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Please help this article by looking for better, more reliable sources. Unreliable citations may be challenged or deleted. 19th and early 20th century. Henry Thornton introduced the idea of a central bank after the financial panic of 1793, although, the concept of a modern central bank wasn’t given much importance until Keynes published “A Tract on Monetary Reform” in 1923. According to his theory, the central bank could control the currency in circulation through book keeping.
This control could allow the central bank to gain a command of the money supply of the country. This ultimately would lead to the central bank’s ability to control the price level. His introduction of the central bank’s ability to influence the price level was a major contribution to the development of the quantity theory of money. Marx did not reject the basic concept of the Quantity Theory of Money, but rejected the notion that each of the four elements were equal, and instead argued that the quantity of commodities and the price of commodities are the determinative elements and that the volume of money follows from them. The law, that the quantity of the circulating medium is determined by the sum of the prices of the commodities circulating, and the average velocity of currency may also be stated as follows: given the sum of the values of commodities, and the average rapidity of their metamorphoses, the quantity of precious metal current as money depends on the value of that precious metal. Its correspondence with fact is not open to question. Also like Marx he believed that the theory was misrepresented.
Where Marx argues that the amount of money in circulation is determined by the quantity of goods times the prices of goods Keynes argued the amount of money was determined by the purchasing power or aggregate demand. Thus the number of notes which the public ordinarily have on hand is determined by the purchasing power which it suits them to hold or to carry about, and by nothing else. So long as k, k’, and r do not change, changes in n cause proportional changes in p. The error often made by careless adherents of the Quantity Theory, which may partly explain why it is not universally accepted is as follows. It would follow from this that an arbitrary doubling of n, since this in itself is assumed not to affect k, r, and k’, must have the effect of raising p to double what it would have been otherwise. The Quantity Theory is often stated in this, or a similar, form. Now “in the long run” this is probably true.
If, after the American Civil War, that American dollar had been stabilized and defined by law at 10 per cent below its present value, it would be safe to assume that n and p would now be just 10 per cent greater than they actually are and that the present values of k, r, and k’ would be entirely unaffected. But this long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean will be flat again. In actual experience, a change in n is liable to have a reaction both on k and k’ and on r.
It will be enough to give a few typical instances. State Banks towards their gold reserves. These reserves were kept for show rather than for use, and their amount was not the result of close reasoning. There was a decided tendency on the part of these banks between 1900 and 1914 to bottle up gold when it flowed towards them and to part with it reluctantly when the tide was flowing the other way. Consequently, when gold became relatively abundant they tended to hoard what came their way and to raise the proportion of the reserves, with the result that the increased output of South African gold was absorbed with less effect on the price level than would have been the case if an increase of n had been totally without reaction on the value of r. Thus in these and other ways the terms of our equation tend in their movements to favor the stability of p, and there is a certain friction which prevents a moderate change in v from exercising its full proportionate effect on p. On the other hand, a large change in n, which rubs away the initial frictions, and especially a change in n due to causes which set up a general expectation of a further change in the same direction, may produce a more than proportionate effect on p.
Keynes thus accepts the Quantity Theory as accurate over the long-term but not over the short term. Keynes remarks that contrary to contemporaneous thinking, velocity and output were not stable but highly variable and as such, the quantity of money was of little importance in driving prices. Friedman understood that Keynes was like Friedman, a “quantity theorist” and that Keynes Revolution “was from, as it were, within the governing body”, i. A counter-revolution, whether in politics or in science, never restores the initial situation.