The Risk of Control MS and Advantage of Increase in Velocity

According to the Irving Fisher’s equation, MV = PY, the stability of economy can be provided via increasing the money supply as well as accelerating the circulation of money. Typically, the monetary policy which control over the MS is done by changing the total amount of outside money such as reserve requirement control, and the increase in money circulation is provided by function of inside money.Even though inside money does not contain certain characteristics of outside money such as unit of account and face value, the significant reason for the existence of inside money is to play a role as providing liquidity or velocity to the financial market as means of payment. Until Britain introduced the concept of securitization of the long-term debt in 1695, the debasement and changing the assigned value of the coins was the only monetary policy that the government provided. By examining the history of the velocity of money, we might able to find a solution which is applicable to the illiquid secondary or mortgage market causing today’s financial crisis.In this paper, we will first examine the situation where the coinage as outside money is an only provider of liquidity. Then, observe the bill of exchange in section two as inside money creates the velocity, followed by its limitation. Section three introduces scenario where outside money changes its form from coins to paper/fiat money and the risk of hyperinflatable currency. Advanced use of inside money, which French failed to control, is illustrated in section four. Lastly, using the points from the British system, we will expand previously stated ideas in order to figure out how to increase the velocity in today’s secondary market