A KEYNESIAN PERSPECTIVE ON MONEY*
Monetarism is an analytical system whose roots go deep into the history of economic thought. It is the modern version of the quantity theory of money which, in turn, is an integral part of classical and neoclassical economic theory. The quantity theory of money viewed inflation as being solely the result of prior increases in the quantity of money in circulation: an x per cent increase in the quantity of money would ultimately produce an x per cent increase in the price level. Classical economists admitted that, in the short period, the increase in the money supply would stimulate output and employment but that, in the longer run, it would be entirely dissipated in the form of higher prices, with output and employment returning to their former levels.
The quantity theory of money dominated thinking on economic policy from the mid-eighteenth century, throughout the nineteenth century and down to the early 1930s. The early formulation by David Hume was refined in the nineteenth century, the locus classicus of the modern presentation of the quantity theory being Irving Fisher 's The Purchasing Power of Money ( 1911).1 Later, a group of Austrian economists, the followers of Ludwig von Mises, elaborated the policy implications of the quantity theory. The main consequence of monetary expansion brought about through low interest rates was, they averred, a distortion in the structure of production which could last only for as long as the inflationary process continued. Sooner or later, natural forces would reassert themselves, the rate of interest would return to its initial level, and the processes of production which were profitable only at the lower rate of interest would be abandoned. The readjustment which inevitably followed____________________