Austrian Measures of the Money Supply

The Austrians have 3 measures of the money supply, as follows:

(1) TMS 1 = the True Money Supply (TMS), Austrian Money Supply, or the Rothbard Money Supply, which can be found on Mises.org.

(2) Shostak’s Austrian Money Supply (AMS = TMS 2), and

(3) Mike Shedlock’s M Prime (M'), which is an alternative measure of (2).

The most recent estimates of these measures can be found here:

Michael Pollaro, “True “Austrian” Money Supply, An Update,” The Contrarian Take, March 4, 2011.

True Money Supply (TMS 1) is made up of the following:

the currency component of M1 + total checkable deposits + savings deposits + US government demand deposits and note balances + demand deposits due to foreign commercial banks + demand deposits due to foreign official institutions.

More analysis of how this measure is calculated can be found here:

Salerno, J. T. 1987. “The ‘True’ Money Supply: A Measure of the Supply of the Medium of Exchange in the U.S. Economy,” Austrian Economics Newsletter (Spring): 1–6.

Shostak, F. 2000. “The Mystery of the Money Supply Definition,” Quarterly Journal of Austrian Economics 3.4 (Winter): 69–76.

Robert P. Murphy, “Lost in a Maze of Money Aggregates?” Mises Daily, February 14, 2011.

Mike Shedlock provides his own comments on this and an alternative measure that he calls M Prime (or M'):

Mike Shedlock, “Money Supply and Recessions,” January 9, 2007.

Mike Shedlock, “TMS: A Truer Money Supply?” July 14, 2008.

Mike Shedlock, “What is Money and How Does One Measure It?” November 3, 2009.

Mike Shedlock, “Money Supply Divergence - TMS1 vs. TMS2 vs. M2 - What does it Mean?” Monday, July 26, 2010.

Mike Shedlock, “True Money Supply (TMS) vs. Austrian Money Supply (AMS or M Prime) Update,” March 19, 2010.

Shedlock’s M Prime measure consists of:

cash + demand deposits with commercial banks and thrift institutions + government deposits with banks and the central bank + sweeps + other checkable deposits.

We can compare the various components of these measures of the money supply, with M0, M1, M2, M3, and MZM, in the following table.

Table Notes
1. MZM = money with zero maturity.
2. TMS = True Money Supply, Austrian Money Supply.
3. Reserves include required and excess, held either as vault cash or at the central bank.
4. This includes time deposits less than $100,000.
5. This includes time deposits of $100,000 and over.

For all of the Austrian rhetoric about how their measure is more accurate, it can be readily seen that there is not that much difference between M1 and the so-called True Money Supply (TMS). It is true that it removes svaings, but the removal of travellers check is an insignificant element. The only real difference in TMS is in the inclusion of US government demand deposits, and demand deposits of foreign official institutions and foreign commercial banks. But the simple fact is that the total amount of US government demand deposits, and demand deposits of foreign official institutions and foreign commercial banks is also an insignificant part of any of these measures of broad money.

And Mike Shedlock makes an interesting admission in relation to these Austrian measures:

“Note that M Prime closely tracks M1 while TMS closely tracks M2. In fact, M Prime = M1 + Sweeps for all practical purposes” (Mike Shedlock, “True Money Supply (TMS) vs. Austrian Money Supply (AMS or M Prime) Update,” March 19, 2010).

A number of other criticisms can be made of the Austrian concept of the True Money Supply (TMS). First, there is the doubtful inclusion of government deposits:

Mainstream thinking currently excludes from the money supply government deposits held in banks and the central bank. Consequently, if the government taxes people by one billion dollars, money is transferred from their deposits to the government’s deposit. This is viewed just as if the money supply fell by one billion dollars. In reality, however, the money is now available for government expenditure, meaning that money held in government deposits should be part of the definition of money (Shostak 2000: 73–74).

The trouble with this argument is that the money held by the government will not necessarily be spent, and until it is spent its nature is very much like excess bank reserves held at the Fed, which the Austrians do in fact exclude from their True Money Supply measure. Excess reserves held at the Fed are available for new loans made by banks, yet until the actual loans are made the status of the reserves is quite different from money in the usual broad money supply measures. As neochartalism/Modern Monetary Theory maintains, money taxed by the government and not spent is essentially money withdrawn from the economy and destroyed.

I will also note here that Shedlock’s inclusion of sweeps in his M Prime is rejected by Shostak for the True Money Supply (TMS) measure:

“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 (Shostak 2007: 76).”

NOTE: This is a work is progress, as there is much to be said.

BIBLIOGRAPHY

Murphy, R. P. 2011. “Lost in a Maze of Money Aggregates?” Mises Daily, February 14, http://mises.org/daily/5028

Pollaro, M. 2011. “True “Austrian” Money Supply, An Update,” The Contrarian Take, March 4, http://blogs.forbes.com/michaelpollaro/2011/03/04/true-austrian-money-supply-an-update/

Salerno, J. T. 1987. “The ‘True’ Money Supply: A Measure of the Supply of the Medium of Exchange in the U.S. Economy,” Austrian Economics Newsletter (Spring): 1–6.

Shedlock, M. 2007. “Money Supply and Recessions,” January 9
http://globaleconomicanalysis.blogspot.com/2007/01/money-supply-and-recessions.html

Shedlock, M. 2009. “What is Money and How Does One Measure It?” November 3
http://globaleconomicanalysis.blogspot.com/2009/11/what-is-money-and-how-does-one-measure.html

Shedlock, M. 2010. “Money Supply Divergence - TMS1 vs. TMS2 vs. M2 - What does it Mean?” Monday, July 26.

Shostak, F. 2000. “The Mystery of the Money Supply Definition,” Quarterly Journal of Austrian Economics 3.4 (Winter): 69–76.