The Mystery of Banking

en masse
when the banks insisted on the fine-
print wait of 30 days. 
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 that noncheckable deposits are transferred more slowly than
checking accounts and therefore should not be “money” is an
interesting but irrelevant fact. Slower-moving money balances are
also part of the money supply. Suppose, for example, in the days
of the pure gold coin standard, that individuals habitually had
kept some coins in their house to be used for day-to-day transac-
tions, while others were locked up in vaults and used only rarely.
Weren’t both sets of gold coins part of their money stocks? And
clearly, of course, the speed of spending the active balances is
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Conclusion
255
deeply affected by how much money people have in their slower-
moving accounts. The two are closely interrelated. 
On the other hand, while savings deposits are really
redeemable on demand, there now exist genuine time deposits
which should not be considered as part of the money supply. One
of the most heartwarming banking developments of the past two
decades has been the “certificate of deposit” (CD), in which the
bank flatly and frankly borrows money from the individual for a
specific term (say, six months) and then returns the money plus
interest at the end of the term. No purchaser of a CD is fooled
into believing—as does the savings bank depositor—that his
money is 
really
still in the bank and redeemable at par at any time
on demand. He knows he must wait for the full term of the loan. 
A more accurate money supply figure, then, should include
the current M-1 plus savings deposits in commercial banks, sav-
ings banks, and savings and loan associations. 
The Federal Reserve, however, has not proved very helpful in
arriving at money supply figures. Its current M-2 includes M-1
plus savings deposits, but it also illegitimately includes “small”
time deposits, which are presumably genuine term loans. M-2
also includes overnight bank loans; the term here is so short for
all intents and purposes as to be “on demand.” That is acceptable,
but the Fed takes the questionable step of including in M-2
money market mutual fund balances. 
This presents an intriguing question: Should money market
funds be incorporated in the money supply? The Fed, indeed, has
gone further to bring money market funds under legal reserve
requirements. The short-lived attempt by the Carter administra-
tion to do so brought a storm of complaints that forced the gov-
ernment to suspend such requirements. And no wonder: For the
money market fund has been a godsend for the small investor in
an age of inflation, providing a safe method of lending out funds
at market rates in contrast to the cartelized, regulated, artificially
low rates offered by the thrift institutions. But are money market
funds money? Those who answer Yes cite the fact that these funds
are mainly checkable accounts. But is the existence of checks the
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256
The Mystery of Banking
only criterion? For money market funds rest on short-term credit
instruments and they are not legally redeemable at par. On the
other hand, they are economically redeemable at par, much like
the savings deposit. The difference seems to be that the public
holds the savings deposit to be legally redeemable at par, whereas
it realizes that there are inevitable risks attached to the money
market fund. Hence, the weight of argument is against including
these goods in the supply of money. 
The point, however, is that there are good arguments either
way on the money market fund, which highlights the grave prob-
lem the Fed and the Friedmanites have in zeroing in on one
money supply figure for total control. Moreover, the money mar-
ket fund shows how ingenious the market can be in developing
new money instruments which can evade or make a mockery of
reserve or other money supply regulations. The market is always
more clever than government regulators. 
The Fed also issues an M-3 figure, which is simply M-2 plus
various term loans, plus large denomination (over $100,000) time
deposits. There seems to be little point to M-3, since its size has
nothing to do with whether a deposit is a genuine time loan, and
since term loans should not in any case be part of the money supply. 
The Fed also publishes an L figure, which is M-3 plus other
liquid assets, including savings bonds, short-term Treasury bills,
commercial paper, and acceptances. But none of the latter can be
considered money. It is a grave error committed by many econo-
mists to fuzz the dividing line between money and other liquid
assets. Money is the