Weight and velocity of money
By Alberto Mingardi
I highly recommend Dollars, Euros, and Debt by Vito Tanzi (I hope Palgrave may soon release a cheaper, softcover edition). Tanzi, a well-known economist, was for twenty years the head of the Fiscal Affairs Deprtament at the IMF. His last book is a very clear and compact analysis of the current crisis. It is full of interesting points and provides strong arguments against popular Keynesian recipes. Tanzi builds both on theory and on his personal experience. I have found very amusing the following story, that goes back to his time as Undersecretary for Economy and Finance in the Italian government (2001-2003):
In the months that followed the physical change from the lira to the euro, I often had to meet representatives of consumer groups that, against all the statistical evidence available, kept arguing that the introduction of the euro had led to an enormous increase (a doubling they claimed) in consumer prices, thus making the Italians immediately poorer. Some questioned the exchange rate that had been used in the conversion from the lira to the euro. Others argued that the shops had taken advantage of the change in currency to immediately raise their prices. Still others argued that the introduction of coins, in place of the lira that had used only paper, had increased the weight in the pockets of Italians, forcing them to get rid of their coins more quickly, thus increasing the velocity of that part of the money supply. This relation between weight of money and its velocity was one that had not been theorized by economists!