224

A TREATISE ON MONEY

BK. Ill

far as it is intended to include, for example, a changein the proportions of the total deposits representedby Savings-deposits, Business-deposits and Income-deposits respectively, due to a change in bank-rate orin the business situation as a whole. In short, I wasapplying to the Cash-deposits, as a whole, conceptionswhich were only appropriate to the Income-deposits.

The argument can, however, be re-stated in a formwhich is formally free from these objections. We canmake it clear that the Price -level (I\) to which it leadsup weights the different objects~of expenditure, not inaccordance with their relative importance to con-sumers, but qn ^proportion to the anticipatory holdingof real balances of which they are the occasion.Stated in its simplest form our Fundamental Equationcan then be expressed as follows :

If M = the total volume of Cash-balances, andC = the corresponding volume of Real-balances,

then Pi =

This equation has—obviously—very little utilityfor quantitative purposes. But qualitatively it doesbring out sharply one important point—namely theparts played by the decisions of the bankers and of thedepositors respectively in the determination of prices—which can be embodied in the following proposition :

The volume of cash-balances depends on the decisionsof the bankers and is “ created ” by them. The volume ofreal-balances depends on the decisions of the depositorsand is “ created ” by them. The price-level (Pfj is theresultant of the two sets of decisions and is measured bythe ratio of the volume of the cash-balances created tothat of the real-balances created.

No one directly “ decides ” what the price-level shallbe ; all the relevant decisions are directed to thedetermination of the volumes of cash-balances and of