Why the Monetary Transparency Act must require the Federal Reserve to publish an overall money supply statistic

Wednesday, May 16, 2007

In response to criticisms of the Monetary Transparency Act by economists, we have been asked to give reasons why its important for the Federal Reserve to provide an estimate of the overall money supply. Yes we also found this rather incredible, but nevertheless provide the answers

The following statements indicate the importance of knowing what the money supply is doing.

From Robert Poteat, AMI Chapter leader for Portland, Seattle and Centralia, WA; and long term monetary researcher writes:

After decades, if not centuries, of using the money supply as a near definition of inflation mantra, not needing to know the amounts is not credible.  How are they measuring inflation?  I once saw a TV segment that showed people checking prices in stores for determining CPI.   Maybe they don’t need the M numbers for that purpose, but we need the information to establish transparency of monetary operations and credibility of the system.

Economists alleging that M3 is not needed for inflation calculations strains belief. Its strange that small time deposits are published in M2, but large time deposits are not needed in M3?  The M3 addition to M2 was/is roughly one third of the total monetary aggregates.  I suspect that no honest reason has been given for dropping publishing M3.  I don’t believe that they don’t keep track of it. The Fed and Census Bureau publish scads of statistical information that is not needed for inflation purposes; they have other useful purposes.

Dropping M3 may be only be the beginning to the eventual elimination of all the M statistics as part of a long time plan to completely obfuscate and privatize the money system.  Moving the reserve rates towards zero is part of the same plan.

Cheers, Bob

From Dick Distelhorst, AMI Chapter leader in Burlington, Iowa, and long term monetary researcher Writes:

The Federal Reserve needs to know and must report the Total Money Supply on a regular basis, as required by the Monetary Transparency Act. Section 2A of the Federal Reserve Act lists the defined goals of the Federal Reserve System: “to promote effectively the goals of maximum employment, stable prices and moderate long term interest rates.”

The Fed’s Open Market Committee usually meets eight times per year and decides whether to increase or reduce our total money supply. It also decides where to set interest rates, specifically the Fed Funds Rate. These decisions determine whether our Total Money Supply will increase, decrease or remain the same. To make these decisions the Fed must know what the Total Money Supply is in relation to the total supply of goods and services available. They should report this total to us in a transparent manner – as they have done since 1945 – but, in 1998 the Fed decided to stop reporting the Total Money Supply known as L, for Total Liquidity. Since then they have only reported part of the total, M1, M2 and M3. Then, in March of 2006, the Fed decided they would no longer report M3, only M1 and M2. This is unacceptable. The Total Money Supply report is critical and, in the name of transparency, must be re-instated. Quoting from the Chicago Federal Reserve’s booklet “Modern Money Mechanics” (issued in 1961: revised 1968; 1975; 1982; 1992; 1994):

“Control of the quantity of money is essential if its value is to be kept stable. Money’s real value can be measured only in terms of what it will buy. Therefore, its value varies inversely with the general level of prices. Assuming a constant rate of use, if the volume of money grows more rapidly than the rate at which the output of real goods and services increases, prices will rise. This will happen because there will be more money than there will be goods and services to spend it on at prevailing prices. But if, on the other hand, growth in the supply of money does not keep pace with the economy’s current production, then prices will fall, the nation’s labor force, factories, and other production facilities will not be fully employed, or both.”

Deciding what the Money Supply will be is as much a part of the public business as any other decision of government, and more critical than most decisions, but relatively few people even are aware that this decision is being made. That’s why we need transparency. The decisions the Fed makes on whether to increase or decrease our Money Supply, usually through Open Market Operations, is critical to our pocketbooks, our jobs, and our economic growth (or lack of same). In general: too large a Money Supply = inflation. Too small a Money Supply = deflation, which leads to recession or depression. To say that the Total Money Supply should not be publicly reported, as the Fed has now decided, is irresponsible. This critical report must be reinstated and properly reported.

The fact that the Fed has to know the Total Money Supply figure in order to make the Open Market Committee decisions, yet they now refuse to make this information available to the Congress and the public implies they have some reason to hide the Total Money Supply figures.

