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This piece was authored by Taxpayers Union of Louisiana member Robert Gaffney. He can be reached at
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. Thanks to Robert for this excellent explanation of money and our current situation. People can often become confused about money supply and why there are so many different measurements (M1, M2, M3, MZM, TMS…). In short, people disagree about what constitutes money. Money, most simply, is a common medium of exchange. The market, left alone, will select a highly marketable commodity to serve as money. In most free economies throughout history, gold and silver (specie) have generally become money. Yet, credit to these commodities can also serve as money (called money substitutes), given the right conditions. The most common forms are bank notes and checking accounts. The key feature for a form of credit to become a money substitute was that it would have to be convertible into money at any time without a fee, by a trustworthy institution. Today, there are a wide range of money substitutes and cleverly-similar items, and the various definitions of money supply attempt to determine which sets of these should actually be considered part of the money supply. Money substitutes do not necessarily increase the money supply, if a money substitute’s circulation involves equal money being removed from circulation (such as being held in a bank vault). Yet, holding such reserves has been virtually abandoned by modern banking. Rather than simply warehousing commodity money, banks have traditionally leant some of it out, operating with reserves that can only cover a fraction of all liabilities. Many believe that if there were truly free banking that allowing fractional reserves would be neither problematic, nor inherently inflationary. Government intervention allows the unchecked, uniform expansion of money and credit, which it uses for its own benefit, despite the problems this poses upon the public. Today, because of central banking and irredeemable, easily-created fiat currency, banks keep virtually no reserves and the money supply haphazardly expands, both in cash and money substitutes. While bank notes and checking accounts are nearly universally considered money, the following credit claims or assets are debatable for inclusion in the money supply. Savings accounts, including money market deposit accounts, can often be redirected into a checking account or turned into cash on demand, representing instant and guaranteed nominal purchasing power to its holder. Some consider this economically no different from other money substitutes; however, dissenters argue that banks can optionally request 30 days before transfer, and that savings accounts are not commonly checked against (although they can be using certified or cashier’s checks). Time deposits are not always immediately redeemable for money or may involve a penalty to do so; however, small time deposits can often be redeemed on demand with negligible penalties, and are thus included in some money supply measurements. Money market mutual funds are accounts that one can sometimes write checks against and always redeem instantly for cash. They would appear to constitute money; however, they are simply claims to liquid investments brokered by an institution. When you make a deposit, your money is used to purchase investments and continues to circulate, and when you check against your account, investments are sold to raise the money necessary to cover the payment. These investments do not function as money, nor are they guaranteed to be more valuable than the original deposit (although in practice they nearly always are). CLICK BLUE LINE BELOW TO KEEP READING |
