Professor Fisher has stated the relation between money and prices in a form that will do much to facilitate an understanding of the subject. In his "equation of exchange" he lets M represent money; V, the velocity 1 of circulation; M', substitutes for money, such as bank deposits subject to check; V, the velocity of circulation of substitutes for money; P the level of prices; and T, the volume of trade. The equation of exchange is as follows; MV + M"V' = PT, or in words, the amount of money in circulation multiplied by the rapidity of circulation of the money plus the amount of substitutes for money in use multiplied by the rapidity of circulation of the money substitutes is equal to the price level multiplied by the volume of trade. If, for simplicity of illustration, we give the different symbols arbitrary values, we shall see more clearly the meaning of the equation.. Let M = 2; V = 22; M' = 8; V = 54; and T =476. If we substitute these arbitrary values for the corresponding symbols and solve the equation, we shall find that P equals 1. If there should be a change in any of the magnitudes represented in the equation, there will result a change in the value of P. If M, M', V, or V is increased or if T is diminished, P will be found to be more than 1. On the other hand, if M, M', V, or V is diminished, or if T is increased, P will be less than 1. In other words, the price level increases as the amount of money in circulation, or its rapidity of circulation, or the amount of money substitutes, or their rapidity of circulation, increases; the price level decreases as the volume of business to be done with money and money substitutes increases. The very marked increase in the cost of living, i.e. increase in the price level, during the past twenty years is explained to a considerable extent by the increase in the amount of money and of money substitutes in circulation during that time.

1 The velocity or rapidity of circulation here means the average number of times a year a dollar is exchanged for goods.