This paper comments on "The Real Bills Doctrine vs. the Quantity-Theory: a Reconsideration" by T. Sargent and N. Wallace. It argues that there exists a class of models similar to theirs that is (a) favorable to the quantity theory view of price stability, (b) supports the imposition of 100 percent reserve requirements, and (c) explains a long history of legal credit restrictions. In particular, lending restrictions stabilize price levels and result in Pareto improvements.

This paper considers a view commonly associated with the "quantity theory of money": that banks should face 100 percent reserve requirements. It argues first that the objectives of the quantity theorists' proposals were more than merely price level stability, and that in fact, price level stability was at most a secondary objective of their proposals. Second, it argues that these theorists had a world with distortions in mind with respect to their proposals. These are present in a special setting examined that (a) supports the imposition of 100 percent reserve requirements (on the basis of an unconstrained Pareto criterion), and (b) supports the view that these restrictions stabilize the price level and make its movements more "predictable."

A model is presented in which governments can select real expenditure levels which are feasible, hut are sufficiently high that a balanced budget is impossible. Thus governments with large expenditures are committed to inflationary finance schemes. This is the case even though the governments in question have access to lump-sum taxes. In addition, the model can explain why poorer countries tend to make heavier use of the inflation tax than do wealthier countries, and can account for the existence of country-specific fiat monies.