The Definition of Inflation is NOT an Increase in Prices
There has been lots of talk of inflation lately. Since everyone younger than 60 weren’t adults during the Great Inflation from 1965 – 1982, most aren’t quite sure what to expect. Not to forget the definition of inflation has changed since then causing more dissonance between the cause and effects of inflation. Don’t fret, here is the old definition according to my substantial Unabridged Webster’s Third New International Dictionary of the English Language published in 1963:
2 : an increase in the volume of money and credit relative to available goods resulting in a substantial and continuing rise in the general price level
This descriptive definition tells the cause, “an increase in the volume of money and credit” without any increase in production of goods, as well as the consequences, “a substantial and continuing rise” in prices for available goods. Contrast this 59 year old definition with that found in my kids’ Merriam-Webster Children’s Dictionary, Third Edition, published in 2019:
2 a continual rise in the price of goods and services
After doing a doubletake, I checked another dictionary, this time the New Oxford American Dictionary, published in 2001:
2 Economics a general increase in prices and fall in the purchasing value of money: policies aimed at controlling inflation
Which is the definition I get when Googling “define: inflation”. So, the new definition is just the result of increasing the money supply. The cause of increased prices is due specifically as a result of an increase in the money supply, a result of monetary policy, it is not just anytime a price goes up for whatever reason. Ignoring monetary policy completely and claiming that whenever prices go up it is inflation is like saying cancer is fatigue, not feeling hungry, trouble swallowing, belly pain, or nausea and vomiting, and swelling or lumps anywhere in the body. But those are the symptoms not the actual source of the illness. Telling a patient the symptoms of their illness isn’t helpful, they already know them! I think people would be livid if they went to a doctor only to be told their symptoms and then billed for the visit. Who would even bother going to see doctors if that is the only service they provided? There are several reasons other than monetary policy which can affect prices in the market. In 2020 we saw a shortage of labor lowering the availability of goods and services, paired with an increase in demand as everyone was given government stimulus money directly. Calling this phenomenon inflation due to supply and demand issues not only makes no sense, it shows a complete lack of understanding the economy as the statement references two completely separate causes of high prices. Which is it? Are we experiencing high prices due to inflation, i.e. monetary policy, or supply and demand problems? Of course, nothing seems out of place to those who believe that the economic term, inflation, only references an increase in prices. Since this revised definition tells only the symptoms of inflation and not the cause, I have to ask: Why would there be a need to change the definition of the word “inflation” for any other reason than obfuscation? Maybe this is why the word inflation is thrown around so much these days and most people don’t even understand inflation well enough to explain it to a 5-year-old.
Inflation is Hidden Taxation
Wouldn’t it be nice, if more people knew enough about inflation to understand it well enough to see why Nobel Laureate Economist Milton Friedman wrote and stated publicly “Inflation is hidden taxation”? How is it taxation? One example, it starts as an easy way for the government to pay off it’s debt. Rather than increase taxes in order to afford to make a payment (which voters tend to dislike), the government increases the money supply and poof, out of thin air the government can pay the minimum payment on it’s debt. Sounds like a too good to be true way to pay the monthly bills, doesn’t it? But as the new definition points at the unintended consequence of such a policy, creating new money to pay the bills lowers the purchasing power of every dollar that already exists. Or stated differently, prices of everything go up. Everyone loves to make fun of those older adults who talk about the good old days, but they aren’t exaggerating when it comes to the purchasing power of the dollar. In 1960 you could buy a slice of pizza for 15¢ and a soda for 10¢ . The average income per person back then was $2,335 compared to $63,444 in 2021 (see chart below). Everyone is making much more than our grandparents did, yet people still feel poor just like our grandparents did. What’s the real difference? Hidden taxation.
