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All economists, whether they are of an Austrian, a Keynesian, or a monetarist bent, as well as nearly every investor, would agree that money plays a vitally important role in the economy. And a correct measure of its supply is an indispensable input into every economic and financial forecast. How could it not be? Money is one half of every economic transaction.
Yet, despite its importance, the money-supply metrics used by the majority of today's economists and investors are seriously flawed, for they are founded on a faulty definition of money.
I ask you, are you using the wrong money-supply metrics as input into your economic and financial forecasts? If so, I submit to you, that is a serious error. And if you are an investor, it's an error that could cost you serious money.
So then, what is money? And how does one properly measure its supply? Keynesian and monetarist formulations of the money supply, based as they are on empirical correlations and inductive statistical techniques, are not the way to go. A correct formulation of the money supply must be based on a deductively derived, theoretically sound definition of money.
Well it just so happens that the Austrians have the inside track here, a track that I invite you now to get on.
Defining the Money Supply
Let's start with this simple definition of money: To quote Austrian economist Murray Rothbard, from his essay "Austrian Definitions of the Supply of Money,"
money is the general medium of exchange, the thing that all other goods and services are traded for, the final payment for such goods and services on the market.
Pretty straightforward, a definition I think we can all agree on.
Of primary import, a point that can not be overemphasized, is the requirement that for a thing to be money it must serve as the final means of payment in all transactions. In other words, it must be the thing that fully extinguishes the debt incurred in a transaction.
To bring this point home, take the case of credit cards, which facilitate the purchase of countless goods and services but in no way should be classified as money. Austrian economist Joseph Salerno, in his essay "The True Money Supply: A Measure of the Supply of the Medium of Exchange in the US Economy," explains why:
Credit cards [should] not [be] counted as part of the [money supply] because use of a credit card in the purchase of a good does not fully discharge the debt created in the transaction. Instead, it gives rise to a second credit transaction that involves present and future monetary payments. Thus the issuer of the credit card or lender is now bound to pay the seller of the good immediately with money on behalf of the card-holder or borrower. The latter, in turn, is obliged to make a monetary repayment of the loan to the issuer at the end of the month or at a later date, at which time the transaction is finally completed.
Even more to the point, and on similar grounds, consider the widely held view that travelers' checks, a component of the Federal Reserve's M1 money-supply measure, are money. Again, to quote Salerno:
What a travelers' check represents … is a credit claim on the investment portfolio of the issuing company. The purchase of travelers' checks from American Express involves, in effect, a "call" loan by the purchaser to American Express, which the latter pledges to repay to the purchaser or to a designated third party at an unspecified date in the future. In the meantime, most of the proceeds of such loans are invested by American Express on its own account in interest bearing assets, while a fraction is held in the form of demand deposits to meet anticipated payments of its travelers' check liabilities as they "mature." In exchange for the foregone interest (and a small fee) the purchaser receives access to an alternative payments system which avoids the risk of loss associated with carrying cash payments and the potential delay or non-acceptance involved with payment by personal check drawn on a distant bank. But the travelers' checks themselves are not the final means of payment in a transaction: the sellers who receive travelers' checks in exchange quickly and routinely present them for final payment at a bank and obtain either cash or a credit to their demand deposit accounts, with the sums paid out ultimately being debited to the demand deposit account of American Express.
With these concepts in mind, it's easy to see why economists of all schools would include currency — in the United States being Federal Reserve notes and Treasury token coins — as part of the money supply. What could be more basic, for what discharges a debt more fully than the exchange of a good or service for currency?
But what about demand deposits and other checkable accounts at banks? What about savings accounts that permit the instantaneous transfer of your money to a checking account? Or what about money-market mutual-fund share accounts that feature checking privileges? Are these things not money, things that all other goods and services are traded for, the final payment for such goods and services on the market?
Indeed, the Keynesian- and monetarist-inspired mainstream measures of the money stock as reported by the Federal Reserve Board — M1, M2 and, until discontinued in February of 2006, M3, diligently followed by millions of economists and investors the world over, include all these things (and more) in the money supply. And there are quite a few things, to say the least:
- Nonbank Traveler's Checks
- Demand Deposits
- Other Checkable Deposits (OCD) at Commercial Banks
- Other Checkable Deposits (OCD) at Thrifts
Non-M1 M2 Components
- Savings Deposits at Commercial Banks, including MMDAs (money-market deposit accounts)
- Savings Deposits at Thrifts, including MMDAs
- Small Time Deposits at Commercial Banks
- Small Time Deposits at Thrifts
- Retail Money Funds
Non-M2 M3 Components
- Large Time Deposits at Banks
- Large Time Deposits at Thrifts
- Euro Dollars
- Institutional Money Funds
So then, how do we make sense out of all this in light of our definition of money? Are all these things money?
