Money, Bank Credit, and Economic Cycles - The Ludwig von Mises ...

A Critique of Monetarist and Keynesian Theories 523Supposing the “velocity of circulation” of money remainsrelatively constant over time, and the gross national productapproximates that of “full employment,” monetarists believemoney is neutral in the long run, and that therefore an expansionof the money supply (M) tends to proportionally raise thecorresponding general price level. In other words, though innominal terms the different factor incomes and productionand consumption prices may increase by the same percentageas the money supply, in real terms they remain the same overtime. Hence monetarists believe inflation is a monetary phenomenonthat affects all economic sectors uniformly and proportionally,and that therefore it does not disrupt or discoordinatethe structure of productive stages. It is clear that themonetarist viewpoint is purely “macroeconomic” and ignoresthe microeconomic effects of monetary growth on the productivestructure. As we saw in the last section, this approachstems from the lack of a capital theory which takes the timefactor into account.Relation to Credit Interest and Crises [New York: Macmillan, 1911 and1925], p. 48 in the 1925 edition), the left side of the equation can also beseparated out into two parts, MV and M’V’, where M’ and V’ denoterespectively the supply and velocity of money with respect to bankdeposits:MV + M’V’ = PTA national income version of the equation of exchange has also beenproposed. In this case T represents a “real” national income measure(for example, the “real” gross national product), which, as we know,only includes consumer goods and services and final capital goods (see,for instance, Samuelson and Nordhaus, Economics). This version is particularlyfaulty, since it excludes all products of intermediate stages inthe productive structure, products which are also exchanged in units of themoney stock, M. Thus the equation more than halves the true, real valueof T which MV supposedly influences. Finally, the Cambridge cash balanceversion is as follows:M = kPTwhere M is the stock of money (though it can also be interpreted as thedesired cash balance) and PT is a measure of national income. See MiltonFriedman, “Quantity Theory of Money,” in The New Palgrave: A Dictionaryof Economics, vol. 4, esp. pp. 4–7.