Economic policy and economic theory of the 30s – 70s of the 20th century were distinguished by the fact that the economic views of Keynesianism played a dominant role in it. But already in the 70s there was a peculiar turn to neoclassical theory. It was primarily associated with the development of discrediting Keynesianism due to rising unemployment and a steady increase in prices.
The new classical quantitative theory of money is presented in the form of monetarism. The birth of a quantitative theory dates back to the 16th century, when the formation of the first economic school in history took place . It was called the school of mercantilists. In this case, the quantitative theory became a kind of reaction to the main tenets of mercantilism, and first of all, to the doctrine characteristic of them that the more money there is, the faster the trade goes, and accordingly, the speed of circulation increases, which has a beneficial effect on production.
The well-known English philosophers D. Locke and D. Hume doubted this thesis about the positive influence of the growth in the amount of precious metals in the country. They were the first to compare the amount of precious metals and the current price level. As a result, it turned out that commodity prices 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 the moment when the quantity of goods cannot be compared with the amount of money. Such ideas were favorably received by the main representatives of the then developed classical direction in economic policy. A. Smith looked especially positively at the proposed theory, who always considered money only as a means of circulation, a kind of technical weapon facilitating the exchange, so he did not recognize their intrinsic value.
The most stringent quantitative theory of money appeared thanks to the American economist I. Fisher, who in his famous work “The Purchasing Power of Money” managed to formulate a well-known equation based on the double expression of the final amount of commodity transactions:
- as a product of the mass and speed of circulation of means of payment;
- as a product of the level of yen and quantity of goods sold.
The form of the Fisher formula is as follows: MV = PQ. The right side of the equation is a product and shows the volume of goods sold, the price estimate of which allows you to ask for the demand for money. In this case, the left part represents money and displays the amount that was spent on the purchase of goods. It fully reflects the offer of money.
As a result, the Fisher equation is a characteristic of the relationship between the money and commodity markets. Since money is just an intermediary in acts of sale, the amount of money spent will always be identical to the amount of prices of sold services and goods. In essence, this equation is an identity reflecting the proportionality between the price level and the amount of money.
Fisher's quantitative theory of money is very common in American literature. European economists have adopted the Cambridge version, or, more simply, the box office theory developed by A. Pigou and A. Marshall, as the most popular version of this theory. They sought to place the main emphasis on the patterns of using money as income. The theory is substantiated by the idea of cash balances, by which it is necessary to understand a part of the income stored by an individual in liquid, cash form.
The monetarist theory of money, like other variants of the quantitative theory, is based on the following premises:
- the money that is currently in circulation is determined strictly autonomously;
- the velocity of circulation of this amount is very rigidly fixed;
- the possibility of the influence of the entire monetary sphere on the production process is excluded.
The quantitative theory of money was the basis of the policy pursued by the central banks of the western part of Europe in the 1920s. Such a policy did not live up to expectations, and therefore it was decided to move on to neoclassical economic theories.