The Economics Book

30

MONEY

CAUSES

INFLATION

THE QUANTITY THEORY OF MONEY

I

n 16th-century Europe prices

were rising inexplicably. Some

said that rulers were using an

old practice of “debasing” currencies

by minting coins with ever-smaller

amounts of gold or silver in them.

This was true. However, Jean

Bodin, a French lawyer, argued that

something much more significant

was also happening.

In 1568, Bodin published his

Response to the Paradoxes of

Malestroit. The French economist

Jean de Malestroit (?–1578) had

blamed the price inflation solely on

currency debasement, but Bodin

showed that prices were rising

sharply even when measured in

pure silver. He argued that an

IN CONTEXT

FOCUS

The macroeconomy

KEY THINKER

Jean Bodin (1530 –96)

BEFORE

1492 Christopher Columbus

arrives in the Americas. Silver

and gold flow into Spain.

AFTER

1752 David Hume states that

the money supply has a direct

relationship to the price level.

1911 Irving Fisher develops

a mathematical formula to

explain the quantity theory

of money.

1936 John Maynard Keynes

says that the velocity of money

in circulation is unstable.

1956 Milton Friedman argues

that a change in the amount of

money in the economy can

have a predictable effect on

people’s incomes.