We see thus that the individual monetary demand at any time is that amount of money which rests in his possession as the necessary condition to making his purchases as he desires. Individual monetary demand varies in proportion directly to the delay, and inversely to the rapidity with which the individual passes the money on ; and directly to the amount of the person's income that is received and expended in monetary form.
terprises. It is that stock of money which is necessarily present to effect the exchanges of the community in the pre vailing manner at any given level of prices. A single dollar as it circulates helps to supply the monetary demand of many individuals in turn: the more quickly each person spends the piece of money he receives, the greater its rapidity of circu lation. Let us suppose that every piece of money passed from one person to another once each day. Then a dollar would, in the course of a business year (about 300 days), serve to buy (and at the same time to sell) $300 worth of goods. If the average purchases of each individual amounted to $1000 a year, the average monetary demand of each would be about The times of maximum monetary demand of the different individuals do not coincide; often they alternate with each other, and the community's total monetary demand at a given time is a composite of the many individual variations. The amount of money that will remain in circulation in a com munity depends on several factors, the chief among them be ing the amount of goods to exchange, the methods of exchange, and the value of the commodity material in other uses. The amount of goods to be exchanged may change even when the amount produced is unaltered (e. g., a change from agricul tural to industrial conditions). The methods of exchange may alter so as to require either more money (e. g., cash in stead of credit business) or less money (e. g., use of bank checks displacing use of money by individuals). Or, apart from the other factors, the scale of prices may change as the conditions of commodity money production are altered.
of dollars has been doubled, every one will, in the long run, and "other things being equal," have twice as many dol lars as before.
Now, prices of goods cannot remain the same as before; for if they did there would be twice as many pieces of money available to effect the same number of trades at the same prices. There is no reason why each person should tie up twice as large a proportion of his income in the form of money. If, however, there is a concerted movement to spend the surplus money, there results a general bidding down of the value of money, a general bidding up of the prices of goods and of services. At what point will this movement stop? The rational conclusion must be that, other things being equal, the new equilibrium will be established when the ratio between the value of money and the price of the goods that each individual is purchasing becomes the same as before. The money in a community being doubled, prices must be doubled, and proportionally for any other change in the quantity.
§ 8. The quantity theory of money. This explanation of the effect of changes in the quantity of money in a country upon prices (the general scale of prices) is known as the quantity theory of money. This theory has, for a century, been very generally accepted by competent students of the money problem. It may be summed up thus: other things being equal, the 'value of the monetary unit, expressed in terms of all other commodities, falls as the quantity of money increases, and vice versa. That is, prices rise and fall in direct proportion to changes in the total quantity. This is a simple explanation of a complex and difficult set of conditions. The phrase, "other things equal," be tokens the statement of a tendency where there are several factors. The quantity theory explains what happens when there is a change in one of the factors—the number of pieces of money. There are three large sets of facts to be brought into relationship with each other in the quantity theory : (1) the amount of business, or the number of trades effected ; (2) the rapidity of circulation, depending on the methods by which business is done; (3) the amount of money avail able. According to the quantity theory, we must expect that, when conditions (1) and (2) remain fixed, prices (the gen eral price level) will vary directly, and the value of money will vary inversely as the quantity of money. This quan tity theory may be expressed in the formula P = — when P is the symbol for price, or the general price level, N is (1) above, R is (2), and M is (3). P, therefore, changes directly with either M or R, or inversely with N.' § 9. Interpretation of the quantity theory. The quan tity theory must be carefully interpreted to avoid various misunderstandings of it that have appeared again and again in economic discussion.