money supply soaring or not? If it is, to what extent? Once again this is the
question many grapple with. The answer depends on the definition of money
How Does One Measure Money?
The mainstream monetary measurements are:
Base Money Supply
M3 (discontinued in
Money AMS and True Money Supply
Hoping to clarify the distinction between money and credit, Austrian economic
followers have two additional measures, one called True Money Supply, the
other Money AMS (Austrian Money Supply). I have a monetary measure called M
Prime (M') but that is a representation (as best as I can put together) of
The main difference between TMS and M Prime is the former includes savings
accounts while the latter does not.
What is Money and How Does One Measure It?
For a complete review of the arguments from both sides as to whether to
include savings accounts, please see What is Money and
How Does One Measure It?
I believe as does Austrian economist Frank Shostak, that savings accounts are
really transfer of claim "lending accounts" and thus need to be
excluded from monetary measurements. Others see it differently. See the above
link for details.
True Money Supply
Please consider a chart of True Money Supply as of 2010-03-18
The above chart was produced by True Money Supply on
Mises. The text states ...
True Money Supply (TMS) was formulated by Murray Rothbard and represents the
amount of money in the economy that is available for immediate use in
exchange. It has been referred to in the past as the Austrian Money Supply,
the Rothbard Money Supply and the True Money Supply. The benefits of TMS over
conventional measures calculated by the Federal Reserve are that it counts
only immediately available money for exchange and does not double count. MMMF
shares are excluded from TMS precisely because they represent equity shares
in a portfolio of highly liquid, short-term investments which must be sold in
exchange for money before such shares can be redeemed. For a detailed
description and explanation of the TMS aggregate, see Salerno (1987) and
Shostak (2000). The TMS consists of the following: Currency Component of
M1, Total Checkable Deposits, Savings Deposits, U.S. Government Demand
Deposits and Note Balances, Demand Deposits Due to Foreign Commercial Banks,
and Demand Deposits Due to Foreign Official Institutions.
The problem with the above text clip is Shostak does not agree with the
definition. See Mystery of the Money Supply Definition in a
Shostak settles on this definition: Money AMS = Cash + demand deposits with
commercial banks and thrift institutions + government deposits with banks and
the central bank.
What Shostak is attempting to measure is money available on demand. I concur
with Shostak in regards to excluding savings accounts.
Think of it this way: Savings accounts are really lending accounts. You
deposit money in a bank (transferring the claim on the money to the bank) in
return for an agreed upon interest rate. Because the claim to the money was
transferred, your money is not theoretically is not available on demand.
Also note that there are no reserves on Savings accounts so it is highly
likely the money was lent out. Furthermore, you cannot write checks against
savings accounts (although some NOW accounts do allow limited check writing).
Others argue that although the money is not theoretically available on
demand, in practice it is. Thus the never-ending debate even among groups
both professing to be “Austrian”.
Here is a chart of Shostak's Money AMS:
Note: That chart is as of November 2009, the latest I have. However, you can
see M Prime follows the Money AMS definition. Be sure to match up the years.
Money AMS starts in 2000, the M Prime chart below starts in 1968.
M Prime as of 2010-03-18
click on chart for sharper image
Note that M Prime closely tracks M1 while TMS closely tracks M2. In fact, M
Prime = M1 + Sweeps for all practical purposes. See What is Money and
How Does One Measure It? for details as
well as a definition of sweeps.
Real (CPI Adjusted) M Prime as of 2010-03-18
By this measure, money supply is barely growing.
The above M Prime Charts are thanks to "TC" who graphed them per my
Unfortunately the Mises site chart functionality for producing year over year
% change in TMS is hopelessly broken and has been broken for years and I have
notified them a half dozen times to no avail so I cannot produce a chart of
year over year % change in TMS for comparison.
However, the charts do show that M Prime has slowed while TMS has not. Both
rose dramatically in 2009 signaling the Fed's liquidity measures, but M Prime
now diverges from TMS.
TMS1 vs. TMS2
While attempting to find a chart of the %Change in TMS I stumbled upon a site
that compared Money AMS with TMS as charted on Mises.
Please consider Contrarian Take:
Austrian Money Supply by Michael Pollaro.
click on chart for sharper image
Pollaro Offers These Short Definitions
TMS1: Narrow Money Supply under the Austrian Economics definition of money M1
Components, per FRB H.6 Statistical Release based on economist Frank Shostak
TMS2: Broad Money Supply under the Austrian Economics definition of money
Other Checkable Deposits (OCD) at Commercial Banks based on economist Murray
Rothbard formulation, further developed by economist Joseph Salerno
M2: Broad Money Supply under the Federal Reserve Board definition of money
Money Supply Comparisons
There are tiny differences between the charts of TMS1, M Prime, and Money AMS
but regardless of which one is perfect (if there even is such a thing).
Michael Pollaro at Contrarian Take did a fantastic job with the
Pollaro has 9 pages of money supply charts that are well worth a look.
As a money supply measure, I am sticking with TMS1 or M Prime, both of which
attempt to match Shostak's Money AMS.
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