The Quantity Theory Of Money And Financial Accounting
AbstractThe Quantity Theory of Money is implicitly embedded in the arguments for price level adjusted financial statements - inflation accounting. Historically, the instability of commodity prices, which is due to changes in relative prices, is considered by one school of economic thought (monetarism) as a reflection of the instability of the value of nominal money. Monetarists maintain that it is the level of the money supply which accounts for the instability of commodity prices. Hence, (1) all changes in the level of the money supply is deemed responsible for changes in the general level of prices, and (2) with each increase in the general level of prices, paper money is said to lose value. In a money economy, nominal money prices reflect the underlying exchange ratios of the various commodities that are produced and exchanged for nominal money. In the absence of monetary dislocation (monetary revaluation or devaluation), any change in the nominal price of a commodity reflects a change in its purchasing power (a change in its exchange ratio vis-a-vis other commodities). Since the physical form of a commodity is relatively constant while the price varies, the simultaneity of these two conditions produces a sensory illusion that leads the monetarists to argue that the measuring device (money) is defective. This paper attempts to demonstrate (in the absence of monetary dislocation): (1) the stability of paper money, which makes it a valid measuring device; and (2) that the quantity theory of money, which is the basis of constant dollar accounting, is a flawed theory.
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Bibliographic InfoPaper provided by EconWPA in its series Macroeconomics with number 0412003.
Length: 23 pages
Date of creation: 08 Dec 2004
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Note: Type of Document - doc; pages: 23
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price level changes; level of money supply; instability of commodity prices; monetarism; price level adjusted; financial statements; general purchasing power.;
Find related papers by JEL classification:
- E - Macroeconomics and Monetary Economics
This paper has been announced in the following NEP Reports:
- NEP-ACC-2004-12-12 (Accounting & Auditing)
- NEP-ALL-2004-12-12 (All new papers)
- NEP-HIS-2004-12-12 (Business, Economic & Financial History)
- NEP-HPE-2004-12-12 (History & Philosophy of Economics)
- NEP-MAC-2004-12-12 (Macroeconomics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Alan S. Blinder, 1999. "Central Banking in Theory and Practice," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262522608, December.
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