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Unit-15: Restatement of Friedman’s Quantity Theory of Money

term interest rates. Actually if demand deposits (M ) are used then, short term rate should Notes
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be preferred, while long term rate is best for term deposits (M ). It is mandatory that the
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structure of interest rate like this will affect the demand of money.
2. Money not a luxury goods: Because Friedman has included term deposits in money, so he
considers money as a luxury goods. On this basis his conclusion is that the natural rate of
supply of money is very higher than income in America. But no any ‘luxury effect’ like this
is found about England.
3. Much Importance to Wealth Variables: In the Friedman’s function of demand of money, to
consider asset variables more eligible for preference instead of income, the together operation
of variables of asset and income, is not seemed logical. As Johansson has targeted, whatever
return is yielded on wealth, is the income and the current value of income is asset. In demand
function of money interest rate and the existence of one out of these variables will be seemed
as making failure to other.
4. Money Supply not Exogenous: Friedman considered money as constant. In Friedman’s
arrangement money holders changes the money from exogenous way. But in America
money supply is made from those bank deposits which are produced by the changes in
bank-lending donations. Bank lending donation further is based in those reserved funds
which then increases or decreases when (a) financial intermediaries deposit or withdraw the
currency; (b) commercial bank borrows from federal reserve arrangement; (c) money inflow
from foreign and money outflow to foreign occurs; and (d) Federal Reserve Arrangement
sells or buys the securities. First three items gives the ingenious element definitely to supply
of demand. Therefore, Money supply is not fully exogenous, while Friedman’s consideration
considers it as exogenous. Money supply mostly occurs ingenious.
5. Ignores the effect of other variables on money supply: Friedman ignores the effect of other
variables on money supply as price, production or the interest rate. But there is empirical
evidence that money supply can’t be described in the form of function of above given
variables.
6. Does not consider time factor: Friedman tell nothing about adjustment speed and time
determination or time duration in which this theory is not applicable.
7. No Positive Relation between Money Supply and Money GNP: It is found in Friedman’s
conclusions that Money Supply and Money GNP are positively correlated. But Kaldor’s
approach is that in Britten, the best correlation is between the quarter changes in cash amount
held in coins and notes by public and according to personal consumption on market prices,
not between money supply and Money GNP.
Conclusion: But on being these criticisms “To apply the fundamental law of Capital theory by
Friedman on Money theory i.e., return on capital and current value capital of income is the most
important development in money theory after the General theory of Keynes. It’s theoretical importance
is included in this thing that it positively integrates to wealth and income in the form of effects on
behaviourally.”

Self Assessment

Fill in the blanks:
1. According to Friedman, money is an asset or…………….. .
2. The demand of Money is the part of capital or …………… .

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