The dean of the Austrian School of economics, Ludwig von Mises, in his classic Theory of Money and Credit laid out the framework:
Money supply = standard money + money substitutes
In today's fiat money system, standard money is easy to define. It's simply Federal Reserve notes plus Treasury token coins, the combined total popularly termed currency.
Money substitutes, that's the challenge.
To paraphrase the Austrian masters, money substitutes are perfectly secure and immediately convertible, par-value claims to standard money which, by virtue of this immediate convertibility substitute fully for standard money in individual's cash balances, and, as such, are used by individuals as a surrogate for cash — namely, a thing that all other goods and services are traded for, the final payment for such goods and services on the market. On this basis, not only are all the Federal Reserve’s M1, M2, and M3 components not money, but some are not even money substitutes.
In a format similar to Salerno's essay on this subject, and with these definitions firmly in mind, let's build the correct formulation of the money supply by "testing" each of the Federal Reserve's M1, M2, and M3 components against these definitions.
As we saw above, in today’s fiat-money system, currency is simply Federal Reserve notes plus Treasury token coins — specifically, standard money held by the public, excluding what is held as reserves by depository institutions. It goes without saying that both meet our money test and should be included in the money supply.
Demand Deposits and Other Checkable Deposits at Banks
Demand and other checkable deposits at commercial banks and thrifts are the embodiment of money substitutes. Without question they pass the money test and should be included in the money supply.
Rothbard makes the case for demand deposits, at the same time explaining the essence of a money substitute:
Demand deposits [are] not other goods and services, other assets exchangeable for cash; they [are], instead, redeemable for cash at par on demand. Since they [are] so redeemable, they [function], not as a good or service exchanging for cash, but rather as a warehouse receipt for cash, redeemable on demand.… Demand deposits [are] therefore "money-substitutes" and [function] as equivalent to money in the market. Instead of exchanging cash for a good, the owner of a demand deposit and the seller of the good would both treat the deposit as if it were cash, a surrogate for money. Hence, receipt of the demand deposit [is] accepted by the seller as final payment for his product.
Rothbard goes on to highlight a key Austrian insight, that being the fact that it is the subjective deliberations of market participants that give a good or service value in the market. And nowhere is this subjectivity more important than in the case of money substitutes:
It is important to recognize that demand deposits are not automatically part of the money supply by virtue of their very existence; they continue as equivalent to money only so long as the subjective estimates of the sellers of goods on the market think that they are so equivalent and accept them as such in exchange.
Now, with FDIC insurance behind every demand deposit, and Treasury guarantees behind the FDIC, all supported by the Federal Reserve's ability to print Federal Reserve notes at a moment's notice to make good on any shortfall that might exist in the FDIC or Treasury coffers, is there any doubt that demand and other checkable deposits are deemed by individuals everywhere as perfectly secure and immediately convertible par-value claims to standard money that substitute fully for standard money in individual's cash balances, and, as such, perform all the functions that one expects of standard money? The answer of course is no. And that's why demand deposits must be included in the money supply.
Nonbank Traveler's Checks
As we saw above, travelers' checks at first glance look like money substitutes, but they are neither perfectly secure, immediately convertible, par-value claims to standard money, nor a final means of payment. As such they must be excluded from any money-supply measure.
Small Time Deposits at Banks
Small-denomination time deposits are federally insured certificates of deposits (CDs) at commercial banks and thrifts, with maturities ranging from a few months to several years. In economic terms, they are credit transactions, specifically loans made by the bank's depositors, where the depositor foregoes the use of his money for the length of the loan in return for interest plus the return of his deposit at maturity. So, while perfectly secure, CDs are not immediately convertible claims to standard money and as such fail our money test. On those grounds, they should be excluded from any money-supply metric.
