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Paradoxical working of the quantity of money a contribution to the theory of exchange equation

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Obszerny wykład z zakresu ilościowej teorii pieniądza autor zilustrował przykładami z historii gospodarczej Polski okresu przedwojennego.

The quantity theory of money has always considered changes in the volume of money to be the cause of changes in price levels. Inflationary and deflationary phenomena have been defined on its basis. This point of view, however, has been justly criticized. The volume of money is not an independent variable, since it depends on fluctuations in credit activity. The same pertains to the velocity of circulation, Which is also dependent on the rate of credit activity. Hence, it is not strange that in economic realities, the dependence of price levels on quantity of money and velocity of circulation has not found adequate confirmation. The history of prices contains many examples of discrepancies between the changes in money volume and changes in price levels. A particularly acute discrepancy of this type occured in Poland in 1924 in connexion with the liquidation of the inflation of the paper mark and its replacement by the zloty as a new monetary unit. By the end of December, 1923, es the result of five years of postwar inflation the sum of marks in circulation reached 125 trillions. By May, 1924, i. e. four months later, the sum had increased to 570 trillions. The monthly increment amounted to more than 100 trillions. This was an unprecedentedly high irate of 'amission. It must be also mentioned, that from the second half of January the mark had been stabilized in relation to the dollar. The flood of emitted marks, hence, was a mass of nondepreoiating money, exchan-gable for foreign currency at fixed rates. If the money volume as such were the cause, an increase in price levels might have been expected. Gontrary to this, in March prices began to fall. The deflation of prices was the market manifestation of the enormous inflation of the money volume. A paradox of such magnitude is probably unknown in the history of money. A similar paradox, although on a smaller scale, recurred between April and December, 1924, the period during which marks were being converted into the new money. A large part of the marks were converted into subsidiary coins with restricted legal tender. Such conversion had to have deflationary effect. In spite of this, to September price level began to rise in the market. Both above-mentioned paradoxes ibad of course special causes which effectively neutralized the growing emission of marks and the deflationary results of conversion. The author explains (this in detail, referring to the above paradoxes with the object of (supporting his critical attitude towards the quantity theory. If enormous increase of money volume did not bring about the increase of price levels, it obviously cannot be used as a critérium in the definition of inflation. Hence, the author defines inflation as such a state of the social economy, in which the rate of production of services outdistances the production of goods. The stream of money income earned in the .service sector outdistances then the stream of income earned in the goods sector. The result is that the surplus of income from services tends to stimulate the demand for goods. If this situation continues for a sufficient lenght of time, an inflationary trend ensues. From this standpoint no exchange equation in which money volume enters as an independent variable, is able to give the index truly informing about inflationary or deflationary trends. The author illustrates this on the basis of the formula MV = PT, from which Irving Fisher deduced P = MV/T. However, this equation may equally well be used to deduce M =PT/V. The letter P denotes price levels, and M is the money volume. It follows from the above formula that not only prices, P, determine the money volume, but money volume, M, determines princes. This lis a contradiction. Moreover, the equation is restricted to the goods sector, excluding the service sector, in which money circulates just as well as in the former. Hence, it is not surprising that Fisher in his work on the stabilization of the dollar by adapting its metal parity to changes in price indices, had to abandon his equation and make use exclusively of price indices. The author concludes that reliable estimations of the buying power of money are possible only when indices induced from the economic reality are employed. Indices deduced from the exchange equation are rejected by the author. The method of exchange equation, in spite of not having achieved its main objective, d. e. the finding of a practical index measuring the buying power of money, has neverthless not been unfruitful, since it has stimulated and facilitated theoretical studies. Some authors make use of it currently in studying monetary equilibrium. The author proposes also employment of exchange equation for calculation of the velocity of circulation. With this in view he recalls Fisher's introductory formula, MV = SpQ. The letter p denotes the priée of an unit of goods, and Q is the annual quantity of goods exchanged. The symbol MV denotes the average quantity of money multiplied by velocity of circulation. However, money 'Circulates not only in the goods sector, but also in the service sector. Hence, the formula should be extended by including in it the symbol SpU, in which U denotes the total sum of services and p the theoretical price of an unit of service. We receive the equation: MV = SpQ + SpU. We deduce then the formula: V=SpQ + SpU/M. The numerator iin the above formula indicates the total of payments for goods and services» Each payment, however, constitutes an expenditure for one partner, but an income for the other partner. If in a country .annual expeditures for consumption, investments, and services are added up, we receive the sum, of the total payments in the exchange. This sum should be equal, lapproximately, to the gross national product which is a calculable magnitude. Let the letter B denote the gross national product. Hence, velocity of circulation may be calculated in the following manner: V=B/M. Although this may not be perfectly accurate, the result is not less useful than the price indices, which in spite of also not being entirely accurate, give sufficient information on changes in price trends. Likewise, all other indices serve essentially only to show changes in trend, without giving a photographically true picture of .the situation. In conclusion, the author suggests that the calculation of circulation velocity in the manner given above may facilitate the calculation of increment in volume of income money from year to year. It, iin turn, would make possible a statistical confirmation of Marx's statement, that the net profit of the enterprising class is a function of the quantity of monetary metals in a given business year. Statistical verification of that statement would be also valid for he broader statement that the net class profit always depends ion the inflow of additional money. In consequence the nature of cyclical movements would be put in the new light. (original abstract)

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