The Mystery of Banking

What Has Government Done to Our Money?
2nd
ed. (Santa Ana, Calif.: Rampart College, January 1974), pp. 50–62. On the
two-tier gold market, see Jacques Rueff, 
The Monetary Sin of the West 
(New
York: Macmillan, 1972).
4
That is only one of the two major problems confronting the Friedman-
ites: the other is 
what
fixed rate should the Fed follow? Monetarist answers
have ranged from 3 to 5 percent (with even higher rates allowed for a grad-
ual transition period) and down to zero (for those Friedmanites who have
noted that in recent years the demand for money has fallen by about 3 per-
cent per year).
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Conclusion
253
having no theory of how to define the supply of money, which
they define in a question-begging way by whichever of the Ms
correlates most closely with Gross National Product (correlations
which can and do change).
5
Everyone concedes that what we can call the old M-1 (cur-
rency or Federal Reserve Notes + demand deposits) was part of
the money supply. The controversial question was and still is:
Should anything 
else
be included? One grievous problem in the
Fed’s trying to regulate the banks is that they keep coming up
with new monetary instruments, many of which might or might
not be treated as part of the money supply. When savings banks
began to offer checking services as part of their savings accounts,
it became clear even to Friedmanites and other stubborn advo-
cates of only checking accounts as part of the money supply, that
these accounts—NOW and ATS—must be included as part of any
intelligible definition of the money supply. Old M-1 then became
M-1A, and NOW and ATS figures were included in a new M-1B.
Finally, in 1982, the Fed sensibly threw in the towel by calling a
new M-1 figure the previous M-1B and scrapping the M-1A esti-
mates.
6
The inclusion of new forms of checking accounts at savings
and savings and loan banks in the new M-1, however, by no
means eliminates the problem of treating these thrift institutions.
For regular savings accounts at these institutions, and indeed at
commercial banks, while not checkable, can be easily withdrawn
in the form of a cashier’s or certified check from these banks.
What genuine difference, then, is there between an officially
checkable account and one that can be drawn down by a simple
5
For an excellent critique of the question-begging nature of Friedman-
ite definitions of money, see Leland B. Yeager, “The Medium of Exchange,”
in R. Clower, ed., 
Monetary Theory 
(London: Penguin Books, 1970), pp.
37–60.
6
Recently, however, Fed apologists are beginning to excuse the discon-
certingly large increases in M-1 as “only” in NOW and ATS accounts.
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The Mystery of Banking
cashier’s check? The typical answer that a savings account must
be withdrawn by presenting a passbook in person hardly seems to
offer any genuine obstacle to withdrawal on demand. 
No: The crucial distinction, and the crucial way to decide
what is part of the money supply, must focus on whether a certain
claim is withdrawable instantly 
on demand
. The fact that any
bank may be able legally to exercise a fine-print option to wait 30
days to redeem a savings deposit is meaningless, for no one takes
that fine print seriously. Everyone treats a savings deposit 
as if
it
were redeemable instantly on demand, and so it should be
included as part of estimates of the money supply. 
The test, then, should be whether or not a given bank claim
is redeemable genuinely and in fact, on demand at par in cash. If
so, it should be included in the money supply. The counter-argu-
ment is that noncheckable deposits are transferred more slowly
than checking. Indeed, we saw above how commercial banks
were able to engineer credit inflation in the 1920s by changing
from demand to alleged time deposits, which legally required
much lower reserves. We also saw how several bank runs on these
savings deposits occurred during the 1930s. Everyone treated
these deposits as if they were redeemable on demand, and began
to redeem them