Law of the Circulation of Money

Also known as “the law of the quantity of money required”. It refers to the law of the quantity of money required in the circulation of commodities within a given period. The basic content of the law of the circulation of money is that the quantity of money required in the circulation of commodities is determined by the sum of the prices of the circulating commodities and the average velocity of circulation of money, namely:

Thus, according to the law of the circulation of money, the quantity of money required in the circulation of commodities is directly proportional to the sum of the prices of commodities to be realized and inversely proportional to the average velocity of circulation of money within the same period. This is the general law of the circulation of money. This formula shows that the quantity of money within a given period depends on three factors: the number of commodities that take part in the circulation, the price level of commodities, and the velocity of circulation of money. These three factors can change in different directions and in different proportions. While the price level of commodities remains constant, the quantity of money in circulation may increase, if there is an increase in the number of commodities in circulation, or a decrease in the velocity of circulation of money, or a combination of the two. Conversely, the quantity of circulating money may decrease.

The above law is concerned with the quantity of metallic money and is therefore also known as the “law of the circulation of metallic money”. As the payment function of money comes into play and new phenomena such as sales on credit, offsetting begin to exist in the circulation of money, the quantity of money required in the circulation of commodities within a certain period needs to be calculated according to the following formula: