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A TREATISE ON MONEY

BK. Ill

of qualitative investigation. For they are, I think, amuch more powerful instrument of analysis than theirpredecessors, when we are considering what kind ofmonetary and business events will produce what kindof consequences. The reader will find, as we havealready found in dealing with the modus operandi ofbank-rate, that we are compelled in any case todiscard the alternatives when we advance to the laterstages of the argument and attempt to analyse theactual monetary problems of the day—the problemof the Credit Cycle, for example—because we dis-cover that they are quite ineffective for handling theelements which most matter. I must, however, leavethe reader to judge whether or not the new instrumentcuts better than the old, when he has become accus-tomed to the use of it in the various chapters of thisTreatise. Meanwhile it will be useful to outline theolder methods in their relation to the new.

(i.) The “ Real-Balances ” Quantity Equation

The first of these is that which I used in my Tracton Monetary Reform and have since developed into amore accurate shape. This method sets out from theidea that what a holder of money requires is a quantityof Real-balances which bears the appropriate relation-ship to the quantity of real transactions upon whichhe employs his balances. Consequently, if this appro-priate relationship remains unchanged, the quantityof Cash-balances which he needs will be equal to thequantity of Real-balances as determined by the above“ appropriate relationship ”, multiplied by the Price- level corresponding to the prices applicable to thevarious real transactions against which the Cash-balances are held.

In my Tract on Monetary Reform (Chapter III. § 1)I measured Real-balances by what I called “ Con-sumption Units ”, namely units “ made up of a