Testing time for monetarism
LETTERS TO THE EDITOR
From Professor F. A. Hayek, FBA
Sir, There is no such contradiction between Mr Rees-Mogg's simplified formula about the relation between changes of the quantity of money and changes of the price level and recent events as Mr Godley (May 24) suggests. It is an experience as old as inflation itself that when it accelerates prices begin to rise faster than the quantity of money.
This is readily explained by the circumstance that as further increases of prices come to be generally expected, people try to reduce their cash holdings and the consequent increase of the "velocity of circulation" magnifies the effect on prices.
But we probably have indeed reached the point where even a further increase of inflation cannot prevent the depression which we have made inevitable by past inflation. It is bound to last as long as we reduce the rate of inflation and the only thing we can do about it is to get it over as fast as possible.
F. A. HAYEK
Urachstrasse 27 D-7800 Freiburg, Breisgau, West Germany