Chapter 10: Concluding Remarks
THE QUANTITY THEORY OF MONEY As we have seen, the most straightforward way to approach monetary policy issues, if not necessarily the most historically accurate, is to think of money as being simply commodity money, such as full-bodied coins minted from precious metals. This immediately leads on to a comparison between the total quantity of such a commodity money in existence at any point in time and the volume of goods and services traded in the economy over some convenient accounting period. In other words, it leads directly to the characteristic modes of thought associated with the quantity theory of money. With money measured in an arbitrary unit of denomination, and making allowance for the concept of the velocity of circulation, the simplest possible theory of the determination of money prices then follows. As illustrated by the passage from Hume (1752) quoted in Chapter 4 above, this approach was already more or less fully developed by the mid-eighteenth century. It can plausibly be argued that recent reﬁnements have really added very little except mathematical sophistication. For example, the logic can be easily transferred from a commodity-based system to a regime with an inconvertible paper currency, as shown by the monetarists. It is doubtful, however, that this general theoretical framework was entirely appropriate as a description of the reality of the market economy even at Hume’s time of writing. Hicks’s (1989) view that even the most basic monetary transaction has an underlying credit element was mentioned in Chapter 2. It...
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