Neutrality of Money

Abstract

‘Neutrality of money’ is a shorthand expression for the basic quantity-theory proposition that it is only the level of prices in an economy, and not the level of its real outputs, that is affected by the quantity of money which circulates in it. Thus the notion — though not the term — goes back to early statements of the quantity theory, such as the classic one by David Hume in his 1752 essays ‘Of Money’, ‘Of Interest’ and ‘Of the Balance of Trade’. At that time the notion also served as one of the arguments against the mercantilist doctrine that the wealth of a nation was to be measured by the quantity of gold (which in 18th-century England constituted a — if not the — major form of metallic money: Feaveryear, 1963, p. 158) that it possessed. The term itself is much more recent. It was introduced into the English-speaking world by Hayek (1931, pp. 27–8), who attributed it to Wicksell (1898). Actually, however, the term in the above sense came into use only later and is due to German and Dutch economists in the decade following World War I to whom (while continuing to attribute the term to Wicksell) Hayek (1935, pp. 129ff) subsequently referred (for details, see Patinkin and Steiger, 1989).