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The demise of the Quantity Theory of Money

Maria Cristina Marcuzzo ()

History of Economic Ideas, 2002, vol. 10, issue 1, 49-62

Abstract: The demise of the Quantity Theory of Money took Keynes a long way from his previously held view. It was not until after the Summer of 1934 that his ideas took on a form different from those presented in the Treatise. Finally, he was able to provide an alternative approach to price level determination based on aggregate demand and aggregate supply. In the process which led to the new formulation, Kahn’s construction of the aggregate supply curve, drawn in the expected proceeds-aggregate output space, was an important step, because it allowed for a straightforward derivation of the ‘level of prices’ as the ratio of expected proceeds to output. The generalized statement of the Quantity Theory presented in chapter 21 of the General Theory shows that an increase in prices – as a consequence of an increase in the stock of money – occurs in very special conditions. On the contrary, the Aggregate Demand and Aggregate Supply models which became popular in the 1990s misrepresent the point against the Quantity Theory and thus facilitate its reinstatement as a general proposition.

Date: 2002
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Handle: RePEc:hid:journl:v:10:y:2002:1:4:p:49-62