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Source link: http://archive.mises.org/11516/the-true-money-supply-the-display-is-now-working-for-this-rothbardsalerno-monetary-aggregate/

The True Money Supply: the display is now working for this Rothbard/Salerno monetary aggregate

January 22, 2010 by

Thank you to all the volunteer developers who made this happen: a Mises Institute monetary aggregate, an alternative to the Fed’s own statistics, is now live.

You can find it at the markets page. It also has its own page.


Conza88 January 22, 2010 at 9:40 am

What happened to M3?

Oh wait.. nvm. lol

barry bell January 22, 2010 at 9:52 am

Speaking of Dr. Salerno, how is the publishing of is book “Sound Money” coming along? when will it hit the shelves?

Jeffrey Tucker January 22, 2010 at 9:56 am

We are in the final stages of that book. It should be out by the Spring or so.

tictawk January 22, 2010 at 9:57 am

can someone explain to me (economically challenged) why is there such a huge discrepancy between M1 & M2? 7 trillion? And I thought that TMS was closer to 2 trillion. What’s going on?

Fred Furash January 22, 2010 at 10:10 am

Probably to do with this:

As you can see, the monetary base, i.e. cash and coins, has more than doubled in just over a year.

I guess that money hasn’t worked its way through the system and been multiplied by banks yet.

christopher January 22, 2010 at 11:02 am

Question: How can an economy grow w/out the supply of money also growing?

AJ Witoslawski January 22, 2010 at 11:03 am

why is there such a huge discrepancy between M1 & M2?

M2 includes savings and money market accounts, time deposits (CDs), and MMMFs. That’s a lot more than just M1 (current accounts and physical currency).

GC January 22, 2010 at 11:27 am


You’ve asked a one sentence question that demands a book-length answer.

The short answer is – higher real savings leads to investment in capital goods which are able to produce more consumer goods in the future.

No more money is needed, just real savings.

As a result of the increased consumer goods, the purchasing power of whatever money is used will increase.

Peruse MES for a more well-developed explanation.

barack obama II January 22, 2010 at 11:32 am
Fred Furash January 22, 2010 at 11:35 am


Man’s wealth increases in proportion to the abundance of goods he is able to buy. As goods become more abundant, their price will fall.

Money is just a medium of exchange. If kept constant and coupled with economic growth, you will have deflation, which is a good thing (ask anyone if falling prices are good).

In this respect, I don’t really understand your question. Perhaps you could provide a reason as to why the economy cannot grow without the supply of money increasing?

39n119w January 22, 2010 at 11:37 am

The Depository Institutions Deregulation and Monetary Control Act of 1980 had begun phasing out interest-rate ceilings on deposits and modified reserve requirements in complex ways. Combined with subsequent administrative deregulation under Greenspan through January 1994, these changes left all the financial liabilities that M2 adds to M1 — savings deposits, small time deposits, money market deposit accounts, and retail money market mutual fund shares — utterly free of reserve requirements and allowed banks to reclassify many M1 checking accounts as M2 savings deposits. M2 and the broader measures became quasi-deregulated aggregates with no legal link to the size of the monetary base.”

if the above is true i assume they have determined compex ways to keep up with the quasi-deregulated aggregatenss of m1 and m2.
i dont know the tms method of determiniing money.

Christopher January 22, 2010 at 11:46 am

Fred et al,

Thank you. Someone at the office asked me a question which I could not answer. We were talking about reserve requirements, and gold standard. The idea was that under a gold standard the supply of money would be finite (It is assumed the amount of gold owned is fixed). I knew that the statement was false, but I was struggling with proving how. Deflation.

Nick January 22, 2010 at 11:52 am

I plotted all of the data a little differently. I added it all on one plot with some key dates to highlight the periods. You lose some resolution on the TMS, but I think it is still interesting. Check it out here:


Frank January 22, 2010 at 11:53 am

$6,564.1 billion for TMS seems too high relative to latest H6 (December) values for (non-seasonal) currency and demand deposits plus SLF “sweeps” component (last update November?). Is Mises including time deposits in their figures notwithstanding Shostak’s (2000) logic that it be excluded?

bob January 22, 2010 at 11:58 am

Ok, we made it work again like it did in 2007. Great. Now can we get some better tools to graph?!?!

Where is YoY% change? Where is a logarithmic scale? Where is an editable date range? Where is a moving average?

The St. Louis Fed has managed to completely overhaul their graphing tool in the same amount of time it took Mises.org to make it work as it should again.

Jeffrey Tucker January 22, 2010 at 12:09 pm

For goodness sake, Bob. I won’t write what I’m thinking about your comment.

