Money Mischief_ Episodes in Monetary History - Milton Friedman [17]
As this exceedingly simplified example illustrates, the equation is a useful way to organize an analysis of the effect of changes in circumstances. In short, Fisher's equation plays the same foundation-stone role in monetary theory that Einstein's E = mc2 does in physics.
Changes in the Quantity of Money
In the real world, money does not drop from helicopters. When money consisted largely of physical commodities like gold and silver, new discoveries and technological advances were a major source of changes in the quantity of money. Chapter 3 discusses the effects of the nineteenth-century discoveries of gold and silver, the most dramatic of which were the Californian (1849) and Australian (1850s) discoveries; the opening of the Comstock Lode (1859), rich in silver and gold; and, later in the century, the Alaskan and South African finds. Chapter 5 discusses the effect on William Jennings Bryan's political career of the most dramatic technological change, the perfection of the cyanide process for extracting gold from low-grade ore.
Consider, in light of the helicopter fable, the effect of the flood of gold from California and Australia in the 1850s. Like those who were quickest to pick up the helicopter money, the first to extract the gold were clearly enriched. My favorite example comes from a visit to a major Australian gold-mining town, now preserved as a tourist attraction. One antique document on display was an advertisement for ice from Walden Pond. Ice, cut in the winter from Walden Pond in Massachusetts, was loaded in sawdust into the hulls of ships, which then sailed around the tip of South America and across the wide Pacific—about fifteen thousand miles—to Melbourne, where the ice was unloaded onto carts and dragged by horses some hundred and more miles to the gold-mining community, to satisfy the desire for cold drinks of the lucky and newly wealthy gold miners!
The gold from California and Australia, being first spent where it was found, attracted people and goods (like the ice) from all over the world by bidding up prices. As this occurred, the gold came to be distributed around the rest of the world and ended by raising prices in all gold-standard countries. As in the helicopter fable, it took a long time for the effects of the discoveries to work themselves out. As they did, the initial wide discrepancies in prices were reduced.
Also as in the fable, the effect on individuals was very different from the effect on the community at large. The lucky persons who first extracted the gold were clearly enriched. But what about the community at large? At the end of the process, the community was worse off. The appeal of the lottery involved in the several gold rushes meant that the resources spent to extract the gold from the earth, transport it to distant lands, mint it into coins, and bury it in bank vaults were almost surely greater in value than the new gold. Some of the new gold doubtless went into jewelry, gold plate, and the like. This part, at least, provided a continuing source of utility. But the rest of the gold, used as money, mostly meant only that prices were higher than they otherwise would have been. As David Hume wrote in 1742, "augmentation [in the quantity of money] has no other effect than to heighten the price of labour and commodities.... In the progress towards these changes, the augmentation may have some influence, by exciting industry, but after the prices are settled ... it has no manner of influence" (1804a, p. 314). "Exciting