The Origins of Velocity Functions

Abstract

The notion of a velocity function relating money’s rate of turnover to its independent determining variables is hardly a twentieth-century invention. Indeed, economists William Petty and John Locke in the seventeenth century, Richard Cantillon in the eighteenth, and Henry Thornton and Knut Wicksell in the nineteenth presented velocity functions incorporating determinants such as income, interest rates, inflation expectations, uncertainty, frequency of receipts and payments, state of business confidence, degree of monetization, extent of financial sophistication, credit, and the availability of money substitutes.