The failure of a time deposit to meet our money test speaks to the essence of what is meant by immediate convertibility, that being the difference between what Austrians call a claim transaction or warehouse receipt, best represented by a demand deposit, and a credit transaction, like a time deposit. Have a read of Austrian economist Frank Shostak's explanation of the difference between a claim transaction, in this case a demand deposit, and a credit transaction from his essay "The Mystery of the Money Supply Definition":
Once an individual places his money in a bank's warehouse he is in fact engaging in a claim transaction. In depositing his money, he never relinquishes his ownership. No one else is expected to make use of it. When Joe stores his money with a bank, he continues to have an unlimited claim against it and is entitled to take charge of it at any time. Consequently, these deposits, labeled demand deposits, are part of money.…
This must be contrasted with a credit transaction, in which the lender of money relinquishes his claim over the money for the duration of the loan. Credit always involves a creditor's purchase of a future good in exchange for a present good. As a result, in a credit transaction, money is transferred from a lender to a borrower.
The distinction between a credit and a claim transaction serves as an important means of identifying the amount of money in an economy.
Here's Rothbard, with the application of this concept to time deposits:
a genuine time deposit — a bank deposit that would indeed only be redeemable at a certain point of time in the future, would merit very different treatment [from a demand deposit]. Such a time deposit, not being redeemable on demand, would instead be a credit instrument rather than a form of warehouse receipt. It would be the result of a credit transaction rather than a warehouse claim on cash; it would therefore not function in the market as a surrogate for cash.
You say, "Wait a minute. Isn't it true that banks stand ready to redeem these small-denomination time deposit CDs at any time prior to their maturity? In that case, couldn't one make the case that these CDs, at least on paper, are not credit transactions but instead money substitutes?"
In theory, yes, at current redemption value. But, given the fact that banks typically charge depositors heavy redemption penalties in addition to forfeiture of accrued interest in the event of early withdrawal, depositors typically treat these CDs as true credit transactions. And because CDs are insured by the government and therefore backed by the Federal Reserve's printing press, the likelihood of early withdrawal owing to depositor concerns about bank solvency is practically nonexistent. In fact, during the depths of the 2008–09 financial crisis, small-denomination CDs actually attracted depositor money, likely because of this insurance.
In summary, and this is a position universally shared in the Austrian camp, the weight of the argument suggests that small-denomination time deposits should be excluded from any measure of the money supply.
Retail Money Funds
Because of their check-writing privileges, money-market mutual-fund share accounts (MMMF) look like demand and other checkable deposit accounts to the naked eye and therefore appear to be money substitutes. But because they are neither immediately convertible, par-value claims to standard money, nor a final means of payment, MMMFs fail our money test and as such should not be included in any money-supply measure. Salerno lays out the case:
Each MMMF share represents a claim to a pro rata share of a managed investment portfolio containing short-term financial assets, such as high-grade commercial paper, certificates of deposit, and U.S. Treasury notes. Although the value of a share is nominally fixed, usually at one dollar, the total number of shares owned by an investor (abstracting from reinvested dividends) fluctuates according to market conditions affecting the overall value of the fund's portfolio. Under extreme circumstances, such as a stratospheric rise in short-term interest rates or the bankruptcy of a corporation whose paper the fund has heavily invested in, the fund's investors may well suffer a capital loss in the form of an actual reduction of the number of fixed-value shares they own. Unlike a check drawn on a demand deposit or MMDA, therefore, an MMMF draft does not simply represent a direct transfer of current claims to currency, but a dual order to the fund's manager to sell a specified portion of the shareowner's asset holdings and then to transfer the monetary proceeds to a third party named on the check. Note that the payment process is not finally completed until the payee receives money, typically in the form of a credit to his demand deposit.
Savings Deposits at Banks, including Money-Market Deposit Accounts (MMDAs)
This is the tough one, a debate even among the Austrians. Are savings accounts (and their cousins MMDAs) at commercial banks and thrifts money substitutes, like demand deposits, or are they credit instruments, like time deposits? Let's have a look at both sides of this debate, as represented by their most distinguished proponents, and see if we can come to a conclusion — in or out.
According to both Rothbard and Salerno, savings accounts are money substitutes, economically indistinguishable from demand deposits, and should therefore be included in the money supply. To quote Salerno,
Both demand and savings deposits are federally insured under the same conditions and, consequently, both represent instantly cashable, par value claims to the general medium of exchange. The objection that claims on dollars held in savings deposits typically do not circulate in exchange…while not unimportant for some purposes of analysis, is here beside the point. The essential, economic point is that some or all of the dollars accumulated in, e.g., passbook savings accounts are effectively withdrawable on demand by depositors in the form of spendable cash. In addition, savings deposits are at all times transferable, dollar for dollar, into "transactions" accounts such as demand deposits or NOW accounts.
