A Note on the Theory of Money

§i IN the course of his discussion of the method of approach to the theory of the value of money (Treatise on Money, I, 229-39), Mr. Keynes makes two propositions which may be paraphrased as follows: (I) It is not useful to bring the volume of real income or output R and its price-level P into relation with the total stock of money M by means of a factor K, denoting the proportion of R over which people wish to keep command in monetary form. It is only useful so to bring them into relation with that part of the money stock which is held for the purpose of facilitating the disbursement of income; for the remainder of the money stock is held for business and investment purposes not directly connected with the level of output, and is used to purchase things whose price-level may behave very differently from that of output. (2) The price-level proper to equations of the Cambridge type is a price-level in which the various items are weighted according to their relative importance in respect of the money balances which they cause to be held, and not (as in equations of the Fisher type, using the concept of velocity of circulation) according to their relative importance in respect of the transactions per unit of time to which they give rise. I venture to suggest that neither of these propositions is well founded.