Neutrality of money

Neutral money or neutrality of money is the idea that there is or can be some fixed price structure, or interrelationship of all prices, that is independent of the quantity of money and which therefore is not disturbed by changes in the quantity of money. Adherents of this idea hold that changes in the quantity of money affect the prices of all goods and services proportionally and at the same time.

This untenable doctrine is the basis for many attempts to maintain a so-called "stable price level" by manipulating the quantity of monetary units. Actually, all changes in the quantity of money must be introduced by changes in the cash holdings of specific individuals whose purchasing power, value scales and spending patterns are thus altered in a manner which affects different prices differently and sets in motion other price changes as the subsequent recipients of such newly induced spending find their cash holdings increased and they in turn change their spending patterns with differing effects on different goods and services. Thus every change in the quantity of money must affect different prices differently and there can be no such thing as the alleged neutrality of money. See "Quantity theory of money". For other effects of changes in the quantity of money related to the trade cycle, see Chapter XX of Human Action.