Quantity Theory of Money - Origins and Development of The Quantity Theory

Origins and Development of The Quantity Theory

The quantity theory descends from Copernicus, followers of the School of Salamanca, Jean Bodin, and various others who noted the increase in prices following the import of gold and silver, used in the coinage of money, from the New World. The “equation of exchange” relating the supply of money to the value of money transactions was stated by John Stuart Mill who expanded on the ideas of David Hume. The quantity theory was developed by Simon Newcomb, Alfred de Foville, Irving Fisher, and Ludwig von Mises in the latter 19th and early 20th century, while it had been argued against by Karl Marx. The theory was influentially restated by Milton Friedman in response to Keynesianism.

Academic discussion remains over the degree to which different figures developed the theory. For instance, Bieda argues that Copernicus's observation

Money can lose its value through excessive abundance, if so much silver is coined as to heighten people's demand for silver bullion. For in this way, the coinage's estimation vanishes when it cannot buy as much silver as the money itself contains . The solution is to mint no more coinage until it recovers its par value.

amounts to a statement of the theory, while other economic historians date the discovery later, to figures such as Jean Bodin, David Hume, and John Stuart Mill.

Historically, the main rival of the quantity theory was the real bills doctrine, which says that the issue of money does not raise prices, as long as the new money is issued in exchange for assets of sufficient value.