, and the precious metals of a known weight and fineness had been used, either for money, or for the standard of money, would exactly produce the same effects. Suppose that by clipping the money, each pound did not contain the quantity of gold or silver which by law it should contain, a greater number of such pounds might be employed in the circulation, than if they were not clipped. ”