The equation of exchange
Irving Fisher wrote MV = PT: money supply times velocity (how often each dollar is spent) equals the price level times transactions. Today T is usually replaced by real GDP (Y). If V and Y are stable, doubling the money supply doubles prices. The Cambridge version, M = kPY, focuses on how much money people want to hold.
Friedman and today's debate
Friedman famously said inflation is "always and everywhere a monetary phenomenon" and pushed for steady money growth rules. But velocity became unstable in the 1980s, so central banks switched to targeting interest rates. After 2008, QE ballooned the monetary base without immediate inflation, reigniting debate, though the theory still explains hyperinflations well.
FAQ
- What is the velocity of money?
- The average number of times a dollar is spent in a year.
- Why didn't QE cause inflation right away?
- Banks largely held the new money as reserves and velocity fell.
Sources reviewed: 2026-10-26
References
- Fisher, I. (1911). The Purchasing Power of Money. New York: Macmillan.
- Friedman, M. (1956). The quantity theory of money: A restatement. In M. Friedman (Ed.), Studies in the Quantity Theory of Money. University of Chicago Press.
- Friedman, M., & Schwartz, A. J. (1963). A Monetary History of the United States, 1867–1960. Princeton University Press.