Salerno penned these thoughts in 1987. In 2010, the transferability he speaks to is near instantaneous, nothing more than a few taps on your BlackBerry or iPod keypad.
Salerno goes on to support his case for savings accounts with this quote by German banker and economist Melchior Palyi, a quote that speaks to the importance of individual subjective valuations as cited by Rothbard:
In their own minds, money is what people consider as purchasing power available at once or shortly. People's "Liquidity" status and financial disposition are not affected by juristic subtleties and technicalities. One kind of deposit is as good as another, provided it is promptly redeemable into legal tender at virtual face value and is accepted in settling debts. The volume of total demand for goods and services is not affected by the distribution of purchasing power among the diverse reservoirs into which that purchasing power is placed. As long as free transferability obtains from one reservoir to the other, the deposits cannot differ in function or value.
Now, moving to the other side of the debate, according to Shostak, savings accounts fail the money test and should be excluded from the money supply. In the final analysis, Shostak rests his case solely on the premise that when one deposits his or her money in a savings account he or she relinquishes "ownership" over that money. Shostak writes,
The crux in identifying what must be included in the money supply definition is to adhere to the distinction between a claim transaction and a credit transaction. Following this principle, it is questionable whether savings deposits should be part of the money supply. According to popular thinking, the inclusion of savings deposits into the money supply definition is justified on the grounds that money deposited in saving accounts can always be withdrawn on demand. But the same logic should also be applied to money placed with an MMMF. The nub, however, is that savings deposits do not confer an unlimited claim. The bank could always insist on a waiting period of thirty days during which the deposited money could not be withdrawn. Savings deposits should therefore be considered credit transactions with depositors relinquishing ownership for at least thirty days. This fact is not altered just because the depositor could withdraw his money on demand. When the bank accommodates this demand, it sells other assets for cash. Buyers of assets part with their cash, which in turn is transferred to the holder of the savings deposit. The same logic is applicable to fixed-term deposits like CDs, which are credit transactions.
Shostak's points are well taken, but in this author's opinion not enough to warrant the exclusion of savings accounts from the money supply.
To see why, let's examine each of Shostak's points.
His first point — that savings accounts are not legally redeemable on demand, the bank being permitted by law to force the depositor to wait up to 30 days for his or her money — is certainly true. If enforced, it would indeed make such deposits more like credit transactions and not money substitutes; in other words, it would mean the depositor had relinquished ownership over his money. The argument though is tenuous at best. As Rothbard asserts, it focuses on legalities rather than economic realities:
The objection fails to focus on the subjective estimates of the situation on the part of the depositors. In reality, the power to enforce a thirty-day notice on savings depositors is never enforced; hence, the depositor invariably thinks of his savings account as redeemable in cash on demand. Indeed, when, in the 1929 depression, banks tried to enforce this forgotten provision in their savings deposits, bank runs promptly ensued.
Never, of course, is a strong word. Having said that, one could easily argue that because savings accounts are insured by the government and therefore backed by the Federal Reserve's ability to print at will, clearly not the situation in 1929, the reason for a bank ever having to enforce its notice period is, for all intense and purposes, nonexistent.
In fact, in this author's opinion, the potential for such an invocation would likely arise only in the event of a system-wide bank run, in which case the government would almost assuredly take control over the entire banking system and ration the withdrawal of depositor money across all deposit classes, making savings deposits no different than demand deposits.
Shostak's second point — that even if no notice period existed, savings accounts are still credit transactions because the bank can accommodate a depositor redemption by selling other assets for cash, at which time buyers of assets part with their cash, which in turn is transferred to the holder of the savings deposit — is a huge leap. Agreed, once the bank loans money entrusted to it by a depositor, it is no longer in the bank's coffers but instead in the hands of the borrowers and/or the borrowers' vendors. But unless the notice period is enforced, contrary to Shostak's assertion, no ownership of money has passed from the depositor to the borrower in this exchange. In the eyes of the depositor, that money is still part of his or her cash balance, immediately convertible at par to standard money whenever he or she so desires.
In point of fact, no money was ever transferred from the hands of the depositor to the hands of the borrower in the first instance, so no money needs to be transferred back in the second instance. The result of this entire transaction is this: if our depositor entrusted $10,000 to the bank, and the bank loaned out the full amount, we have increased the aggregate amount of money in individual's cash balances — namely, the money supply, by $10,000.