If you haven’t read the book titled Economics in One Lesson, written by Henry Hazlitt, then you should add it to your reading list. First published in 1946 it is still relevant today. This book was based on an essay titled What is Seen and What is Unseen written by Frédéric Bastiat, published in 1850 demonstrating that economic ignorance transcends time. Hazlitt spoke in simple terms, not wanting to overcomplicate, but expound one’s own common sense of economics. The following excerpts are from the concluding section of chapter XXIII “The Mirage of Inflation”:
Who among us does not feel richer and prouder when he is told that our national income has doubled (in terms of dollars, of course) compared with some preinflationary period? Even the clerk who used to get $75 a week and now gets $120 thinks that he must be in some way better off, though it costs him twice as much to live as it did when he was getting $75. He is of course not blind to the rise in the cost of living. But neither is he as fully aware of his real position as he would have been if his cost of living had not changed and if his money salary had been reduced to give him the same reduced purchasing power that he now has, in spite of his salary increase, because of higher prices. Inflation is the autosuggestion, the hypnotism, the anesthetic, that has dulled the pain of the operation for him. Inflation is the opium of the people…
When the government comes to repay the debt it has accumulated for public works, it must necessarily tax more heavily than it spends. In this later period, therefore, it must necessarily destroy more jobs than it creates. The extra-heavy taxation then required does not merely take away purchasing power; it also lowers or destroys incentives to production, and so reduces the total wealth and income of the country…
If no honest attempt is made to pay off the accumulated debt, and resort is had to outright inflation instead, then the results follow that we have already described. For the country as a whole cannot get anything without paying for it. Inflation itself is a form of taxation. It is perhaps the worst possible form, which usually bears hardest on those least able to pay. On the assumption that inflation affected everyone and everything evenly (which, we have seen, is never true), it would be tantamount to a flat sales tax of the same percentage on all commodities, with the rate as high on bread and milk as on diamonds and furs. Or it might be thought of as equivalent to a flat tax of the same percentage, without exemptions, on everyone’s income. It is a tax not only on every individual’s expenditures, but on his savings account and life insurance. It is, in fact, a flat capital levy, without exemptions, in which the poor man pays as high a percentage as the rich man.
But the situation is even worse than this, because, as we have seen, inflation does not and cannot affect everyone evenly. Some suffer more than others. The poor are usually more heavily taxed by inflation, in percentage terms, than the rich, for they do not have the same means of protecting themselves by speculative purchases of real equities. Inflation is a kind of tax that is out of control of the tax authorities. It strikes wantonly in all directions. The rate of tax imposed by inflation is not a fixed one: it cannot be determined in advance. We know what it is today; we do not know what it will be tomorrow; and tomorrow we shall not know what it will be on the day after.
Like every other tax, inflation acts to determine the individual and business policies we are all forced to follow. It discourages all prudence and thrift. It encourages squandering, gambling, reckless waste of all kinds. It often makes it more profitable to speculate than to produce. It tears apart the whole fabric of stable economic relationships. Its inexcusable injustices drive men toward desperate remedies. It plants the seeds of fascism and communism. It leads men to demand totalitarian controls. It ends invariably in bitter disillusion and collapse.
He took some big leaps at the end there, let’s just first clarify two points here. First, he was talking about when inflation becomes hyperinflation. I looked in my 1963 dictionary and did not find the word hyperinflation. But, referencing economist Phillip Cagan’s work from the 50’s, “Hyperinflations begin in the month the rise in prices exceeds 50 per cent and end in the month before the monthly rise in prices drops below that amount and stays below for at least a year” . Second, while Hazlitt doesn’t throw a country under the bus here, he is very specific, and I think it is safe to say that the Weimar Republic fits into the illustration he drew.
A Brief Dive in History of Hyperinflation in the Weimar Republic
An extraordinarily brief history overview, the Weimar Republic was the government of Germany from 1919 to 1933, so right after World War I, and just up to the point when the National Socialist German Workers’ Party (Nationalsozialistische Deutsche Arbeiterpartei a.k.a NSDAP) assumed control of the German state. I have to tread lightly here, the IJustRead.Ink Instagram account has already been throttled and censored for posting a quote by that party’s chancellor. Hitler, I am talking about Adolf Hitler, but his time was yet to come. Abandoning the gold standard in 1914 and taking on an extraordinary amount of debt to fund their involvement in World War I, the leaders of Germany at the time viewed the war as an investment which they would reap the benefits of as soon as they had vanquished their foes. Citizens were already feeling the effects of inflation before the end of the war. After losing World War I, Germany, Austria-Hungary, Bulgaria, and Turkey agreed to the Treaty of Versailles which imposed heavy war reparations. The treaty was signed without any compromising and enforced penalties so steep, that many questioned how a country already so deep in debt could meet its requirements. “Almost no one in Germany, across the entire political spectrum, considered the debts owed to the victors under the Versailles Treaty as legitimate ones.” But to France who owed the