quantity theory of money
Quantity Theory of Money says if there is more money chasing the same amount of goods, prices simply rise to soak it up.
In plain English
Think of a small chop parlour in Ibadan with exactly twenty plates of jollof rice ready every afternoon, and forty regular customers who show up with money to buy. If those forty customers always had a fixed ₦500 each to spend, prices would settle at some level and stay there because the amount of money and the amount of rice never change.
Now suppose government or the central bank suddenly hands every one of those forty customers an extra ₦500, but the woman frying the rice still only makes twenty plates. Nothing about the food changed. What changed is the cash in people's pockets. So customers start offering more naira for the same twenty plates, and the price of jollof creeps up, and not since rice got scarce, but because money got plentiful.
That is the whole heart of the Quantity Theory of Money. It says the general price level in an economy is tied to how much money is circulating compared to how much stuff, goods and services, is actually being produced. Print more money without producing more goods, and prices rise. It is often written as MV equals PT, where M is money supply, V is how fast money changes hands, P is the price level, and T is the total transactions or output in the economy.
Nigerians feel this theory in real life whenever the Central Bank increases money supply sharply, say by financing government spending through the printing press, and shortly after, garri, transport fares and rent all start climbing even though nothing physically changed about how much garri exists. In the United Kingdom, this same logic is why the Bank of England watches money supply growth closely, because unchecked increases can calmly push inflation up even when factories are working fine.
For someone in the diaspora sending money home, this theory explains part of why ₦100,000 buys less today than it did three years ago. It is not always that things got more expensive to produce. Sometimes it is simply that there is more naira in circulation chasing roughly the same basket of goods.
If Nigeria's money supply grows by 20% in a year but the actual output of goods and services only grows by 5%, the theory predicts the extra money will mostly show up as higher prices rather than more real wealth for anyone.
Questions people ask
Does this mean printing money always causes inflation?
Mostly, yes, especially if the extra money is not matched by more goods and services being produced. There can be short delays, and other factors like confidence and how fast people spend also play a role, but the basic link between excess money and rising prices holds up over time.
Is this theory the same as what causes Nigeria's inflation today?
It is one major piece of the puzzle. Nigeria's inflation also comes from things like exchange rate pressure, fuel costs and supply problems, but when government borrows heavily from the Central Bank to fund spending, that extra money creation adds fuel to the fire the theory describes.
Can a country escape this by simply not printing money?
Largely yes, which is why many central banks, including Nigeria's, try to control money supply growth carefully. But economies still need enough money to support genuine growth in trade and production, so the goal is balance, not zero money growth.
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