J Cortez January 22, 2010 at 12:45 pm

Excellent. Thank you.

Wayne January 22, 2010 at 12:53 pm


As the developer who updated this it took me less than a week. The changes you so politely demand are some we’re thinking about implementing right now.

I’m glad to see you’re easily satisfied by a free service offered by LVMI. If you’re happy with the St. Louis graphs then by all means use them. Perhaps you can demand whatever added value you find on our graphs from them, see how well that goes…

tfr January 22, 2010 at 1:11 pm

Nice. I tried assembling some data like this a while ago. It didn’t work out – too much noise on the data, too much fudging by the bureaucrats. Thank you.

Morrisey January 22, 2010 at 1:29 pm

…so for us dummies — does this chart somehow depict the annual inflation rate ?

What was the U.S. $$ inflation rate for 2009 ?

Dick Fox January 22, 2010 at 1:51 pm

Oh great! Just what we need, another monetarist graph. So Friedman is winning and Mises is turing over in his grave.

Axiomata January 22, 2010 at 4:28 pm


I’d in include the adjective “price” in front of deflation in answering your question.

Since Austrians generally define inflation more broadly as an increase in the quantity of money as opposed to just an increase in prices it makes sense apply the same logic to deflation.

Thedesolateone January 22, 2010 at 6:42 pm

I’d be extremely interested to see a graph of GPP (Rothbard’s measure) vs. TMS.

I think it would be highly illuminating.

Vincent Cook January 22, 2010 at 7:30 pm

From an Austrian perspective, there are a couple of glaring omissions from this TMS statistic.

First, it is not the case that MMMF shares represent an instance of double counting. MMMF’s are similar to Mutual S&L’s and Credit Unions–they issue shares that are redeemable on demand at par and are fully negotiable (making these shares equivalent to money as a final means of payment in a transaction), and then lend the proceeds of the share sales, creating the usual fractional reserve temporal mismatch in maturities (on-demand liabilities versus term assets). In theory, an MMMF could “break the buck” and redeem at less than par, but no MMMF that qualifies under current SEC rules as a “money market fund” would actually dare to do that–they would go out of business or get bailed out first. As Rothbard pointed out with respect to S&L shares (which also have a legal escape clause, since they have the right to delay redemption), it is the de facto and not the de jure nature of the money claim that matters to an economist. If the reality is that MMMF’s can never break the buck and stay in business, and are even bailed out by the Fed to guarantee redemption at par (as has been the case recently), clearly the market will treat MMMF accounts as being just as suitable for monetary purposes as any bank account or savings account. They all represent instant claims to a definite sum of money, and they can all be easily transferred from owner to owner without any additional transactions taking place.

Second, the Federal Reserve’s direct contribution to the money stock consists of more than just Federal Reserve Notes. There are also deposit accounts at the Federal Reserve banks. While previously these almost entirely consisted of bank reserves (which make no net contribution to the total money stock since they are being used by commercial banks to cover a portion of the money substitutes they issue), that has not been the case recently. Lately, hundreds of billions of dollars have been held as Fed deposits by various non-bank entities, including other central banks, the U.S. Treasury, and certain bailed out non-bank private entities. These deposits are instantly convertible into Federal Reserve Notes by the Fed and are in effect an electronic version of the Federal Reserve Note, so they really ought to be counted as a part of the fiat Fed commodity that constitutes “money in the narrow sense.” To the extent that narrow money is not being used to cover money claims on banks, it should be added to the TMS.

Wayne January 23, 2010 at 12:17 am

@Thedesolateone if you can give me a formula for GPP maybe I could make it available.

@Vincent Cook I didn’t really follow any of that was there a suggestion in there that I could act on realisticly or was it just a wish?

Kerem Tibuk January 23, 2010 at 12:44 am

True money supply can not be measured because money is a subjective function, not a good or a commodity or anything else.

How will you know, for example, is time deposits should be included or not? Don’t you think that depends on the savers that have time deposit accounts?

What if some of the savers think their deposits as “withdrawable cash” (money) and add them to their cash balance in their heads and other savers do not?

Even if fractional reserve banking was outlawed and only gold coins were used as money, there is no way of measuring a money supply. (oc course estimation would be closer to truth than what we have now but still)

Money is not a commodity that you add up some physical attribute like weight, volume or a number you put on it.

Also you can not measure the exact inflation. Neither through the money supply nor through another estimation called CPI.

That is why Monetarism and Keynesianism is doomed to fail. You can not manage something you can not measure.

