ABSTRACT
The Quantity Equation was the complement to the Classical theory of production and distribution. Although the subject is contentious, it is has been argued with strong textual backing that the Classics applied their value theory to money. A certain sum of real value, in an appropriate medium, would be required for circulation; this depended on the structure of the economy and on institutional arrangements, and in normal circumstances would be represented by a rectangular hyperbola. The money article was made of metal that was mined and minted; its value thus depended, like any other good, on costs of production (including seignorage as the analogue to profit.) Over some range these costs might well be constant, but at some point costs at the extensive margin would rise. The intersection of this supply function with the circulation requirements then defined a long-period normal position, 1 determining the quantity of circulating money and its value. Temporary changes in this quantity, which could be engineered by governments, or caused by wars and social dislocation, would, in the short run, be reflected in (more or less) equiproportional changes in the price level.
