Definitions

As referenced in the Money matrix table, some sovereigns have different definitions for the same money supply. The following descriptions are meant to aid the reader in understanding these idiosyncrasies in monetary economics across the world. In some cases, we need to make adjustments for consistent analysis.

Monetary base. Two things to note about the Monetary base. Firstly, many nations don’t actually define the physical currency issued plus commercial bank reserves liabilities as the ‘Monetary base.’ In Asia, a typical term used is ‘Reserve money.’ Other terms seen are ‘Central bank money’ or ‘High-powered money.’ In the United Kingdom and South Africa, among other places, they actually refer to the ‘Monetary base’ as M0. This can be confusing, as most nations don’t define M0 in this way. As is seen in the Money matrix table, M0 typically means any physical currency (basic money) that is outside bank vaults and the central bank (in other words, generally held in circulation). So no matter what the term used for ‘physical currency issued’ plus ‘commercial bank reserves’ may be, this research defines it as the ‘Monetary base.’

The second thing of importance is the coin supply. Some central banks do not include the issue of coins on their balance sheet. The United States Federal Reserve is one such case. This is due to historical reasons, where the coinage was originally (and still is) minted by the Treasury; whereas the central bank came later and monopolized the issue of notes. However, the United States would still define the ‘Monetary base’ as including both notes and coins, and they do a separate compilation of such. Most central banks, however, do include both notes and coins on their balance sheet in the Monetary base calculation. In any event, to the extent that this is not consistent and the data is available, this research will always include both notes and coins in the ‘Physical currency’ component of the Monetary base. If and when it emerges, central bank digital currencies (CBDCs) will be consistently added to the money supply as well.

Monetary base: United Kingdom. Again, note that the Bank of England’s reported M0 is in fact the Monetary base (see above). As well, the Bank of England only begins reporting the commercial bank reserve component of the Monetary base in May 2006 (despite providing physical currency data from January 1870). Therefore, any growth rate data for the Monetary base and M0 prior to May 2006 is effectively the same, and May 2006 is a break month, as far as the Monetary base is concerned.

Monetary base: Vietnam. The State Bank of Vietnam issues the Vietnamese đồng. This is comparatively not a small currency; however, the communist bank is not very transparent. They do publish a figure which is analogous to M0, but nothing regarding bank reserves nor the full amount of physical currency issued by the central bank. Therefore, Monetary base, Physical currency issued, and M0 are all effectively the same.

M1: United States. Though stewarding the most globally reserved currency of the 20th century, the United States Federal Reserve works hard to make lookback historical data very inconsistent for researchers. So is the case with M1, particularly after the global pandemic. M1 has effectively always and everywhere been equal to ‘M0’ plus ‘Demand deposits.’ However, according to the Federal Reserve, after April 2020, it will:

…recognize savings deposits as a type of transaction account[.]… This recognition reflects the Board’s action on April 24, 2020, to remove the regulatory distinction between transaction accounts and savings deposits by deleting the six-per-month transfer limit on savings deposits in Regulation D. This change means that savings deposits have had a similar regulatory definition and the same liquidity characteristics as the transaction accounts reported as “Other checkable deposits[.]”… Consequently… [the Board’s data now] combines release items “Savings deposits” and “Other checkable deposits” retroactively back to May 2020 and includes the resulting sum, reported as “Other liquid deposits,” in the M1 monetary aggregate. This action increases the M1 monetary aggregate significantly while leaving the M2 monetary aggregate unchanged.

In other words, the Federal Reserve’s M1 money aggregate makes no comparative sense before or after April 2020. One would think they would at least provide a lookback M1 aggregate that adds savings deposits for historical comparison, or at least keep compiling an alternate M1 supply without savings deposits into the future. Yet they have chosen to do neither. Since they have ceased publishing the series ‘Other checkable deposits,’ it is also impossible to independently keep publishing a lookback M1 supply comparable with the past. Note that ‘Other checkable deposits’ are primarily deposits at credit unions and thrifts (analogous to what the Fed calls ‘Demand deposits at commercial banks’—both of which were included in United States M1 before).

