The Mystery of Banking

uniquely
liquid asset because money is the
final payment, the medium of exchange used in virtually all trans-
actions to purchase goods or services. Other nonmonetary assets,
no matter how liquid—and they have different degrees of liquid-
ity—are simply goods to be sold for money. Hence, bills of
exchange, Treasury bills, commercial paper, and so on, are in no
sense money. By the same reasoning, stocks and bonds, which are
mainly highly liquid, could also be called money. 
A more serious problem is provided by U.S. savings bonds,
which are included by the Fed in L but not in M-2 or M-3. Savings
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Conclusion
257
bonds, in contrast to all other Treasury securities, are redeemable
at any time by the Treasury. They should therefore be included in
the money supply. A problem, however, is that they are
redeemable not at par, but at a fixed discount, so that total sav-
ings bonds, to be accurately incorporated in the money supply
would have to be corrected by the discount. Still more problems
are proffered by another figure not even considered or collected
by the Fed: life insurance cash surrender values. For money
invested for policyholders by life insurance companies are
redeemable at fixed discounts in cash. There is therefore an argu-
ment for including these figures in the money supply. But is the
Fed then supposed to extend its regulatory grasp to insurance
companies? The complications ramify. 
But the problems for the Fed, and for Friedmanite regulators,
are not yet over. For should the Fed keep an eye on, and try to reg-
ulate or keep growing at some fixed rate, a 
raw
M-1, or M-2 or
whatever, or should it try to control the seasonally adjusted figure? 
In our view, the further one gets from the raw data the fur-
ther one goes from reality, and therefore the more erroneous any
concentration upon that figure. 
Seasonal adjustments
in data are
not as harmless as they seem, for seasonal patterns, even for such
products as fruit and vegetables, are not set in concrete. Seasonal
patterns change, and they change in unpredictable ways, and
hence seasonal adjustments are likely to add extra distortions to
the data. 
Let us see what some of these recent figures are like. For
March 1982, the nonseasonally adjusted figure for M-1 was
$439.7 billion. The figure for M-2 was $1,861.1 billion. If we
deduct money market mutual funds we get $823 billion as our
money supply figures for March 1982. There are at this writing
no savings bonds figures for the month, but if we add the latest
December 1981 data we obtain a money supply figure of $891.2
billion. If we use the seasonally adjusted data for March 1982, we
arrive at $835.9 billion for the corrected M-2 figure (compared
to $823.1 billion without seasonal adjustments) and $903.6 bil-
lion if we include seasonally adjusted savings bonds. 
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How well the Reagan Fed has been doing depends on which
of these Ms or their possible variations we wish to use. From
March 1981 to March 1982, seasonally adjusted, M-1 increased at
an annual rate of 5.5 percent, well within Friedmanite parameters,
but the month-to-month figures were highly erratic, with M-1
from December 1981 to February 1982 rising at an annual rate of
8.7 percent. Seasonally adjusted M-2, however, rose at a whop-
ping 9.6 percent rate for the year March 1981–March 1982. 
The numerous problems of new bank instruments and how to
classify them, as well as the multifarious Ms, have led some econ-
omists, including some monetarists, to argue quite sensibly that
the Fed should spend its time trying to control its 
own
liabilities
rather than worrying so much about the activities of the commer-
cial banks. But again, more difficulties arise.