True Money Supply vs. Austrian Money Supply Update

by: Michael Shedlock

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:
Base Money Supply
M3 (discontinued in 2006)

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 Money AMS.

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:

click on all charts for sharper image

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, U.S. 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 does not agree with the definition. See Mystery of the Money Supply Definition in a Mises journal.

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 theoretically 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”.

Money AMS

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

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 specs.
Thanks "TC".

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.

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 formulation

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 charts.

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.