Galtland Index

The 'True' Money Supply

4 min read

The ‘True’ Money Supply

The ‘True’ Money Supply is Joseph T. Salerno’s 1987 paper “The ‘True’ Money Supply: A Measure of the Supply of the Medium of Exchange in the U.S. Economy.” It turns Rothbard’s broad money-supply criterion into a concrete monetary aggregate for Austrian analysis.

Purpose

Salerno’s paper answers a measurement problem in Austrian Business Cycle Theory. If the cycle mechanism is driven by money and money-substitute expansion, then an Austrian diagnosis needs an aggregate that tracks the medium of exchange rather than a conventionally reported statistical basket.

The immediate source is Rothbard’s broad money-supply criterion in America’s Great Depression Ch. 4 and The Mystery of Banking: claims genuinely redeemable on demand at par in cash belong in the money supply. Salerno’s contribution is to operationalize that criterion against the Federal Reserve’s M1, M2, M3, L, and memorandum-item categories.

TMS Components

The True Money Supply includes currency in the hands of the nonbank public, excluding currency held by the Treasury, the Federal Reserve, and commercial-bank vaults. It includes demand deposits and other checkable deposits, including NOW accounts, because they are par-value claims to standard money and function as immediately spendable money-substitutes.

Salerno also includes savings deposits at commercial banks and thrift institutions, money market deposit accounts, overnight repurchase agreements, overnight Eurodollars, and U.S. Savings Bonds at current redemption value. He treats several excluded official categories as memorandum items that should be counted for analytical purposes: U.S. government demand deposits at the Fed and commercial banks, foreign official demand deposits in the United States, and foreign commercial-bank demand deposits in the United States.

The common rule is not the legal label on the instrument. The rule is whether the claim is an immediately available, par-value claim to the general medium of exchange and whether the quantity can persist as money rather than disappearing when unwanted.

What It Excludes

Salerno excludes money market mutual funds. Even when MMMFs are checkable, he treats shares as equity claims on a portfolio of short-term assets, not as money proper or par-value claims to money. An unwanted MMMF share can be redeemed out of existence; unwanted fiat money is spent onward until prices and cash-balance demands adjust.

He excludes term repurchase agreements, term Eurodollars, large CDs, short-term Treasury securities, small-denomination time deposits or CDs, and travelers’ checks issued by nonbank financial institutions. The theoretical issue is maturity and loan character. Term instruments are loans to banks or other issuers, not immediately spendable final media of exchange. That makes them different from overnight instruments and insured demand-like balances.

M1, M2, and Cycle Diagnosis

The paper’s practical target is the use of M1, M2, or M3 as if they were neutral empirical measures of the Austrian money stock. M1 is too narrow for Salerno because it misses demand-like savings and overnight instruments. M2 is too broad because it includes time-deposit and money-fund components that are closer to commodity-credit or investment claims than to money.

This is why Monetary Aggregates and Credit Expansion treats TMS as the cleaner Austrian aggregate. It is not a perfect measure of fiduciary media alone, but it is a better stock proxy for the broader medium of exchange than M2 when diagnosing credit expansion.

See Also

Sources

Graph View

Backlinks