Fephisto January 23, 2010 at 9:10 am


I’ll say the only thing that hasn’t been said so far that probably should be said:


39n119w January 23, 2010 at 3:54 pm

“In this respect, I don’t really understand your question. Perhaps you could provide a reason as to why the economy cannot grow without the supply of money increasing?”

it seems to me that developing ways (requirein spending of money) that make getting money to things make money get to where people want it to go faster would be the best way to grow the economy without adding more money???

39n119w January 23, 2010 at 4:03 pm

is a cd still a financial liability of a bank?

if money comes out of an m1checking account and goes into a cd….m1 will decrease and the money is in an m2 CD?….the cd is now a “difficult to demand laibility” of a bank?? and the money is loaned out and goes into a different m1 checking account?

first m1 checking account is reduced by check to CD account, CD is created but money is not held – thought it is a bank liability?? and is loaned out to another m1 checking account making m1 go up again??

does a cd count as an asset for a bank??

otherwise it just seems to a some type of detatched promisory note. if a cd is withdrawn early and the bank never has enough to cover them then it wouuld seem that they should be counted as money?

but that i am not sure about.

39n119w January 23, 2010 at 4:31 pm

“True money supply can not be measured because money is a subjective function, not a good or a commodity or anything else.”

they are currency supply figures really for govt issued currency. it should be fairly easy to figure out the supply s long as people dont lie about or wrongly define the nature and balance of accounts.

i asked earlier…m2 says CDs are part of the currency supply…do they function in a way that is separate from m1?? via govt guarantee? fdic??

imagining a non-dollar to be a dollar in my head doesnt make it part of the money supply.

39n119w January 23, 2010 at 4:40 pm

http://www.economagic.com says

currency in circulation is 925 billion.

m1 as 1.725 trillion

m2 as 8.5 trillion

i assume currency to be cash and coin….are the portions called m2 available in some way that would not affect m1? if i called in my cd early would the bank have to plead for new money from the govt of does it come from an m1-type holding in the bank??

Dick Fox January 24, 2010 at 8:31 am


Thanks for a resonable, logical post in the Mises tradition, but alas many Austrian economists have gone over to the monetarist side adapting Milton Friedman into the ABCT, so you will probably be ignored.


You wrote, “the Federal Reserve’s direct contribution to the money stock consists of more than just Federal Reserve Notes. There are also deposit accounts at the Federal Reserve banks. Since these reserves are not yet in the active economy should they be counted in the money supply? Should money that is buries in someone’s back yard be counted in the money supply. Should the money that is being considered in the brain of “Helicopter” Ben be considered part of the money supply?

Thank you for illustrating one of the biggest problems with monetarism and for supporting Kerem, Ludwig von Mises, and me. For those who are scratching their heads at what Kerem and I are saying and asking, “Then how are we to maintain a stable currency?” Look to Ludwig von Mises. He didn’t worry about defining the money supply because he knew that was impossible and even if you could what about money demand? Mises said look to the price of gold, the most monetary of commodities. You don’t need to define money (actually money substitutes) when you have gold.

Thank you for once again supporting the point made by Kerem.

Brian Macker January 24, 2010 at 2:55 pm

St Louis Fed has base money supply going from 850 billion in late 2008 to 2 trillion today. Yet your graph of M1 is above this value in 2008 and below it in 2010. Something is wrong with somebodies numbers somewhere.

Wayne January 24, 2010 at 4:23 pm

Compare ours:

with the Feds:

The main difference I see is that the Fed’s has weekly reporting and we only have monthly.

Thedesolateone January 24, 2010 at 4:31 pm

America’s Great Depression,

“To estimate the extent of government depredation on private product, we first find private product by deducting “product” or “income” originating in government and “government enterprise”—i.e., the payment of government salaries—from Gross National Product. We now have the Gross Private Product. Government depredations upon this GPP consist of the resources that government drains from the private sector, i.e., total government expenditures or receipts, whichever is the higher. This total subtracted from the GPP yields the private product remaining in private hands, which we may call PPR. The percentage of government depredation to gross private product yields an estimate of the burden of government’s fiscal operations on the private economy.[1]

If government expenditure is larger than receipts, then the deficit is a drain on private resources—whether financed by issuing new money or by borrowing private savings—and therefore the expenditure figure is chosen as a measure of government depredation of the private sector. If receipts are larger, then the surplus drains the private sector through taxes, and receipts may be considered the burden on the private sector.[2]”

p. 340-341

Brian Macker January 24, 2010 at 6:01 pm

I said base money supply. That is MB not M1.

Somethings was fishy and I have found out what. MB includes “notes and currency in bank vaults” and “bank reserves”, which M1 doesn’t.

