ABSTRACT
Prices were seen as relative prices, with money prices depending on the relative abundance of money and goods. A general rise in prices was the result of money’s becoming more abundant relative to goods. Historians have thus been able to justify turning to alternative, non-monetary explanations of inflation. The explanations of inflation proposed by sixteenth-century writers such as Navarrus, Jean Bodin and Sir Thomas Smith were all based on the well-understood notion that the price of anything depends on scarcity. Inflation would raise the demand for money, ensuring that the newly created money remained in circulation. Variations in the inflation rate were explained in terms of variations in the natural rate of interest, with the money rate remaining relatively constant. Demand for money, Milton Friedman argued, depended on a number of factors, notably income, interest rates, share yields and the rate of inflation.
