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M easuring M Money matters, as the saying goes, and a great deal thus depends on what we actually mean by “ mon ey/' There are conceptual and measurement problems galore— and frequently the quantities meas ured don't fit in with the concepts—so that the Federal Re serve must make a constant effort to improve both its theory and its statistics. But it recently got some help from a special committee of prominent economists who, from a variety of theoretical standpoints, commented on the adequacy of the System's techniques for measuring the monetary aggregates. These in clude M i, M2, and all the other M's that Federal Reserve Chairman Burns discusses in his quarterly re ports to Congress. The advisory committee, chaired by Stanford University's Professor G.L. Bach, was established in early 1974 after some worrisomely large changes showed up in the Fed's annual revision of its monetary sta tistics. (For example, revised Mi data for 1973 showed a 5.7-percent increase for the year, instead of 5.0 percent as originally estimated.) The worst problems arose with non-member-bank data, which— unlike member-bank data—varied considerably because they were based only on occasional (single day) call-report information. Fed statisticians began efforts to im prove the data through expanded reporting mechanisms and refur bished estimating techniques, and their efforts may be enhanced fur ther with the help of the advisory committee's recommendations. i The committee listed seven recom mendations relating to questions of measurement, definition, seasonal adjustment, and publication of the many statistical series involved. Some of these recommendations were purely technical, but the com mittee also got into the more inter esting (but difficult) area of relating the various concepts of money to the rapid changes now taking place in the nation's payments mecha nism. Still, the committee found no one monetary aggregate clearly preferable to all others as a means of gauging the economy's need for money and credit. “ Each has its theoretical and practical strengths and weaknesses as a guide to, or intermediate target for, monetarypolicy operations, and as a measure of the effectiveness of such opera tions." Three alternatives The committee first considered the concept of “ money" in terms of the “ monetary base" or “ highpowered money"—that is, in terms of assets that are generally used to discharge obligations and that are not the explicit liability of non governmental entities. The mone tary base—$119 billion at year-end 1975—includes all currency outside the Federal Reserve and the Treas ury, plus all bank deposits at Feder al Reserve Banks. More than other monetary aggregates, it can be ac curately measured and precisely controlled by the Federal Reserve. Many observers question the value of the monetary base as a measure, because of a belief that it is less reliably linked to the ultimate ob(continued on page 2) Opinions expressed in this newsletter do not necessarily reflect the views of the management of the Federal Reserve Bank of San Francisco, nor of the Board of Governors of the Federal Reserve System. jectives of policy—output, employ ment and prices—than most other aggregates. Nonetheless, the com mittee found some advantages in the use of the base, such as its relative freedom from the influence of the many financial innovations which are now disturbing the finan cial world. A second possible aggregate is the "medium of exchange" concept of money, which corresponds to assets generally used to discharge debts. This means M 3 (currency plus commercial-bank demand depos its), which totalled $295 billion at year-end 1975. There are problems of measuring M i, arising primarily from the necessity of estimating the amounts of money held from bank records. There are also problems of controlling M i, arising from changes in the ratio of currency held by the public to its demand deposits and from changes in the ratio of demand deposits to bank reserves—the latter in turn reflect ing such factors as shifts of funds among different categories of bank deposits. Nonetheless, most observers prefer Mi to the mone tary base as being more closely and more reliably related to the ulti mate goals of policy, although there is a growing realization that that close relationship may now be loos ening under the pressure of finan cial innovation, such as "checkless" computerized payments and • checkwriting on savings accounts. 