Two Things

Thing One

The Wikipedia article "Money Supply" this morning contains this statement:

Since most modern economic systems are regulated by governments through monetary policy, the supply of money is broken down into types of money based on how much of an effect monetary policy can have on each. Narrow measures include those more directly affected by monetary policy, whereas broader measures are less closely related to monetary-policy actions.

I'd say that's an accurate statement. Maybe we could leave out the word since, because it implies causal relationships that complicate the simple facts. Leave out the word since, change the first comma to a period, and we're good.

The supply of money is broken down into types of money based on how much of an effect monetary policy can have on each. Narrow measures [are] more directly affected by monetary policy, whereas broader measures are less [responsive].

Thing Two

The same article contains this statement:

Some politicians have spoken out against the Federal Reserve's decision to cease publishing M3 statistics and have urged the U.S. Congress to take steps requiring the Federal Reserve to do so. Congressman Ron Paul claimed that "M3 is the best description of how quickly the Fed is creating new money and credit."

Ron Paul says M3 is the best indicator of how quickly the Fed is creating new money and credit. What is M3, anyway?

M3 is a bigger number than M1 or M2. But M2 already counts "money and 'close substitutes' for money," according to the Wik. So you know M3 counts more distant substitutes for money. M3 counts things as money which are less commonly thought of as money. Keynes pointed out that the distinction between money and debt can be set at any convenient point; M3 pushes that point farther toward debt than M2, that's all.

But my point is this: The Congressman says M3 is "the best description of how quickly the Fed is creating new money." But it isn't the Fed that's creating M3. And as the Wikipedia says, the "broader measures are less closely related to monetary-policy actions."

The Federal Reserve has control over the narrowest measure -- the lowest-number M, M0. As the M-numbers go up, the Fed's control diminishes. The Fed doesn't tell me I'm not allowed to borrow money. The Fed doesn't raise my interest rate. An intermediary -- the bank -- deals with the Fed. The financial intermediary sets my interest rate. The Fed has less control over me than it has over the bank. Me? I'm subject to the whims of private banks.

The Fed controls M0. Banks and their customers control the rest, subject to Fed guidance. But M2 is less subject to that guidance than M1, and M3 less subject than M2. As the numbers increase, money responds more to the guidance imposed by bank regulations and deregulations as established by Congress.

Congressman Paul points a finger at the Fed. But the money the Fed controls increased little (before the crisis). Meanwhile, M1 and M2 and M3 money increased at rates comparable to their number: M1 faster than M0, M2 faster than M1, M3 faster than M2.

The money controlled by the Fed increased little. The money subject to Congressional regulatory policy increased much. M3 has the highest M-number. It is the biggest money-measure. It is least responsive to the Federal Reserve, and most responsive to (de)regulation. If the Congressman is concerned about the growth of M3, he should be pointing his finger at himself and his fellows in Congress.