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Defining Money Supply to Understand Its Actions


Debating True Money Supply and Austrian Money Supply. Which measurement do you agree with?


Is 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 supply.

How Does One Measure Money?

The mainstream monetary measurements are:

Austrian Money Supply 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 (TMS), the other Money AMS (Austrian Money Supply). I have a monetary measure called M Prime, but that is a representation (as best as I can put together) of Money AMS.

The main difference between TMS and M Prime is the former includes savings accounts while the latter doesn't.

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, Anyway?

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.

True Money Supply

Please consider a chart of True Money Supply as of March 18.

The above chart was produced by True Money Supply on Mises. The text states:

The 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, US Government Demand Deposits and Note Balances, Demand Deposits Due to Foreign Commercial Banks, and Demand Deposits Due to Foreign Official Institutions.

Money Available On Demand

The problem with the above text clip is Shostak doesn't agree with the definition. See Mystery of the Money Supply Definition in a Mises journal.

Shostak settles on this definition: Money AMS equals cash plus demand deposits with commercial banks and thrift institutions plus 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 theoretically isn't available on demand.

Also note that there are no reserves on savings accounts so it's highly likely the money was lent out. Furthermore, you can't write checks against savings accounts (although some NOW accounts do allow limited check writing).

Others argue that although the money isn't theoretically available on demand, in practice it is. Thus the never-ending debate even among groups both professing to be "Austrian."
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