The fundamental problem of monetary theory is not merely to establish identities or statical equations relating (e.g.) the turnover of monetary instruments to the turnover of things traded for money. The real task of such a theory is to treat the problem dynamically, analysing the different elements involved, in such a manner as to exhibit the causal process by which the price level is determined, and the method of transition from one position of equilibrium to another.

The forms of the quantity theory, however, on which we have all been brought up—I shall give an account of them in detail in chapter 14—are but ill adapted for this purpose. They are particular examples of the numerous identities which can be formulated connecting different monetary factors. But they do not, any of them, have the advantage of separating out those factors through which, in a modern economic system, the causal process actually operates during a period of change.

Moreover, they have a further fault, in that the standard, to which they apply, is neither the labour standard nor the purchasing power standard, but some other, more or less artificial, standard, namely, either the cash transactions standard or the cash balances standard, as defined in chapter 6 above. This is a serious fault, because it must be the two former standards which are our true quaesita. For the labour power of money and the purchasing power of money are fundamental in a sense in which price levels based on other types of expenditure are not.