The Problem of the Quantity Theory of Money

Previous: Who Was Jacques Rueff?

Rueff’s first work in monetary theory, Theorie des Phenomenes Monetaires (1927), was devoted partly to examining the theories put forward by Irving Fisher in The Purchasing Power of Money (1911). Rueff himself owed a large debt to Fisher, as does all of economics, for ideas like the modern understanding of income and capital. But Fisher is best remembered for his famous Equation of Exchange:

MV + M’V’ = PT

where M is the supply of money, M’ the supply of bank credit, and V and V’ referred to the “velocity of circulation” of money and bank credit, respectively.

For Fisher, unlike modern monetarists, P and T referred to the average price and transactions volume of all wealth exchanged for money – including financial claims and capital goods, not just the final products of labor and capital.

Nowadays, monetarists lump the M’s and V’s together so that they refer to composite money-plus-credit aggregates, and use the formula.


where P and Y refer only to the price and volume of final output of goods and services, measured for example by GNP.

Rueff pointed out that Irving Fisher’s Equation of Exchange is always true, “because it simply states that the amount of payments made over a certain period of time is identically equal to the value of the goods paid for during this period.

“However, the equation of exchange, like the quantity theory, calls for a basic reservation as regards the meaning to be ascribed to it. As a matter of fact, in the form in which we have stated it, and contrary to what is too commonly believed, the equation of exchange does not allow for any causal interpretation. In particular, nothing in this theory would justify an assertion that changes in the circulation of money should always be the cause of variations in the general price level…” (op cit., unpublished Lehrman Institute translation, I/19-20).

As an empirical matter, Rueff found that V and V’ tended to vary with the business cycle – rising and falling with wholesale prices.

Before discussing Rueff’s own monetary theory, let’s turn first to the problems raised by Say’s Law and Keynes theory, because Rueff’s answer to all three is related.

Next: The Problem of Say's Law


Kathleen M. Packard, Publisher
Ralph J. Benko, Editor

In Memoriam
Professor Jacques Rueff

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