Trading Economics: A Guide to Economic Statistics for Practitioners and Students

5 Monetary Statistics

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.

Nicolaus Copernicus (1517), memorandum on monetary policy¹

Theories about the importance of the quantity of money – called monetarism – have been around for a long time. There is no mystery as to why monetarism is one of the main constructs of views about what makes economies successful. It is because money is at the centre of the process of how people access resources and because acquiring money is the incentive for producing goods and services, which, in turn, gives them access to the products (resources) being created. The theory asserts that the supply of money is linked to the level of prices. If the money supply increases, then the level of prices would increase in some proportional way.

The monetarists' explanation of inflation is driven by the ‘quantity theory of money’, which states that:

MV = PT

(money stock × velocity = price × transaction)

Reinvigorated by Friedman in response to Keynesian criticism, the theory shows that money stock as well as the velocity of the circulation of the money within the economy directly relate to price levels and the number of transactions undertaken.² It is the classic monetarist interpretation ...