cafChap3pg1 - Friedman,Milton.(1962)Discussion Chapter 3The...

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Friedman, Milton. Capitalism and Freedom (1962) Discussion J.Payne ECO232 CCC Chapter 3—The Control of Money Friedman covers a lot of ground here. He summarizes the findings of his masterful A Monetary History of the United States 1867- 1960 in more accessible terms. To understand it, you need to know the quantity theory of money. You should recall this from ECO 231. (Yes, you should.) If not, here is a one-page summary: Recall that in a given economy, total spending must equal total income over any given time period, because if I spend a dollar, someone else must receive it as a dollar of income. So TOTAL SPENDING = TOTAL INCOME (1) And since GDP can be calculated as either total spending or total income, both equal GDP : TOTAL SPENDING = TOTAL INCOME = GDP (2) Now, let’s say that Country X’s GDP last year was $10 billion. If the money supply (M) was equal to $1 billion, then, on average, each of those billion dollars must have been spent 10 times. Thus, the velocity of money, (V), which is the average number of
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