Formalisation of the Cambridge Quantity Theory

The development of the Cambridge quantity theory is divided over the next three chapters, and reappears again in Chapter 11 which considers Robertson’s Banking Policy and the Price Level (1926). The subject of the current chapter is the first algebraic presentation of Marshall’s real balances approach by Pigou (1917i)and Keynes’s (1923i)later development of that equation. Hawtrey’s nominal balances approach (as in 1919i) is also considered, since, at least in part, later work in Cambridge can be seen as the coming together of these two approaches. Hawtrey built a theory which could deal with disequilibrium conditions, and a similar analysis was later used by Robertson (1926), but this is properly the subject of a later chapter. Hawtrey also distinguished between consumers’ and traders’ balances, an approach which attracted Keynes in his work after 1923.