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A TREATISE ON MONEY

BK. Ill

former standards which, are our true quaesita. Forthe Labour Power of Money and the Purchasing Powerof Money are fundamental in a sense in which price-levels based on other types of expenditure are not.Human effort and human consumption are the ulti-mate matters from which alone economic transactionsare capable of deriving any significance ; and all otherforms of expenditure only acquire importance fromtheir having some relationship, sooner or later, tothe effort of producers or to the expenditure of con-sumers.

I propose, therefore, to break away from thetraditional method of setting out from the totalquantity of money irrespective of the purposes onwhich it is employed, and to start instead—for reasonswhich will become clear as we proceed—with theflow of the community’s earnings or money-income,and with its twofold division (1) into the parts whichhave been earned by the production of consumption-goods and of investment-goods respectively, and (2)into the parts which are expended on consumption-goods and on savings respectively.

We shall find that, if the first of these divisionsof the community’s income is in the same proportionas the second, i.e. if the output measured in cost ofproduction is divided between consumption-goods andinvestment-goods in the same proportion as expendi-ture is divided between current consumption and sav-ings, then the price-level of consumption-goods willbe in equilibrium with their cost of production. Butif the proportionate divisions are not the same in thetwo cases, then the price-level of consumption-goodswill differ from their cost of production.

The price-level of investment-goods, on the otherhand, depends on a different set of considerations,which we shall come to later.