CH. IO

THE FUNDAMENTAL EQUATIONS

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public is neither bullish nor bearish of securities andis maintaining in the form of savings-deposits neithermore nor less than the “ normal ” proportion of itstotal wealth, and when the volume of saving is equalboth to the cost and to the value of new investments—there is a unique relationship between the quantityof money and the price-levels of consumption-goodsand of output as a whole, of such a character that ifthe quantity of money were double the price-levelswould be double also.

But this simple and direct quantitative relation-ship is a phenomenon only of equilibrium as definedabove. If the volume of saving becomes unequal tothe cost of new investment, or if the public dispositiontowards securities takes a turn, even for good reasons,in the bullish or in the bearish direction, then thefundamental price-levels can depart from their equili-brium values without any change having occurred inthe quantity of money or in the velocities of circula-tion. It is even conceivable that the cash-depositsmay remain the same, the savings-deposits mayremain the same, the velocities of circulation mayremain the same, the volume of monetary transac-tions may remain the same, and the volume of outputmay remain the same ; and yet the fundamentalprice-levels may change.

Such an exact balance is, of course, only a theoreticalpossibility. In the actual world a change in anythingis likely to be accompanied by some change in every-thing else. But even so the degrees of change in thequantity of money, the velocities of circulation, andthe volume of output will not be related in any definiteor predictable ratio to the degrees of change in thefundamental price-levels. Indeed this is notoriouslythe case at the acute phases of a credit cycle.

There are, of course, various possible assumptionsas to the effect of profits and losses on the amount ofthe Business-deposits maintained by entrepreneurs,