United States $4 billion and another $3 billion to Britain as a result of funds needed to defend themselves from the committed German onslaught, reasonableness was tainted by their own debt concerns. It was quite the love triangle of debt. France and other allied countries owed Britain, and Britain owed the United States. “The United States had lent the European Allies around $10 billion altogether”. Who could afford to pay off their debts without Germany’s reparations? Remember this the next time someone claims war is good for the economy. Long story short, the Weimar Republic even with hiking taxes considerably, couldn’t afford to pay these reparations, they couldn’t even make the minimum payments. Unable to secure more financing to help pay current obligations, as the result of an assassination of the one man working toward that end, they failed to meet a couple of deadlines. Once they defaulted on more than one delivery of hard goods (i.e. telephone poles, and a failed coal quota) France peacefully invaded as laid out in the treaty. Germans were irate, they wanted their territory back, and this time funded a rebellion against the occupation with a printing press. While inflation is turned to as a solution on paper, it generates a special kind of hell for those attempting to live life peacefully through it. Experiencing inflation is one thing, now they entered hyperinflation: month after month, prices went up 50 percent. There are many personal stories from those who suffered the grip of hyperinflation such as a woman who left her basket of marks on a counter at a store and when she turned back someone had stolen the basket, and left the money. However, it is quite an experience to read about, so I have decided to share the following three individual accounts from the book, When Money Dies: The Nightmare of Deficit Spending, devaluation, and hyperinflation in Weimar Germany, by Adam Fergusson :
1. Erna von Pustau, whose father was a businessman who ran a fish market:
We used to say “The dollar is going up again”, while in reality the dollar remained stable but our mark was falling. But, you see, we could hardly say our mark was falling since in figures it was constantly going up – and so were the prices – and this was much more visible than the realization that the value of our money was going down… It all seemed just madness, and it made the people mad…
Inflation finished the process of moral decay which the war had started. It was a slow process over a decade or more; so slow that really it smelled of a slow death… In between were times when the mark seemed to stop devaluating, and each time we people got a bit hopeful. People would say, “The worst seems over now.” In such a time Mother sold her [tenanted] houses. It looked as though she had made a good business deal, for she got twice as much cash as she had paid. But the furniture she bought… had gone up five times in price and… the worst was not over. Soon inflation started again with new vigour[sic], and swallowed bit by bit the savings accounts of Mother and millions of others.
Our times made us cynical. The pie was growing smaller and more people wanted to have pieces of the pie, and so there was nothing left from the “good neighbor” atmosphere of former days. Everybody saw an enemy in everybody else.
Note by Adam Fergusson: Her father complained that “we of the middle class are not organized against the wholesalers, while the workers are organized against us”. The middle classes, in other words, were being squeezed between the two big classes of big business and the workers.
2. Anna Eisenmenger, excerpts from The Diary of an Austrian Middle-Class Woman:
The State has been obliged to put 10,000 kronen notes in circulation – each equivalent to two years’ income from my capital. A suit costs about six times what it was in 1913, but some things like food are a hundred or two hundred times as much… Paper clothes are being sold. Never had I dreamed it possible that one could purchase so little for 10,000 kronen… Jealousy and envy flourish in this atmosphere, and if one has procured some harmless article of food, one is careful to conceal the fact from one’s fellow men. Hunger reigns inexorably and selects its dumb and uncomplaining victims above all from the middle classes.
The confidence of Austrian citizens in the currency administration if the state is shaken to its foundation. The state which is perpetually printing new banknotes deceives us with the face value… A housewife who has had no experience of the horrors of currency depreciation has no idea what a blessing stable money is, and how glorious it is to be able to buy with the note in one’s purse the article one had intended to buy at the price one had intended to pay.
Before the next quote, Adam Fergusson adds some context: “Gambling on the stock exchange had become the fashion – the only way to avoid losing all one’s money and perhaps to add to it. Many new bankers were giving people advice, the flight from the krone governing all transactions.”
The large numbers of unemployed, their passions fermented by the Communists, are seething with discontent… a mob has attempted to set the Parliament building on fire. Mounted policemen were torn from their horses, which were slaughtered in the Ringstrasse and the warm bleeding flesh dragged away by the crowd… the rioters clamoured[sic] for bread and work… Side by side with unprecedented want among the bulk of the population, there is a striking display of luxury among those who are benefitting from the inflation. New nightclubs are being opened. These clubs have the further effect of greatly intensifying the class hatred of the proletariat against the bourgeoisie.
Former civil servants and officers are undoubtedly the poorest of the poor in Austria today. They are too proud to press their claims, can get no employment. Thus it happens every day, again and again, that elderly, retired officials of high rank collapse on the streets of Vienna from hunger.
3. Walther Rathenau, Former German Foreign Minister of the Weimar Republic:
Milliard. noun British. 1. one thousand millions; equivalent to U.S. billion.
