How did the quantitative theory of money develop?

Economic policy and economic theory of the 30s - 70s of the 20th century was distinguished by the fact that the economic views of Keysianism played a dominant role in it. But already in the 70's there was a kind of turn to neoclassical theory. He was associated primarily with the development of discrediting Keysianism due to rising unemployment and a steady rise in prices.

The new classical quantitative theory of money is presented in the form of monetarism. The origin of the quantitative theory dates back to the 16th century, when the formation of the first in the history of the economic school took place. It was called the school of mercantilists. In this case, the quantitative theory has become a kind of reaction to the main postulates of mercantilism, and first of all to the characteristic doctrine that the more money there is, the faster the trade, and, accordingly, the speed of circulation increases, which has a beneficial effect on production.

We doubted this thesis about the positive influence of the growth in the number of precious metals in the country by the famous English philosophers D. Locke and D. Hume. They were the first to compare the number of precious metals and the existing price level. As a result, it turned out that the prices for goods mirror the mass of precious metals in circulation in the country.

Thanks to them, a quantitative theory of money was born. Philosophers were able to determine that inflation falls precisely at a time when the amount of goods can not be compared with the amount of money. Such ideas were favorably received by the main representatives of the classical direction developed at that time in economic policy. Especially positive about the proposed theory looked A. Smith, who always viewed money only as a means of circulation, a kind of technical weapon that facilitates the exchange, so he did not recognize their intrinsic value.

The hardest quantitative theory of money came about thanks to the American economist I. Fischer, who in his famous work "The Buyer's Power of Money" managed to formulate a well-known equation based on a double expression of the final amount of commodity transactions:

• As a product of mass and speed of circulation of payment means;
• As a product of the level of yen and the number of goods sold.

The form of Fisher's formula is MV = PQ. The right part of the equation is a commodity and shows the volumes of the sold goods, the price assessment of which allows you to specify the demand for money. At the same time, the left part represents money and displays the amount that was spent to purchase goods. It fully reflects the supply of money.

As a result, Fisher's equation is a characteristic of the relationship between the money and commodity markets. Since money is only an intermediary in acts of sale and purchase, the amount of money spent will always be the same number of prices of services and goods sold. In essence, this equation is an identity that reflects the proportionality between the level of prices and the amount of money.

The quantitative theory of Fisher's money is very common in American literature. European economists have adopted as the most popular version of this theory Cambridge version, or, more simply, the theory of cash balances developed by A. Pigou and A. Marshall. They sought to make the main emphasis on the patterns of using money as income. The theory is argued by the idea of cash balances, by which it is necessary to understand a part of the income stored by an individual in liquid, monetary form.

Monetarist theory of money, like other variants of the quantitative theory, is based on the following assumptions:

• Money that is currently in circulation is determined strictly autonomously;
• The rate of circulation of this amount is very rigidly fixed;
• The possibility of the entire monetary sphere's influence on the production process is excluded.

The quantitative theory of money was laid in the basis of the policy pursued by the central banks of the western part of Europe in the 1920s. Such a policy did not justify the expectations, so it was decided to move on to neoclassical economic theories.