The crude quantity theory of old days—though it protected itself with the words other things being equal—was liable to suggest that the total quantity of money (M) was the main, if not the exclusive, determinant of the supply of cash facilities. Experience, under war finance and during the post-war monetary inflations, of price fluctuations which did not closely correspond with the changes in the ratio of the total quantity of money to the volume of output, has led almost everyone today to lay a more equal stress on the relative importance of the other monetary factors. Nevertheless the total quantity of money remains, if not an overruling factor, at least in the long run a dominant one—and of exceptional practical significance because it is the most controllable factor.

Let us, therefore, now proceed to a determination of the causes governing the total quantity of money. We shall move by two stages in this and a later chapter, considering, first of all, how the quantity of bank money is related to the quantity of reserve money, and then (in Book VII, chapter 32) what governs the quantity of reserve money.

We have seen in chapter 2 that the aggregate volume of the deposits of the member banks of a modern banking system depends on the reserve ratio (i.e. the proportion of reserves to deposits) which the member banks aim at keeping, and the amount of these reserves (in the shape of cash and deposits at the central bank).