It is certainly true that, in our fractional-reserve banking system, banks can and do make loans by creating demand deposits out of thin air at a multiple of their cash reserves, but they can only loan out the money deposited in savings accounts on a one-to-one basis. This does not mean, as many in the Shostak camp seem to argue, that money deposited in a savings account and then loaned out by a bank is any less of a money substitute in individuals' cash balances than if that money had been deposited in a demand deposit or other checking account. As Rothbard explains,
This distinguishes the sources or volatility of different forms of money, but should not exclude savings deposits from the supply of money … while each of these forms of money is generated quite differently, so long as they exist each forms part of the total supply of money.
Palyi, as Salerno suggests, does an admirable job of explaining these issues in commonsense terms when he writes,
A source of confusion is the identification of savings deposits with savings. The former are no more and no less "saved" than are the funds put on a checking account or the currency held in stockings. In all three cases, someone is refraining from consumption (for the time being); in all three, the funds constitute actual purchasing power. And it makes no difference in this context how the purchasing power is generated originally: dug out of a gold mine, "printed" by a government agency, or "created" by a bank loan. As a matter of fact, savings banks and associations do exactly what commercial banks do: they build a credit structure on fractional reserves.
In the opinion of this author, once it is agreed that savings deposits are immediately convertible claims, at par to standard money, they are by definition money substitutes and should be included in the money supply.
Non-M2 M3 Components
In February 2006, much to the horror of many Fed watchers, the Federal Reserve Board discontinued publishing M3, claiming that the costs of collecting the underlying components and publishing the series outweighed the benefits. Well, if the purpose of M3 in the eyes of these Fed watchers was to track the ebb and flow of the money supply, then this is one time this author must agree with the logic of the Federal Reserve. M3 is dominated by accounts that fall under the category of credit transactions and as such should not be included in the money supply.
The Federal Reserve's Other Memorandum Items
The Federal Reserve publishes several data series under what it calls "Other Memorandum Items," none of which it feels are worthy of the status of money. Oddly enough, several of these items are in fact money substitutes and should be included in the money supply. These are demand deposits at banks due foreign commercial banks and official institutions, and US government demand deposits and note balances held at commercial banks and at the Federal Reserve. As Salerno writes,
The somewhat mysterious exclusion of these items from money supply measures is typically justified by one recent writer who claims that the deposits of these institutions "…serve an entirely different purpose than the holdings of the general public" or are "…viewed as being held for 'peculiar' reason." This overemphasis on the particular "motives" for holding money, as opposed to the importance of the quantity of money itself, is one of the modern legacies of the Keynesian revolution.
The case for inclusion of US government demand and note balances is of particular import today because of the growing size and volatility of these accounts. As such, it's worthy of some discussion.
Let's start with the theoretical case for the inclusion of US government deposits in the money supply. Here's Salerno, quoting economist Harold Barger:
The Treasury's deposits are not part of its reserve against money that it has issued, but are rather part of the general fund of the Treasury available for meeting general expenditures. Output is purchased and taxes are collected with the help of these deposits, and they would seem to be as much a part of the money stock with which the economy operates as are the deposits of state and local governments, which are included in adjusted demand deposits. Much the same may be said of Treasury deposits at Federal Reserve Banks.
Treasury deposits, whether held at commercial banks or at the Federal Reserve (the latter known as the "General Account"), are simply demand deposits owned by the US government. They are clearly money substitutes and should therefore be included in the money supply.
In September of 2008, well after Barger and Salerno penned these thoughts, the Treasury, at the request of the Federal Reserve, established a new account at the Federal Reserve — the Treasury's Supplementary Financing Account (SFP).
In contrast to traditional, government-controlled Treasury deposit accounts, which were created for the purpose of collecting the government's taxes and paying the government's bills, the SFP was created as a special-case, "temporary" account under the control of the Federal Reserve for the purpose of managing down the explosion in excess reserves owing to the Federal Reserve's en masse purchase of toxic securities and its special loan programs. The Federal Reserve Board describes the SFP and the reasons for its creation as follows:
With the dramatic expansion of the Federal Reserve's liquidity facilities, the Treasury agreed to establish the Supplementary Financing Program (SFP) in order to assist the Federal Reserve in its implementation of monetary policy. Under the SFP, the Treasury issues short-term debt and places the proceeds in the Supplementary Financing Account at the Federal Reserve. When the Treasury increases the balance it holds in this account, the effect is to drain deposits from accounts of depository institutions at the Federal Reserve. In the event, the implementation of the SFP thus helped offset, somewhat, the rapid rise in balances that resulted from the creation and expansion of Federal Reserve liquidity facilities.