Steven Walsh, Educator and Chicago AMI Chapter Coordinator, tells us that:

Frederic Mishkin, recently New York Fed Vice President and Research Director, and Associate Economist on the Fed’s Open Market Committee wrote on the lack of a definition of money:

“Because we cannot be sure which of the monetary aggregates (M1, M2, M3) is the true measure of money, it is logical to wonder if their movements closely parallel one another.  If they do, then using one monetary aggregate to predict future economic performance and to conduct policy will be the same as using another, and it does not matter much that we are not sure of the appropriate definition of money for a given policy decision.  However, if the monetary aggregates do not move together…the conflicting stories might present a confusing picture that would make it hard for policymakers to decide on the right course of action”(p.53, Mishkin’s The Economics of Money, Banking, and Financial Markets, 7th Edition, 2002)

But when examining the growth rate of M1, M2, and M3 from 1960 to 2002 Mishkin admits the M’s don’t always move together:

“… while the growth rate of M1 actually increased from 1989 to 1992, the growth rates of M2 and M3 in this same period instead showed a downward trend.  Furthermore, from 1992 to 1998, the growth rate of M1 fell sharply while the growth rates of M2 and M3 rose substantially; from 1998 to 2002, M1 growth actually remained well below M2 and M3 growth.  Thus the different measures of money tell a very different story about the course of monetary policy in recent years…From the data in figure 1 (showing growth rate of M1, M2, and M3 from 1960 to 2002), you can see that obtaining a single precise, correct measure of money does seem to matter and that it does make a difference which monetary aggregate policymakers and economists choose as the true measure of money” (ibid, p.55, emphasis added).

Virginia Tech Economics Prof. Nic Tideman, formerly Senior Economist of the President’s Council of Economic Advisors, and Advisor to the American Monetary Institute, advises us:

My advice for your response would be to emphasize the idea (which you mention) that if the Fed is going to stop naming the things that are money, it is important to have a public dialogue about the thinking that leads to the conclusion that this is the right thing to do.

Stephen Zarlenga, Director of the American Monetary Institute and author of The Lost Science of Money, and A Refutation of Menger’s Theory of the Origin of Money comments:

When the AMI discusses the “money supply” we are including not only government created money – coinage and printed notes, but also the bank created credits which function as money in our system. Often referred to as “purchasing media,” they form most of the nation’s money supply.

For decades economists including such as Milton Friedman told us that the real government money was “high powered money” and the purchasing media credits loaned out at interest by banks were “lower powered money.” If the Fed or economists are now switching this concept and explanation of our money supply to no longer consider the bank credits as “money,” we deserve to have more public discussion of the logic of that switch. We know the Fed has had trouble with the concept of money from Greenspan’s testimony before Congress:

In the late 90’s Congressman Ron Paul asked him why the Money measure – M3 – has been
growing for the past several years. Why has the FED allowed M3 to grow unchecked since 1992?

Greenspan replied, (paraphrased comments, taken verbatim from newspaper reports)

We have a problem trying to define exactly what
money is…the current definition of money is not sufficient to give us a
good means for controlling the Money Supply…”

Congressman Paul asked “Well, if you can’t define Money, how can you
control the Monetary System?”

Greenspan replied “That’s the problem.”

Just how serious a problem this represents is underestimated. Ideologues like Greenspan fight their battles against inflation in the realm of their pre-conceived ideas. But even in that imaginary landscape they can’t formulate valid plans or economic concepts unless they first
have a valid concept of the nature of money.

Among other important things, requiring the Fed to publish the money supply figures will encourage (actually require) them to get to a reasonable definition or concept of money. Perhaps there is a tendency not to do this because it would highlight the importance of the banking system in the “money” creation process; and the power and privilege that represents would become more apparent. Perhaps that would demonstrate how this money creation privilege is a major factor concentrating the nation’s wealth to ridiculous, levels. Perhaps that would then give a strong indication of the need to remove these special monetary privileges from the banking and financial community.

Other factors can influence inflation besides monetary supply levels; for example the availability of goods and services. But these supplies themselves are strongly influenced by the type of activity that new money creation goes into. If those activities are creating values for living then inflation is kept down because those values are then available in the society. If it goes into non-creative real estate speculation or Wall Street games and mergers and acquisitions then it can cause real estate and stock market bubbles – a form of inflation in those sectors. If it goes into warfare, destroying values instead of creating them, then it can cause a general inflation – a part of our present situation.

That is also why it’s so critically important for transparency in this Act, to know where the newly created credit money is going. The overall money supply stat demonstrates whether the monetary authorities are generally leading the country into monetary expansion or contraction. Leading it into expansion is generally a pre-requisite for good economic opportunity and fairness in an expanding economy and population. Leading it into contraction will place more importance and power onto those who already have money, or the privilege to create it.

Finally, where is any economists’ potentially career ending written public statement that the overall “money supply” is not an important statistic? The Fed says the M3 is not really measuring the money supply appropriately? Then it’s their responsibility to devise a measurement that does the job! And it is long past time for the Congress to play a more active role in overseeing the Federal Reserve System. America’s skewed distribution of wealth situation is enough proof of that.


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