The majority of statesman and financiers think in terms of paper. They sit in their offices and look at papers which are lying in front of them, and on those papers are written figures which again represent papers… They write down noughts[sic] (zeroes), and nine noughts[sic] mean a milliard. A milliard comes easily and trippingly to the tongue, but no one can imagine a milliard.
What is a milliard? Does a wood contain a milliard leaves? Are there a milliard blades of grass in a meadow? Who knows? If the Tiergarten (most popular inner-city park in Berlin) were to be cleared and wheat sown upon its surface, how many stalks would grow? Two milliards!
Adam Fergusson: Social unrest was one of the obvious symptoms of inflation… It was natural that a people in the grip of raging inflation should look about for someone to blame. They picked upon other classes, other races, other political parties, other nations. In blaming the greed of tourists, or the peasants, or the wage demands of labour[sic], or the selfishness of the industrialists and profiteers, or the sharpness of the Jews, or the speculators making fortunes in the money markets, they were in large measure still blaming not the disease but the symptoms.
The right…saw its enemy in the republican government. More ominously, it saw treachery in the policy of fulfilment of the reparation debt personified by Dr Rathenau…As Rathenau was driven from his home to the Foreign Office, the path of his car was blocked deliberately by another, while two assassins in a third car which had been following riddled him with bullets at close range. A bomb, thrown into his car for good measure, nearly cut his body in two.
In the summer of 1922… the Communist newspaper Rote Fahne (whose statistical material was also generally accurate) reckoned that at that date the “minimum of existence for a four-person family”, in Germany, had increased since 1914 by 86 times while the average wage had increased only 34 times. An egg which had once cost 4 pfennigs now cost 7.20 marks, a 180-fold increase. In the course of the first week of July alone, the four-person-family weekly minimum (a little more than £1 in London terms, or $5 in New York) rose from 2,300 to 2,800 marks. A bank clerk’s annual salary would therefore keep his family alive for about a month. The Austrian situation was thus being relentlessly reproduced in Germany, with the more educated classes, deprived in most cases of the right decently to live and bring up their families, becoming more and more hostile to the Republic and receptive to the forces of reaction. The consul in Frankfurt reported a virulent growth of anti-Semitism.
It is no exaggeration to say that cultured German men and women of high social standing openly advocate the political murder of Jews as a legitimate weapon of defence[sic]. They admit, it is true, that the murder of Rathenau was of doubtful advantage… but they say there are others who must go so that Germany shall be saved. Even in Frankfurt, with a prepondering Jewish population, the movement is so strong that Jews of social standing are being asked to resign their appointments on the boards of companies.
Erna von Pustau recalled the same trend in Hamburg, where “stock exchange” and “Jews” were ideas very much connected in the minds of the people, and where the circumstances of a situation which no one really understood made those who had lost their savings or their fortunes ready prey for anti-Semitic propaganda. Her father began to speak against the Jews more and more, asserting now that “creative capital is the capital we Germans have: parasitical capital is the capital of the Jews.”
“You should have known my father as he used to be.” She told her friend. “The political education I had I got from him. He explained to me things against the Kaiser, and our Parliament. But now he has stopped thinking and reasoning, and this will do more damage to us than it will ever damage the Jews.”
The British Consul-General in Munich, William Seeds reported to the Berlin Embassy:
The NSDAP’s existence was only known through enormous red placards, advertising public speeches to be delivered by Herr Hitler, which always closed with the notice ‘No admission to Jews!’ Antisemitism seemed the chief plank in his platform, but in general he was anti-everything: the Entente, the Reich government, the capitalists, the Bavarian government at times, the Socialists and the Communists – all were depicted in eloquent language as betrayers of the people. The public attitude was, at first, one of amusement; but as time went on and both political and economic conditions grew from bad to worse, the tendency arose to consider Hitler as the man who was always in the right.
Adam Fergusson clarified: Economic salvation had become for most people the more pressing need. They were being turned from politics by the cost of living, poor wages and low salaries.
How bad did it get? 1923 was the worst year.
There were stories (many of them, as the summer wore on and as exchange rates altered several times a day) of restaurant meals which cost more when the bills came than when they were ordered. A 5,000-mark cup of coffee would cost 8,000 marks by the time it was drunk.
In a letter to the Foreign Office on June 29 [Ambassador, Joseph] Addison recorded a circulation increase between June 25 and 26 of 959,156,010,000 marks and between June 26 and 27 of 1,523,534,460,000: in one day, an increase in the increase of more than 500,000,000,000 marks. ‘We are far from the modest daily increase of 160 milliards of a week ago’ he wrote.
