The “True Money Supply” Metric: Recent Trends by Ryan McMaken

Those who are familiar with money supply stats know that M2 is the usual go-to money supply metric for observers of the money supply and its growth. Investopedia has an explanatory video of M2 here. Basically, M2 is this:

A measure of money supply that includes cash and checking deposits (M1) as well as near money. “Near money” in M2 includes savings deposits, money market mutual funds and other time deposits, which are less liquid and not as suitable as exchange mediums but can be quickly converted into cash or checking deposits.

At least as early as the late 1970s, though, Murray Rothbard concluded that M2 and other “official” measures of money did not accurately reflect the true supply of money. That is, money, as understood by Austrian economists was something other than the definitions used by the Federal Reserve and government officials.

Rothbard explained this in his essay Austrian Definition of the “Austrian Supply of Money” in the 1978 book New Directions in Austrian Economics, edited by Louis Spadaro. Joseph Salerno later expanded on this in 1987 with “The ‘True’ Money Supply: A Measure of the Supply of the Medium of Exchange in the U.S. Economy.”

More recently, Michael Pollaro has presented a summary of recent usage of the true money supply metric. Pollaro notes there is some debate among Austrians as to exactly what the metric should include. Frank Shotak uses a slightly different method than the older Rothbard-Salerno metric.

Pollaro himself was publishing recent updates using the true money supply, but he seems to have abandoned this in late 2014.

Without a source for regular updates, I have reproduced the metric as used by Pollaro for the Rothbard-Salerno metric, which he calls “TMS2” but which we’ll simply call “TMS” from now on. My version of it matched up with Pollaro’s metric for the Rothbard-Salerno version, which can be seen in a 2014 update here

Here’s his graph:

I reproduced this TMS measure using stats on M2, retail money funds, small time deposits, treasury and US government deposits at the fed, and travelers checks. I have not attempted to reinterpret the measure, but only to recreate it using Rotbard’s and Salerno’s commentary on the measure.

The rest of the article can be read here.

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