It should be noted in the first place that the attempt to use the doctrine of demand and supply in support of this theory is a failure. This doctrine is simply a method of describing the process through which the value-determining forces work. It is a short way of saying that when some people want to buy more goods at a certain price than other people are willing to sell at that price, some of the prospective buyers will bid higher, some will stop bidding, new sellers will very likely enter the market, old ones will perhaps offer more goods for sale, etc., etc., and that this process of "higgling" will continue until a certain quantity of goods passes from the hands of certain sellers to those of certain buyers at some price. At what price, this doctrine does not and cannot determine. The so-called equalization of demand and supply may be accomplished at many different prices. To determine at about what price in the long run demand and supply will be adjusted to each other, we are obliged to resort to the principle of cost of production, and ultimately to that of marginal utility. The numerous forces comprehended under these terms work in accordance with the so-called law of demand and supply. An appeal to this law, therefore, cannot settle a dispute regarding the true source of the value of the money unit. A further difficulty with the application of the doctrine of demand and supply to the problem in hand is the fact that the demand for money, or the amount of money needed, obviously depends in part upon prices. If six commodities, for example, worth a dollar apiece, are exchanged once each simultaneously, six dollar coins will be required to do the work. If they are worth five dollars each, under the same circumstances, thirty dollar coins, or their equivalent, will be required. We thus meet the same problem in another form. If we would explain the demand for money, we must explain prices, and the quantity theorists are thus compelled to reason in a circle, using the doctrine of demand and supply in support of the quantity theory, and the quantity theory in explanation of the doctrine of demand and supply.
* It dates back at least to the sixteenth century.
It should be observed further that the introduction of the conception rapidity of circulation into the explanation of the demand and the supply of money renders impossible the application of the doctrine to any actual situation. How is one to compare quantity of commodities, together with the rapidity of their circulation, with the number of pieces of money, together with the rapidity of their circulation? What is really meant, when these expressions are used, is that we should compare the aggregate prices of the commodities to be simultaneously exchanged with the number of money units available for effecting these exchanges, these units, of course, existing in the form of coins and paper of various denominations. In any actual case, however, it is impossible statistically to determine these aggregates, and the quantity theorists are forced to resort to vague general statements of probabilities and unproved and unprovable claims regarding the actual state of the facts.