What is the Reciprocal of the Velocity of Money?
Mark E. Schaefer, Georgia State University In discussing the equation of exchange and the quantity theory, we often are forced into an embarrassed remark that the reciprocal of velocity, or the Cambridge K, is a mysterious parameter related to the demand for money. But 1/ V is not really obscure, only misrepresented. It has a natural interpretation as the average holding period of money by the seller, or borrower or portfolio manager. You can help students gain insight into this phenomenon by making this analogous to the management of inventory in retail sales. The financial press routinely reports the ratio of inventory to sales which gives the coverage or the number of days until current inventory will run out. For example, auto dealers have a 90‑day backlog on their lots. Ask the students what this means. Someone will eventually say that it would take 90 days to sell the cars they currently have on hand if the current rate of sales continued; similarly, cash‑holdings. This length of
