The title of this post was taken from a paper by Josef Mensik, a colleague of mine from Brno in the Czech Republic. The abstract starts like this:

The income theory of money was conceived in the 19th century, and in the first half of the 20th century it formed the backbone of all the main monetary approaches of the time. Yet, since it did so mostly implicitly rather than explicitly, and since the later developments moved economic theory in a different direction, the income theory of money is hardly remembered at present. While mainly accounting for the origins of the approach, I am also offering a brief comparison with the present mainstream economics and I shortly address the question of the possible future of the theory too.

Those that are not satisfied with DSGE models are invited to read the paper. Whereas in DSGE models monetary flows are not explicitly modelled, the income theory of money is taking monetary flows as the point of departure:

The income theory of money is a monetary theory. Its assumption is that all the trade is carried out not in the form of barter but it is rather done in exchange for monetary payments. Instead of imagining a gross exchange of the whole bundles of goods supplied and demanded by the market participants under current prices, the picture is rather that of a flow of monetary streams passing through various markets in the opposite direction to the flows of goods. While the ultimate result of the exchange might be the same, the income theory of money is always interested in how it was achieved monetarily, what the actual monetary flows that facilitated the trade were.

In the context of deflation in the euro zone this seems like a very promising way to go:

For a secular movement of the price level to occur, there must be a persistent pressure to keep altering either the real or the monetary streams within the economy. Though long-lasting repetitive changes in real streams are possible in principle, it will rather be incessant changes originating on the monetary side which will accompany secular movements in the level of prices in practice. Such continual changes of monetary streams are certainly technically feasible with flexible monetary system. To explain them, we need to find some changes in economic conditions for some individuals that will induce them to reorient their behaviour vis-à-vis the monetary streams. They must no longer feel bound by the Nash equilibrium position and they have to keep altering the volume of monetary streams. We shall presently see the various reasons different authors found for this situation to occur.

Running down savings to zero would definitely trigger “changes in economic conditions for some individuals that will induce them to reorient their behaviour vis-à-vis the monetary streams”, and (sustained) unemployment would probably do the same. It is probably an interesting idea to revive the income theory of money in order to explain macroeconomic prices and quantities. Sometimes old economic thinking can turn out to become the basis of new economic thinking – the income theory of money might be a contender. I am closing this with a quote from Wicksell (1898), also taken from the paper by Mensik:

[T]he real cause of the rise in prices is to be looked for … in provision by the Bank of easier credit[.]

Wicksell 1965 [1898], 7.A., p. 87