ch. i 4 ALTERNATIVE QUANTITY EQUATIONS 223

collection of specified quantities of tlieir (the public’s)standard articles of consumption or other objects ofexpenditure ” ; and I designated by k and k' respect-ively the number of consumption units which thepublic required in cash and in bank-deposits respect-ively. I pointed out that “ the amount of k and k'depends partly on the wealth of the community,partly on its habits ”, and that “ its habits are fixedby its estimation of the extra convenience of havingmore cash in hand as compared with the advantagesto be got from spending the cash or investing itAnd I ended up with the Fundamental Equation

n =p(k + rk'),

where n is the total quantity of cash, r the proportionof the banks’ cash reserves to their deposits, and pthe price of a consumption unit.

Now the great fault of this treatment lay in thesuggestion that the units relevant to its argumentsare, strictly speaking, consumption units, so that p,being the price of a consumption unit, represents ourquaesitum, the purchasing power of money. But thisimplied that Cash-deposits are used for nothing exceptexpenditure on current consumption, whereas in factthey are held, as we have seen above, for a vast mul-tiplicity of business and personal purposes. Our unitsof Real-balances must, therefore, correspond to themultiplicity of purposes for which Cash-balances areused, and the price-level measured by p must be theprice-level appropriate to this multiplicity of purposes.In short p measures, not the purchasing power ofmoney, but the Cash-balances Standard as defined inChapter 6 above.

Its second fault lay in the suggestion that thepossible causes of a variation of k' were limited tothose which can be properly described as a change ofhabit on the part of the public. This use of languagewas not formally incorrect; but it is misleading in so