Money Velocity & Quantity Theory

## Fallacy:

“The economy will get moving when the velocity of money picks up.”

Quantity of money theory and money velocity based on the formula MV=PT.

## Truth:

For an extensive refutation of this argument see: The Velocity of Circulation by Henry Hazlitt

In the meantime, consider the logic of the basic formula.

MV=PT
M = Quantity of Money
V = Velocity of Money (Turnover)
P = General Price Level
T = Transaction Volume

To calculate a money price you need the number (X) of units of money exchanged and the number (Y) of units of goods, i.e. P =( X \$) / (Y units). We have the units of money: dollars. What units should we use for the goods in the general price level? What common unit of measure covers pigs, chickens, steers, and iPods?

What distinguishes V (Velocity of Money) from T (Transaction Volume)? For every money transaction, parties exchange a quantity of goods for a quantity of money. You don’t have more money transactions than you have goods transactions. Doesn't T = V?