The purchasing capacity of an individual at any time (his power to command goods in the market) is increased by his bank deposits subject to transfer by check - instead of paying by money he pays by check. The statement of the quantity theory must, therefore, include the volume of bank deposits and the rate at which they circulate. The best statement of the theory is probably contained in Professor Irving Fisher's formula, MV plus M'V' =P T, in which M is the quantity of money in circulation, V the rate of turnover of money, M' the quantity of deposits subject to check, V the rate of turnover of deposits, P the price level, and T the volume of trade.

But M and M' are not independent factors; they bear a more or less constant ratio to each other, because of two facts: (1) that bank reserves are kept in a more or less definite ratio to bank deposits, out of the requirements of law or business expediency; (2) that individuals, firms, and corporations preserve more or less definite ratios between their cash transactions and their check transactions, and also between their money on hand and deposit balances. In a given community the quantitative relation of deposit currency to money in circulation is determined by considerations of convenience; and while the ratio differs greatly for the individual, for the community the average ratio is quite constant and can be approximately determined. If the ratio of bank reserves to M' is 1: 4, this means that as the quantity of bank reserves increases, M' may expand four times the amount of the reserve increase. For instance, if the quantity of money in bank reserves were \$1,000,000 and the superposed M', \$4,000,000, an increase of the reserves to \$2,000,000 would bring M' to \$8,000,-000. The price level P will vary with the combined amounts of M and M'. A lowering of reserve requirements is, therefore, likely to bring a higher price level through the inflation of deposits.