August 4, 2008
How Big is the Money Supply?
By Perry Willis
Quote of the Day:

"We make money the old fashioned way. We print it."
-- Art Rolnick, former Chief Economist, Minneapolis Federal Reserve Bank

Subject: How big is the money supply?

The value of your money depends on the amount of money in circulation. Is it possible for you, as a layman, to learn and understand how large the money supply is, and whether it's growing or shrinking?

Probably not. There are many measurements of the money supply, and there seems to be no consensus about which measurements are best. These measurements go by the names M-zero, M1, M2, M3, and MZM. There's even something called the "True Money Supply," devised by Murray Rothbard, and reported at the website of the Ludwig von Mises Institute.

The "True Money Supply" page will also give you numbers for M1, M2, M3, and MZM, but the numbers are only updated through April, and the M1 measurement, for some reason, is only current through February of 2006.

Well, you could try the Federal Reserve instead. They ought to know, right? Well, there are problems there too. The Fed doesn't report M3 anymore, which some people think is the best measurement. The Fed also provides two different numbers for M1 and M2, one seasonally adjusted, and one not, without explaining what the seasonal adjustment entails. Worse still . . .

If you look for reports on M-zero (the narrowest definition of money), or MZM on the Fed site, you may have difficulty. I did. I couldn't find summary reports for these measurements, though presumably they could be constructed from the raw data that's available in various places on the Fed website.

You could try a site called, which aggregates all sorts of economic data, but if you compare the numbers you'll find there with the numbers the Fed reports for M1 and M2, they're different.

The numbers for M1 and M2 reported at the "True Money Supply" site are also different from both the Fed site and the EconoMagic site. And we would bet that if you paid the money to subscribe to the ShadowStatistics site you would find yet another set of totally different numbers.

Well, if you really wanted to understand what's going on, perhaps you could consult an expert. That seems reasonable until you stop to think about it. All of the money supply numbers found in various places are all concocted by experts, and they all disagree. Do you need another expert to tell you which experts are providing the best money supply measurements?

It gets worse.

As we understand it, most of the various money supply measurements are actually a mixture of two things: the number of monetary units (dollars), and the amount of credit available. Basic monetary expansion happens when new dollars are created by the Fed. Credit expansion happens when you deposit money in a bank. The bank lends some of this money to others, while keeping some as a reserve. This creates a default risk. If too many people try to withdraw their money at the same time, the bank won't be able to pay.

Essentially, banks create competing claims to money. You can withdraw money from your checking or savings account at any time, even though much of this money is being used by the people who borrowed it from the bank. If too many people try to withdraw too much money at the same time the Fed will have to ride to the rescue, perhaps by creating new money to keep the banks solvent.

What this means is that some parts of the various money supply numbers are actually measuring the size of competing claims to money. The way we understand it the basic money supply and the size of the competing claims to money (credit) both have an impact on prices, but not in the same way. Expanding the basic money supply can cause a general rise in prices, while expanding credit (creating competing claims to money) tends to bid up prices in certain economic sectors, such as manufacturing or housing. Credit expansion is especially dangerous in terms of causing booms and busts.

So where can you go to find distinct measurements of money and credit?

Well, Murray Rothbard was trying to address this question by creating the "True Money Supply." His approach, as we understand it, weeds out much of the credit aspects of the various measurements, but if you want to figure out what's going on with the credit situation you'll have to get out your calculator and dive into the raw data provided by the Fed. Good luck.

This whole subject is a complete mess. It's an indictment of both the government and the economics profession. It's also frustrating to us here at Downsize DC. We like to find ways to present you with clear and simple information, eliminating jargon and confusing detail. But when it comes to the supply of money and credit, we just can't do that for you, yet.

So what do we do when we want you to communicate with Congress about the Federal Reserve's manipulations of money and credit? How do we define what those manipulations are, so that you can use the information in your messages to Congress? The best we can do is to use the Fed's own numbers, even though they conflate money and credit as if they were the same thing.

The Fed has just issued its report for June.

Here again, there is confusion. The seasonally adjusted numbers show an $18.5 billion increase in M1 in June, while there was a $1 billion decrease in M2. The non-adjusted numbers show an $11.7 billion increase in M1, and a $17.4 billion increase in M2.

What are we to make of this? The money supply and credit are probably both expanding. This means higher prices, devalued savings, and more risks of booms and busts and credit defaults.

What can be done about this? Congressman Ron Paul probably has the best answer. Removing the tangles between the Federal Reserve and the banking system would be very complex, but making Federal Reserve Notes (dollars) compete with free market forms of money, such as gold, would not be complex. Competition would serve to limit the Fed's power to manipulate the supply of money and credit.

Congressman Paul has two bills designed to make this happen: HR 2756, the "Honest Money Act," and HR 4683, the "Free Competition in Currency Act." Please ask your elected representatives to co-sponsor both of these bills. You could mention the M1 and M2 numbers provided above in your personal comments. You can send your message here.

Please also consider making a contribution to further our work. You can do so here.

Thank you for being a part of the growing Downsize DC army.

Perry Willis
Communications Director, Inc.
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