6 - CURRENCY STANDARDS

Summary

THE CASH TRANSACTIONS STANDARD AND THE CASH BALANCES STANDARD

The new fundamental equation, which I shall propound in chapter 10, leads up, as it should, to the purchasing power of money. The quantity equations which have been in use hitherto do not, however, do so. They refer, as we shall see in chapter 14, to price levels which weight different articles, not in proportion to their importance to consumers, but in proportion to their importance in connection with the volume either of cash transactions or of cash balances—two types of currency standard, as they may be termed, which we shall call respectively the cash transactions standard and the cash balances standard.

These currency standards must necessarily differ from the purchasing power of money, because the relative importance of different articles as objects of monetary transactions is not the same as their relative importance as objects of consumption. It is evident that the systems of weighting appropriate to a consumption standard and to a currency standard respectively can differ materially from one another. An object of expenditure which passes straight from the original producer to the ultimate consumer, such as personal services for example, gives rise to a less volume of monetary transactions than an object of equal value which passes through many hands and through many stages of production, each of which involves a monetary transaction, before it reaches the consumer.