Underlying All Theories of Money and Banking Is the Familiar Equation of Exchange: MV = PQ

Underlying all theories of money and banking--as well as all prescriptions of policy and recommendations for reform--is the familiar equation of exchange: MV = PQ. For the economy as a whole, buying must equal selling, where buying is represented by the total supply M of money times the frequency (the circulation velocity V) with which each monetary unit on average is spent and where selling is represented by the average price P of goods times the total quantity Q of goods sold. Although true by construction, the equation of exchange helps us to keep in view the interdependencies that characterize the macroeconomy. It is impossible, for instance, to conceive of a change in only one of the four magnitudes represented in the equation of exchange. Any one change implies some offsetting change or changes on one side or the other of the equation--or possibly on both sides. For instance, a decrease in money's circulation velocity, which simply reflects an increase in the demand for money, must be accompanied by (1) an increase in the money supply, (2) a decrease in prices, or (3) a decrease in real output sold (or by some combination thereof).

--Roger W. Garrison, "Central Banking, Free Banking, and Financial Crises," Review of Austrian Economics 9, no. 2 (1996): 110.