ABSTRACT
Inflation is generally1 defined in terms of an increase in the factor, P, in Fisher’s equation:
MV=PT
where M, V, P and T have the same meanings as those assigned to them at the beginning of chapter 5. Since, however, P cannot increase without a change occurring in at least one of the other factors, M, V or T, the study of inflation as a phenomenon must concern itself with the way in which such changes relate to an increase in P. In practice, the relation is generally established in terms of a correspondence between an increase in P (on the right-hand side of the equation) and an increase in M-the total stock of money-(on the left-hand side), although in theory M can always remain unchanged-simply by allowing for appropriate changes in V (the velocity of circulation), or T (the output of goods and services).2 This approach, although it corresponds with such popular conceptions of inflation as ‘too much money chasing too few goods’, obviously takes for granted a number of potentially important factors. It is useful none the less as a starting point, since it allows inflation to be approached by taking as its cause either an increase in M or an increase in P. This is reasonable enough in terms of V, since, although an increase in V might theoretically be a cause of inflation, this is in practice unlikely: all the evidence3 suggests that V is a stable factor-or at least homeostatic (in terms of chapter 2)—in any sphere of payment save in exceptional circumstances, such as hyperinflation. T, on the other hand, may well decrease, and by doing so cause P to increase, but the historical instances of inflation occurring in this way are remarkably few. The fact that the price of agricultural produce may increase following a poor harvest-a common enough occurrence in the course of history-appears hardly ever to have been the cause of an overall increase in the price level; an increase in population, leading to a secular increase in demand on the resources of the land, is much more likely to have this effect (Slicher van Bath, 1963, pp. 195f.), but even in such a case it seems unlikely to occur without a parallel increase in M.4 For this reason, if no other, the behaviour of the factor, T, is discussed in relation to inflation caused by an increase in M.
