ch. i 4 ALTERNATIVE QUANTITY EQUATIONS 229

Provided we remember that the price-level to whichthese propositions relate is not the same thing as thepurchasing power of money, that there are all sorts ofassumptions underlying the argument as to what ishappening to output, etc., and that the real-balancesin question are an amalgamation of balances held fordifferent kinds of purposes, the above analysis maycontribute to our understanding of the monetarysystem. For it exhibits the broad aspects of theprice-making process—the see-saw tilted in one direc-tion by the volume of cash supplied by the bankersand in the other by the volume of real-balances whichthe public are willing to maintain.

Formerly I was attracted by this line of approach.But it now seems to me that the merging together ofall the different sorts of transactions—income, businessand financial—which may be taking place only causesconfusion, and that we cannot get any real insightinto the price-making process without bringing in therate of interest and the distinctions between incomesand profits and between savings and investment.

(ii.) The “ Cambridge ” Quantity Equation

The “ Beal-balances ” Equation discussed above isdescended from a method of approach long familiarto those who have heard Professors Marshall and Pigou in the lecture-rooms of Cambridge. Since this methodhas not often been employed elsewhere in recent"times I call it the “ Cambridge ” Quantity Equation ;but it has {vide the footnote (Q, p. 230) a much longerdescent, being derived from Petty, Locke, Cantillonand Adam Smith. Its essence cannot be summed upbetter than in the words of Dr. Marshall:

“ In every state of society there is some fraction of theirincome which people find it worth while to keep in theform of currency; it may be a fifth, or a tenth, or a