2 A third possible type of measure is the "liquid asset" concept, or "tem porary abode of purchasing pow er." Under this concept, sellers of goods, services or financial assets hold their proceeds in this form at least temporarily, prior to convert ing those proceeds into media of exchange. Many observers view this concept as coming closest to cap turing the essential feature of mon ey and as having the closest rela tionship to final policy goals, al though unfortunately it is difficult to define empirically. It can corre spond to Mi plus bank time-andsavings deposits other than large certificates as deposits (M2, total ling $663 billion), or it can corre spond to M2 plus thrift-institution deposits (M3 totalling $1,092 bil , lion). Alternative possibilities in clude M4 ($746 billion) or M 5 ($1,175 billion), which equal M 2 and M3, respectively, with the addition of large certificates of deposit. But M4 and M5 have conceptual problems, since CDs resemble open-market commercial paper more than tradi tional time-and-savings deposits. Matching data with concepts The committee argues that this is a difficult time for finding the precise empirical counterparts to the vari ous aggregate concepts, especially in view of the host of financial innovations and regulatory changes affecting the payments mechanism under an extended regime of high interest rates. High rates have stim ulated the development of NOW accounts and other substitutes for demand deposits, given the prohi bition on the payment of explicit interest on demand deposits and the inability of thrift institutions to hold demand deposits. Also, high interest rates have stimulated dif ferentiation among deposit catego ries, given the differential ceilings on interest rates that may be paid on the various time-and-savings categories. The development of CDs on the one hand, and of substitutes for demand deposits on the other, plus the differential ceilings on interest rates payable on different deposit categories, have increased the prac tical importance of the distinction between time and savings accounts. The distinction has become even more significant recently, in view of the requirement for relatively large interest penalties on the withdrawal of time deposits before maturity. Consequently, while savings depos its have become much more similar to demand deposits, time deposits have become more and more simi lar to securities. In the committee's view, we may be forced eventually to adopt new empirical measures to correspond to the various monetary concepts. Instead of using M 2 as the measure of a “ temporary abode of purchas ing power," we might better use a total which adds only commercialbank savings deposits to M ,— leaving time deposits out of the 3 total. (Similarly, for M3 we could just add thrift-institution savings deposits.) Even more appropriately, this demand-plus-savings-deposit total might replace Mi as the “ me dia of circulation" concept, while a broader total encompassing time deposits, CD's and money-market funds might replace M4 and Ms as the best measure of the “ temporary abode of purchasing power." Complicating matters further is the movement toward an increasingly “ checkless" society, as exemplified by the increasing volume of pur chases now made on credit cards, as well as the use of computer net works to credit (or debit) wages, salaries, and consumer purchases directly to bank accounts. Insofar as these developments merely pro vide more convenient and efficient means of transferring demand de posits, they do not call for any redefinition of the money supply— although they could lead to a high er velocity of circulation. But if credit cards and a checkless society largely supplant present methods of payment, it may be necessary to redefine Mi and the other related deposit totals in a more fundamen tal way. So although the committee concludes that definitional changes are not immediately required, it leaves us with the implication that radical changes will eventually be required in our ideas of what we mean by “ money." William Burke uojSuiqsBM . qBjfi • M BM BH . uo Ss jo B jU J O p |B 3 . • EpeA3|sj . oqepi BUOZUy • • | ! | E 3 'O D S ID U B JJ U B S Z£Z ON llWHHd aivd aovisod s n 1IVW SSV1Z) ISdld BANKING DATA—TWELFTH FEDERAL RESERVE DISTRICT (Dollar amounts in millions) Selected Assets and Liabilities Large Commercial Banks Amount Outstanding 6/09/76 88,237 66,460 1,599 22,226 19,932 11,088 9,818 11,959 88,145 25,058 268 61,411 6,374 25,945 26,913 11,625 Weekly Averages of Daily Figures Week ended 6/09/76 Change from year ago Dollar Percent _ Loans (gross, adjusted) and investments* Loans (gross, adjusted)—total Security loans Commercial and industrial Real estate Consumer instalment U.S. Treasury securities Other securities Deposits (less cash items)—total* Demand deposits (adjusted) U.S. Government deposits Time deposits—total* States and political subdivisions Savings deposits Other time deposits! Large negotiable CD's Change from 6/02/76 + 1,009 + 652 774 1,050 + 263 + 1,194 + 798 441 + 2,105 + 963 83 + 1,089 786 + 5,699 2,439 - 4,221 - + + + + - + + - + + 495 952 917 2 49 5 370 87 173 96 38 212 89 51 257 202 Week ended 6/02/76 + + + + + + + + + - 1.16 0.99 32.62 4.51 1.34 12.07 8.85 3.56 2.45 4.00 23.65 1.81 10.98 28.15 8.31 26.64 Comparable year-ago period Member Bank Reserve Position Excess Reserves Borrowings Net free(+)/Net borrowed (-) 166 11 + 155 + + 1,110 - 378 + 2,883 + + 318 + 1,472 - 49 1 50 42 1 41 Federal Funds—Seven Large Banks Interbank Federal fund transactions Net purchases (+)/Net sales (-) Transactions of U.S. security dealers Net loans (+)/Net borrowings (-) 737 ’"Includes items not shown separately, tlndividuals, partnerships and corporations. Editorial comments may be addressed to the editor (William Burke) or to the author. . . . Information on this and other publications can be obtained by calling or writing the Public Information Section, Federal Reserve Bank of San Francisco, P.O. Box 7702, San Francisco 94120. Phone (415) 544-2184. E>jSB |V
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