The quantity theory of money holds that the volume
of spending in the economic system, for goods, for
labor, or any other broad economic category of things, is
determined primarily by the quantity of money that exists
in the economic system. To state the theory in the sim-
plest possible terms: the amount of money that is spent
is determined primarily by the amount of money that
exists. The quantity theory of money can be expressed in
terms of the following simple equation, which relates the
quantity of money to aggregate demand in the sense of
the volume of spending:

M × V = D,

where M is the quantity of money in the economic
system, D is the aggregate demand, as manifested in a
definite total expenditure of money in the economic
system, and V is the average number of times a unit of
the money supply is spent in the period (i.e., the so-called
velocity of circulation of money).

For example, as these words are written, the money
supply in the United States is approximately $1,150
billion. The so-called gross domestic product (GDP)
(formerly gross national product or GNP), which is the
most commonly used measure of aggregate spending, is
approximately $6,700 billion. ¹ The implied average num-
ber of times a dollar is spent in a way that counts in GDP
is thus approximately 5.8.

The money supply embraces all directly spendable
money--all commonly used means of payment. In the
context of modern economic conditions, this includes
paper currency, coin, and, quantitatively most important
nowadays, checking-account balances (including bal-
ances transferable by telephone or computer). As of the
end of 1993, the money supply of the United States
amounted to $329 billion of coin and currency, including
$8 billion of outstanding traveler's checks, and $799
billion of checking account balances. The total money
supply, therefore, amounted to $1,128 billion. ²

GDP currently consists almost 90 percent of con-
sumption expenditures: $4,585 billion reported as per-
sonal consumption expenditures, $1,169 billion of
government expenditures for goods and services, almost
all of which is consumption, and a further substantial
portion of the $284 billion reported as investment in
residential structures, but which in fact is consumption. ³
Thus, out of a current GDP of approximately $6,700
billion, well over $5,700 billion represents one form or
another of consumption expenditure.

Because it is comprised overwhelmingly of consump-
tion spending, GDP can be taken as an approximate
measure of aggregate consumer demand in the economic
system. The velocity of circulation figure which relates
GDP and the money supply could be termed GDP veloc-
ity or consumption velocity, since it reflects the number
of times the average dollar of the money supply is spent
in a way that counts in GDP, which essentially means: is
spent for consumption. However, because of the virtual
equivalence of GDP and consumption spending with
national income, it happens that this measure of velocity
is called income velocity. ⁴ In any case, for the sake of

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