The SFP, then, is really a reserve-management tool. In fact, it is accounted for as such on the books of the Federal Reserve, namely, as reduction in depositories' "Reserves Balances at Federal Reserve Banks." Consequently, the SFP is nothing like traditional Treasury deposits and in this context should not be included in the money supply.
It should be noted that the author is aware of differing opinions among practicing Austrians with regard to the "moneyness" of the SFP. For example, to the author's best knowledge, Shostak includes the SFP account in his measure of the money supply, while Sean Corrigan over at Diapason Commodities does not. Indeed, as Salerno suggests, the emphasis by this author on the particular motives of the Treasury and the Federal Reserve as justification for the exclusion of the SFP from the money supply is a slippery slope.
Who's to say that the SFP will be temporary or will be used only by the Federal Reserve to manage down the excess reserves amassed as a result of the financial crisis? The answer is that no one knows. But as long as the SFP remains under the direct control of the Federal Reserve for the specific purpose of managing reserves, the author is inclined to believe that the SFP is not a thing that all other goods and services are traded for, the final payment for such goods and services on the market, and therefore should not be included in any money-supply measure.
Austrian Money Supply Metrics for the Economist and Investor
I happen to believe that Austrian economics, properly applied, can give any economist, financial forecaster, or investor a competitive edge in his or her deliberations. And if Austrian economics has taught me anything, it's the importance of the money supply's ebb and flow in the economy and financial markets. That's why the correct measurement of the money supply is so vital, for using a flawed money-supply measure is an accident waiting to happen.
So then, to repeat my opening salvo, are you using the wrong money-supply metrics as inputs into your economic and financial forecasts, or worse, your investment decisions? If so, I'm here to help.
A narrow definition of the money supply, based largely on Shostak's AMS formulation of money — excluding savings deposits but adding back bank deposit sweep programs (those monies banks "sweep" out of demand deposit accounts and into savings and MMDAs to lower effective reserve requirements).12
A broad definition of the money supply based on Rothbard and Salerno's TMS formulation of money, brought current in accordance with the conclusions presented in this essay; it is the most complete and most correct measure of the money supply.
The Federal Reserve Board's broad money-supply measure.
Given the conclusions presented in this essay — that TMS2 is the most complete and most correct measure of the money supply — you might ask, Why track TMS1? Two reasons:
in recognition of the fact that there exists a tenuous, legal right of a bank to deny immediate convertibility for money deposited in a savings account for up to 30 days, and
as Salerno wrote, and to me this is the more important reason, claims on dollars held in savings deposits typically do not "circulate" in exchange, making a TMS1 measure important for certain analysis.
Similarly, why track M2? That's easier to answer: as a means to track the reality that is TMS against the perception of reality that is M2. As Kevin Duffy, a comanager of Bearing Asset Management once said,
Investment management is simply capturing the arbitrage available between perception and reality. It is paramount to know both.
Rothbard, Murray, 1978. "Austrian Definitions of the Supply of Money," in New Directions in Austrian Economics. Louis M. Spadaro, ed. Kansas City: Sheed Andrews and McMeel, Inc.
Salerno, Joseph, 1987. "The True Money Supply: A Measure of the Supply of the Medium of Exchange in the US Economy." Austrian Economics Newsletter, Spring.
Salerno, 1994. "Ludwig von Mises Monetary Theory in Light of Modern Monetary Thought." The Review of Austrian Economics, March.
Shostak, Frank, 2000. "The Mystery of the Money Supply Definition." Quarterly Journal of Economics, Winter.
- 1. To quote Shostak, "Since January 1994, banks and other depository financial institutions have initiated sweep programs to lower statutory reserve requirements on demand deposits. In a sweep program, banks 'sweep' funds from demand deposits into money market deposit accounts (MMDA), personal savings deposits under the Federal Reserve's Regulation D, that have a zero statutory reserve requirement ratio. By means of a sweep, banks reduce the required reserves they hold against demand deposits. As a result of the sweep program one could argue that the money definition outlined above will not cover the total money supply. This criticism, however, is misplaced, for it has nothing to do with the definition as such, but with the difficulties of measuring money, which was transferred out of demand deposits by banks without the depositors' consent."
- 2. To clarify any confusion for those readers familiar with Frank Shostak's AMS metric, note that, (a) as is the case with AMS, TMS1 excludes savings deposits but adds back bank deposit sweep programs, and, (b) in contrast to AMS, TMS1 does not include the SFP account.