I had assumed that it would only make sense that M1, M2, and M3 would have the base money supply included. Incredibly they don’t. M1, M2, M3 are both less broad and more broad than MB. What a stupid system and exactly what you would expect from the Feds.

Gerry Flaychy January 24, 2010 at 6:38 pm

Bank reserves, together with currency, make up the narrowest definition of money, the monetary base.


M1 consists, principally, of currency (money in circulation) and demand deposits at commercial banks.

Brian Macker January 24, 2010 at 9:16 pm


Actually the term “narrowest” doesn’t make sense in the context of M1 and MB.

Since M1 is a subset of M2, and M2 a subset of M3 then the relationship M1

The same is not true of MB and M1. MB contains components not in M1 and vice versa. That is why in 2008 MB < M1 yet in 2010 the relationship is reversed with MB > M1. The difference caused by a vast increase in “notes and currency in bank vaults” and “bank reserves” which are not included in M1.

Brian Macker January 24, 2010 at 9:48 pm

Ok, all the less than signs in my post evaproated.

I said the “Since M1 is a subset of M2, and M2 a subset of M3 then the relationship M1 less than M2 less than M3 holds.”


“That is why in 2008 MB was less than M1 in, while in 2010 MB was greater than M1.”

Dick Fox January 25, 2010 at 8:25 am

So all these money supply classifications are all over the map. Does that give you a warm and fuzzy. And people are making policy based on these number?

Gerry Flaychy January 25, 2010 at 10:47 am

Brian, if in 2010 the MB his greater than M1, that could mean that the reserves of the bank as a whole are over 100% versus the demand deposits, instead of being fractional.

bob January 25, 2010 at 3:15 pm

@Jeff and everyone else involved with making Mises.org as incredible as it is, I extend my heartfelt thanks. This site is one of my favorites, and its necessity in our current political climate is met with a powerful and awe-inspiring implementation.

That being said, I really think this site needs a focused effort to present economic data. And not just repeating what the government releases. It should focus on the “problems” of the official statistics and present alternatives, with explanations of what the alternatives consist of and why they are necessary. Gross and net private production numbers would be helpful.

There has to be a web graphing tool in existence that has included functionality as I described above. If there really is a void in this area, I’m thinking about trying to make a piece of software to do it myself.

I hope I don’t sound rude – it just seems to me that much of this site is extremely polished. Also, a lot of the Austrian School economic analysis and theory is quite robust. I think having economic data to highlight the validity of the philosophy is also essential.

Vincent Cook January 25, 2010 at 8:09 pm

Wayne asked:

@Vincent Cook I didn’t really follow any of that was there a suggestion in there that I could act on realisticly or was it just a wish?

I wasn’t making any specific recommendations, but knowing how the Fed is manipulating the dollar can be helpful in making certain kinds of investment decisions.

Dick Fox wrote:

You wrote, “the Federal Reserve’s direct contribution to the money stock consists of more than just Federal Reserve Notes. There are also deposit accounts at the Federal Reserve banks. Since these reserves are not yet in the active economy should they be counted in the money supply? Should money that is buries in someone’s back yard be counted in the money supply. Should the money that is being considered in the brain of “Helicopter” Ben be considered part of the money supply?

Yes, yes, and no. You are confusing two different concepts, namely “money stock” and “money supply.” In general, the stock of something is the number of units (as recognized by other market actors; figments of Bernanke’s imagination don’t count) that are in someone’s possession at a given time. The supply of something is the quantity that would be offered for sale at a given price; the difference between the stock and the supply is known as the “reservation demand.” If you prefer burying cash in the back yard and leaving it there instead of spending it right away, that means that you’ve increased the reservation demand for that money. The money stock remains the same, but the supply at the prevailing purchasing power of money has now decreased, thereby causing an increase in money’s purchasing power (fewer units of money are now “active”).

As far as I can tell, the Fed’s non-bank depositors are just as “active” as any other actor in the economy. The money doesn’t just sit there being “inactive”; we know that because the Fed’s statistics show considerable fluctuations in these balances over time. Of course, as long as the Fed is not audited, we have no way of knowing for sure where this money is going and what sort of “activity” is being financed by it. My guess is that a lot of it originates as TARP funds that are then used to bail out AIG, Fannie, Freddie, etc. which in turn is used to make good on credit default swaps, etc. held by other financial institutions. It appears that much of the money that initially shows up as non-bank Fed deposits ultimately winds up in Fed bank deposits, which is an important reason why bank reserves have been skyrocketing over the past 15 months (the other reason is that the Fed is now directly buying lots of Fannie & Freddie paper).

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