AMBSL

Graph #1 shows the history of the quantity of money, assuming "money" is the money that is controlled and issued by the Federal Reserve:

Graph #1: The Monetary Base

Basically horizontal for a long time, with maybe a one-pixel increase during World War II. Then a noticeable increase beginning in the 1960s and continuing essentially without letup until late in the 2000-2010 decade. Then the Bernanke spike that had so many people so terribly concerned about the sanity of U.S. economic policy.


Graph #2 puts that history of money in context. It shows the quantity of money relative to the size of our economy:

Graph #2: The Monetary Base relative to "Real" Output

Here "money" = the monetary base (as in the first graph), and "the size of our economy" = GDP with inflation stripped away = "Real output". This graph looks very much like the first one. Yeah it starts three decades later and it starts with a slight downtrend. But then we have that uptrend beginning in the 1960s and lasting again into the 2000s. And we have that infamous Bernanke spike, just as before.

The "context" for this graph comes from Milton Friedman, from Money Mischief. For the denominator of his ratio he used National Income, not GDP, but that difference is minor. What's not minor is that he used Real National Income. He factored inflation out of the denominator, and thereby into his results.

Graph #2 uses "Real" GDP for the denominator.


Graph #3 puts the history of money in a more realistic context. It shows the quantity of money relative to the size of our economy, with output measured at the prices we paid to purchase that output. Actual prices. This time, the graph looks different:

Graph #3: The Monetary Base relative to Actual-Price Output

Graph #3 shows a remarkable decline in the quantity of money from the end of World War II until about 1981. Then a persistent, gradual increase lasting until just after the year 2000. Then a brief decline, followed by the Bernanke spike. That spike, however, does not this time appear to increase the quantity of money to a dangerous and unprecedented level. It only restores the quantity of money to the level it was starting from, at the end of World War II.

Between 1947 and 1980 the quantity of money fell by two thirds, compared with the nation's output valued at actual prices. It fell from 14 cents (per dollar of output) to less than 5 cents. Then it rose, by 2003 reaching a peak of between 6 and 7 cents. Then by 2008 it fell to just below 6 cents. Then the Bernanke spike drove the quantity of base money up by 2010 to where it had been in 1947.


It is useful to compare the quantity of money to actual-price output, not "real" output, because when we use money to buy output, we pay actual prices. If we could buy the stuff at "real output" prices -- at 1967 prices, say -- none of this would matter. But of course we cannot buy stuff at those prices.

As long as we are paying actual prices for things, it is best to compare the quantity of money to actual-price output.