THE QUANTITY THEORY OF MONEY AND FINANCIAL ACCOUNTING

Stanley Salvary

Macroeconomics from University Library of Munich, Germany

Abstract: The Quantity Theory of Money is implicitly embedded in the arguments for price level adjusted financial statements - inflation accounting. Historically, the instability of commodity prices, which is due to changes in relative prices, is considered by one school of economic thought (monetarism) as a reflection of the instability of the value of nominal money. Monetarists maintain that it is the level of the money supply which accounts for the instability of commodity prices. Hence, (1) all changes in the level of the money supply is deemed responsible for changes in the general level of prices, and (2) with each increase in the general level of prices, paper money is said to lose value. In a money economy, nominal money prices reflect the underlying exchange ratios of the various commodities that are produced and exchanged for nominal money. In the absence of monetary dislocation (monetary revaluation or devaluation), any change in the nominal price of a commodity reflects a change in its purchasing power (a change in its exchange ratio vis-a-vis other commodities). Since the physical form of a commodity is relatively constant while the price varies, the simultaneity of these two conditions produces a sensory illusion that leads the monetarists to argue that the measuring device (money) is defective. This paper attempts to demonstrate (in the absence of monetary dislocation): (1) the stability of paper money, which makes it a valid measuring device; and (2) that the quantity theory of money, which is the basis of constant dollar accounting, is a flawed theory.

Keywords: price level changes; level of money supply; instability of commodity prices; monetarism; price level adjusted; financial statements; general purchasing power. (search for similar items in EconPapers)
JEL-codes: E (search for similar items in EconPapers)
Pages: 23 pages
Date: 2004-12-08
New Economics Papers: this item is included in nep-acc, nep-his, nep-hpe and nep-mac
Note: Type of Document - doc; pages: 23
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://econwpa.ub.uni-muenchen.de/econ-wp/mac/papers/0412/0412003.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wpa:wuwpma:0412003

Access Statistics for this paper

More papers in Macroeconomics from University Library of Munich, Germany
Bibliographic data for series maintained by EconWPA ( this e-mail address is bad, please contact ).