The Phillips Curve

Henry Thornton, and David Hume before him, understood that the initial effect of a change in the quantity of money was on output. Hume's analysis of the gold standard and Thornton's discussion of paper money leave no doubt that departures from steady state equilibrium output were neither ruled out of the analysis nor denied. By 1800, economists understood that the relation between money, prices and output did not imply constant velocity, constant real balances or ever-full employment.