William Petty - Money Supply and The Velocity of Its Circulation

Money Supply and The Velocity of Its Circulation

This figure for the stock of wealth was contrasted with a money supply in gold and silver of only £6m. Petty believed that there was a certain amount of money that a nation needed to drive its trade. Hence it was possible to have too little money circulating in an economy, which would mean that people would have to rely on barter. It would also be possible for there to be too much money in an economy. But the topical question was, as he asks in chapter 3 of Verbum Sapienti, would £6m be enough to drive a nation’s trade, especially if the King wanted to raise additional funds for the war with Holland?

The answer for Petty lay in the velocity of money’s circulation. Anticipating the quantity theory of money often said to be initiated by John Locke, whereby Yp = MSv, Petty stated that if Y was to be increased for a given money supply, 'revolutions' must occur in smaller circles (i.e. higher v). This could be done through the establishment of a bank. He explicitly states in Verbum Sapienti "nor is money wanting to answer all the ends of a well policed state, notwithstanding the great decreases thereof which have happened within these Twenty years (p. 113)" and that higher velocity is the answer. He also mentions that there is nothing unique about gold and silver in fulfilling the functions of money and that money is the means to an end, not the end itself:

Nor were it hard to substitute in the place of Money (were a comptency of it wanting) what should be equivalent unto it. For Money is but the Fat of the Body-Politick, whereof too much doth often hinder its agility, as too little makes it sick... so doth Money in the State quicken its Action, feeds from abroad in the time of Dearth at home.' (Hull 1899: p.113)

What is striking about these passages is his intellectual rigour, which put him far ahead of the mercantilist writers of earlier in the century. It is also interesting to note the use of biological analogies to illustrate his point, a trend continued by the physiocrats in France early in the 18th century.