Online Library of Liberty: Economics, vol. 2: Modern Economic Problems

quantity theory answers the question: What general change occurs in prices as a result of the increase or decrease of the money in a given community at a given moment? Like the law of gravitation and the law of projectiles, the theory must be interpreted with relation to actual conditions.

The quantity theory makes intelligible the great and rapid changes in prices which have followed sudden changes in the quantity of money. Inductive demonstration of broadly stated economic principles is usually difficult, but there have been many “monetary experiments” to teach their lessons. Many inflations and contractions of the circulating medium have occurred, now in a single country, again in the whole world; and the local or general results have helped to exemplify richly the working of the quantity principle. With the scanty yield of silverand gold-mines during the Middle Ages, prices were low. After the discovery of America, especially in the sixteenth century, quantities of silver flowed into Europe. The great rise of prices that occurred was explained by the keenest thinkers of that day along the essential lines of the quantity theory, tho there were many monetary fallacies current at that time. The experience in England during the Napoleonic wars, when the money of England was inflated (by the forced issue of large amounts of banknotes) and prices rose above those of the Continent, led to the modern formulation of the theory of Ricardo and others about 1810. The discovery of gold in California and Australia in 1848-50 greatly increased the gold supply, and gold prices rose throughout the world. Between 1870 and 1890 the production of gold fell off while its use as money increased greatly, and prices fell. A great increase of gold production has occurred in the period since 1890. The wave-like movements of prices since 1897 are explicable as the periodic up and down swings of confidence and credit, but in the main the general trend upward has been due to the stimulus of increasing gold supplies.8 These are but a few of many instances in monetary history, which, taken together, make an argument of probability in favor of the quantity theory so strong as to constitute practically an inductive proof.

References.

Fisher, Irving, The purchasing power of money. N. Y. Macmillan. 1913. Johnson, J. F., Money and currency. N. Y. Ginn. 1905. Chs. III-VIII, X. Kemmerer, E. W., Money and credit instruments in their relation to general prices. 2d ed. N. Y. Holt. 1909.

Phillips, C. A., Readings in money and banking. N. Y. Macmillan. 1916. Walker, F. A., Money. N. Y. Holt. Chs. IV, V.

PLL v4 (generated January 6, 2009)

26

http://oll.libertyfund.org/title/2008