QUANTITY THEORY OF MONEY. A summary form of expression for two allied but distinct propositions relating to the causes of changes in the value of money. The broader propo sition referred to is that, other things being equal, changes in the value of money are dependent upon changes in the quantity of money. The narrower proposition is that changes in the value of money, other things being equal, are directly proportional to changes in the quantity of money : so that, if, say, the qqantity of money is either halved or doubled, all other things remaining the same, the value of money will be doubled or halved; that is (since the price level is an expression of changes in the value of money) prices will rise or fall in strict proportion to a given change in the quantity of money, all other things being supposed to remain un changed. It will be clear from what has been said that the nar rower proposition cannot be true if the broader proposition is not, but that it by no means follows that the untruth of the broader proposition can be proved by disproving the truth of the narrower.
The controversies to which these propositions have given rise are amongst the most celebrated in political economy. Before ap proaching them, it must be pointed out that the issues involved are irrelevant for any theory of money which asserts that money is only a symbol expressing values, but itself incapable of possess ing value. Any such theory must reject not only the quantity theory in any form, but also the view (which historically is very important) that the value of money is based upon the cost of production of the precious metals. It must reject the latter alter native by arguing that, though the given form of money may be made from gold or silver, which may possess value, it is not this i fact which is relevant in deciding whether the coin so made money or not; the important fact is the denomination of units of value expressed and these are independent of the material out of which money is made. But, though some "symbolistic" theories
of money reject the quantity theory, others are so worded as to admit of some form of it ; and, in any case, the "quantity theory" and the "cost of production theory" are capable of reconciliation ; for it may be argued, as, for example, by J. S. Mill, that "cost of production would have no effect on value if it could have none on supply." Thus a lowering of the cost of production of gold lowers the value of gold and therefore raises prices, because under these circumstances more gold will be produced.
It must be pointed out, further, that the truth of any form of the quantity theory cannot be established purely by an appeal to facts. This is so, not merely because, in practice, other things never are equal—so that, in the real world, changes in the quantity of money are always accompanied by changes, not only in the price level, but in other things—but also because mathematical or statistical equivalences between quantities are incapable of throw ing any light upon causal sequence. In other words, assuming that changes in the price level always do accompany changes in the quantity of money, this fact, if it is a fact, does not tell us which change depends upon which. It must be shown, if any form of the quantity theory is true, why changes in the price level are de pendent upon changes in the quantity of money. Otherwise it might be argued that changes in the quantity of money are de pendent upon changes in the price level, or that changes in the price level and changes in the quantity of money are co-effects of remoter causes.
Though the truth of the quantity theory is not denied by a ma jority of economists, the formulation of the theory has undergone profound modifications. A distinction must be drawn between the "older" and the "newer" quantity theories. In what follows we shall deal first with the older and traditional theory, and then with its formulation in recent years.