CHAPTER 10

THE FUNDAMENTAL EQUATIONS FOR THE VALUEOF MONEY

The Fundamental Problem of Monetary Theory is notmerely to establish identities or statical equations re-lating ( e.g .) the turnover of monetary instruments tothe turnover of things traded for money. The real taskof such a Theory is to treat the problem dynamically,analysing the different elements involved, in such amanner as to exhibit the causal process by which theprice-level is determined, and the method of transitionfrom one position of equilibrium to another.

The forms of the Quantity Theory, however, onwhich we have all been brought up—I shall give anaccount of them in detail in Chapter 14—are butill adapted for this purpose. They are particularexamples of the numerous identities which can beformulated connecting different monetary factors.But they do not, any of them, have the advantage ofseparating out those factors through which, in amodern economic system, the causal process actuallyoperates during a period of change.

Moreover, they have a further fault, in that thestandard, to which they apply, is neither the LabourStandard nor the Purchasing Power Standard , butsome other, more or less artificial, standard, namely,either the Cash-Transactions Standard or the Cash-Balances Standard, as defined in Chapter 6 above.This is a serious fault, because it must be the two