Therefore, the solution resolved in this research is to remove the series ‘Other checkable deposits’ entirely (as it’s discontinued), and only calculate ‘Demand deposits at commercial banks,’ plus M0. This effectively makes the M1 money supply pre-April 2020 approximately 20% smaller on average. However, it will continue on into the future in a comparable manner.

As to why we feel it’s unnecessary and irrelevant to analyze the Fed’s new M1 money aggregate—when adding in their new ‘Other liquid deposits’ stock to M1 (which again is primarily adding anew all ‘Savings deposits’)—the result is an M1 money stock which is nearly identical to M2. In which case one must ask… what is the benefit of this M1 idea over M2?

M3: United States. After February 2006, the Federal Reserve ceased publishing the M3 money supply. The Federal Reserve has never given a ‘non-PC’ explanation as to why it unfortunately stopped publishing this important, broader money supply. Remember, M3 is simply defined as M2 plus ‘Less liquid institutional deposits.’ It absolutely is relevant.

Their politically correct explanation was as follows:

M3 does not appear to convey any additional information about economic activity that is not already embodied in M2 and has not played a role in the monetary policy process for many years. Consequently, the Board judged that the costs of collecting the underlying data and publishing M3 outweigh the benefits.

For an institution in charge of stewarding the most globally reserved currency of the 20th century, this explanation is extremely weak. In fact, no other central bank in the world has followed in the Fed’s footsteps and ceased calculating their own, respective M3 money stock (some central banks calculate even broader monetary aggregates, such as M4 or L). So why did the Fed? The answer lies in the components of the aggregate. Two components not compiled anymore are ‘Repurchase agreements’ and ‘Eurodollars’ (see the Money Matrix for further explanation).

When it comes to eurodollars in particular, they cause complications for the Fed. Eurodollars are worldwide, dollar-denominated claims in banks outside the United States (not just in Europe, and this has nothing to do with ‘euros’) and outside the jurisdiction of the Federal Reserve. Eurodollars are thus very much outside of the Fed’s ‘control.’ The more dollar-denominated assets abroad, the potentially greater risk and confusion to the Federal Reserve system at home. This risk can come in the form of distorted monetary and price inflation (beyond what the Fed causes on its own, of course, which this research hastens to stress is far more risky).

The last-published stock of eurodollars the Fed produced in February 2006 was $430 billion. In 2012, it was estimated that in tax havens alone (think Panama or Paradise Papers) there was at least $21 trillion in wealth. This was in… 2012. To be sure, this tax haven money is certainly not all in the form of a ‘US dollar-denominated deposit.’ Yet it is certainly well greater than zero. What percentage of it is? What about all the banks and deposit institutions outside the United States which trade in dollars? The fact that the Federal Reserve won’t (publicly) estimate the size of this crucial market tells us not that they think it’s economically irrelevant; rather, they have no idea how large it really is.

Having said this, the Fed still does publish balances of most of the monetary data that once resided in the M3 money supply, some on a quarterly basis. They are:

M2 money supply;
Institutional (large-denomination) time deposits;
Institutional money market funds (Total minus retail);
Repurchase agreements (Ex-Federal funds, max of Repurchase agreements (cash-like / liabilities) vs. Reverse repurchase agreements (security-like / assets).

As well, the Fed does compile balance sheet data, across a variety of macro sectors, in the Financial Accounts of the United States (Z.1). Compiling the ‘All sectors: Total currency and deposits’ categories for all sectors in the Z.1 exhibit—and then adding in Money market funds and Repurchase agreements—is an alternate way of calculating M3. Note that this method is generally larger than simply the sum of the four time series listed above. In some sense, the difference between these two methodologies could be attributed to eurodollars, as these Z.1 accounts do include USD deposits held by foreign banks / depositors in the US (already included in the four time series above), yet also include USD deposits held by US banks / depositors abroad (not included in the four time series above).

However, these accounts certainly do not include USD deposits held by foreign banks / depositors, abroad.

Thus, we can conclude that the true amount of ‘eurodollars’ in the world is indeed unknown, and this derived M3 money stock in this research is understated.

It is quite helpful to understand and (at least make an effort!) to compare this broader USD money supply with other fiat currencies’ broader money stocks, but it is understated nonetheless.