Friday, January 20, 2017

Poor on the Velocity of Money

Poor on the Velocity of Money
Thomas Allen

    Henry Varnum Poor (1812-1905) was a financial analyst and founder of a company that evolved into Standard & Poor’s. He was a proponent of the real bills doctrine. Like Anton Fekete, he saw the Quantity Theory of Money as a highly flawed theory. (In Money and Its Laws, he discusses flaws in the Quantity Theory of Money.)
    The velocity of money is the rate at which a given amount of money changes hand during a specific time. It measures how fast people are spending.
    Poor contends that the velocity of money, which was gold when he wrote, has no effect on its value. Even when representative money (bank notes) is included, velocity has no effect on money’s value. Thus, the number of times that money changes hands during a day, a week, or a month neither increases nor decreases its value.
    Money only changes hands when goods and services are being sold. As the selling of goods and services increases, the velocity of money increases. Poor wrote, “The relationship of one to the other, both in quantity and activity, must be uniform.”
    Poor considers money to be capital and the representation of capital. If it were not capital or its representation, it is a scale of valuation — “an instrument of commerce like a set of weights.”
    The Bullion Committee,[1] which was a proponent of the Quantity Theory of Money, contended that “the effective currency of a country depends upon the quickness of circulation and the number of exchanges performed in a given time, as well as upon its numerical amount.” Poor strongly objects to this assertion. He illustrates the absurdity of the Bullion Committee’s statement with a barrel of flour. If the Bullion Committee’s conclusion were true, then “one barrel of flour, by the rapidity of its circulation, may serve the purpose of three barrels.” Poor concluded, “The quantity of money must always be in ratio to the exchanges that are made.”

1. The Bullion Committee was set up after the Napoleonic Wars to provide recommendations for stabilizing British finances and returning Great Britain to the gold standard.

Copyright © 2016 by Thomas Coley Allen.

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