1923 One Billion Marks Note
Reading through personal accounts, it is disheartening to learn of how many starved. Watching Jews increase their wealth and attend nightclubs was insufferable for parents who literally watched their children starve to death. Surely, it was not only Jews who were thriving from making wise investments in hard assets used for production, as well as store their savings in foreign currencies opposed to inflating Marks, yet the envy that festered was focused on them. Frederick Taylor attempted to explain this sentiment in his book the Downfall of Money: “The notion of the Jews being to blame for everything fitted even better into the framework of the post-war inflation. Jews represented, for the German far right, internationalism, mobile finance capital, the rendering to mere unreliable (and stealable) paper of the honest, tangible wealth that came from making and growing things. Therefore the destruction of real value that the inflation had brought with it was seen as an essentially Jewish phenomenon.
Fergusson carefully ignores pointing fingers economically in his book, but he does expound on the full history leading up to the end of the Weimar Republic, which enabled the rise of Hitler to power in Germany in 1933. Most are aware of what happened after. While it is difficult to understand how Germany could afford a second war after being wiped out financially, the late economist Walter E. Williams illuminated that which Ferguson did not, “Most people like to think the horrors of World War II were the result of mad man Hitler at Germany’s helm. Nonsense! A considerable part of what we saw in Germany was the attempt to make socialism work.” These are unpleasant quotes and ideas, not an enjoyable topic to discuss. It takes emotional intelligence to acknowledge these events and attempt to understand the circumstances. But I share them to add context and to qualify the last paragraph written by Henry Hazlitt quoted earlier:
Like every other tax, inflation acts to determine the individual and business policies we are all forced to follow. It discourages all prudence and thrift. It encourages squandering, gambling, reckless waste of all kinds. It often makes it more profitable to speculate than to produce. It tears apart the whole fabric of stable economic relationships. Its inexcusable injustices drive men toward desperate remedies. It plants the seeds of fascism and communism. It leads men to demand totalitarian controls. It ends invariably in bitter disillusion and collapse.
The Cause and Cure for Inflation
According to Milton Friedman, the cause and cure for inflation can be summarized as the following:
Five simple truths embody most of what we know about inflation:
1. Inflation is a monetary phenomenon arising from a more rapid increase in the quantity of money than in output (though, of course, the reasons for the increase in money may be various).
2. In today’s world, government determines—or can determine—the quantity of money.
3. There is only one cure for inflation, a slower rate of increase in the quantity of money.
4. It takes time (measured in years, not months) for inflation to develop; it takes time for inflation to be cured.
5. Unpleasant side effects of the cure are unavoidable.
…We have been misled by a false dichotomy: inflation or unemployment. That option is an illusion. The real option is whether we have higher unemployment as a result of higher inflation or as a temporary side effect of a cure for inflation.
Inflation can lead to hyperinflation, which clearly can destroy an economy as well as a society as we have learned. But how bad is the inflation situation currently in the U.S.? And will we ever experience hyperinflation due to out of control government spending reminiscent of the Weimar Republic?
Dire Warning from John Maynard Keynes
I would like to conclude by reading from a book written entirely about the stupidity, according to it’s author, of the Treaty of Versailles. The author was involved with the Treasury of Britain during WWI, was a representative at the Paris Peace Conference until June 7, 1919, and was also deputy for the Chancellor of the Exchequer on the Supreme Economic Council. He resigned from these positions once he became disgusted with how the negotiations or lack of negotiations were being handled. The following is from the book titled The Economic Consequences of The Peace, written by John Maynard Keynes, a mathematician, who earned recognition as an economist.
Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth. Those to whom the system brings windfalls, beyond their deserts, and even beyond there are expectations or desires, become “profiteers,”, who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat. As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.
Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.
In the latter stages of the war, all the belligerent governments practiced, from necessity or incompetence, what a Bolshevist might have done from design. Even now, when the war is over, most of them continue out of weakness the same malpractices. But further, the Governments of Europe, being many of them at this moment reckless in their methods as well as weak, seek to direct on to a class known as “profiteers” the popular indignation against the more obvious consequences of their vicious methods. These “profiteers” are, broadly speaking, the entrepreneur class of capitalists, that is to say, the active and constructive element in the whole capitalist society, who in a period of rapidly rising prices cannot help but get rich quick whether they wish it or desire it or not. If prices are continually rising, every trader who has purchased for stock or owns property and plant inevitably makes profits. By directing hatred against this class, therefore, the European Governments are carrying a step further the fatal process which the subtle mind of Lenin had consciously conceived. The profiteers are a consequence and not a cause of rising prices. By combining a popular hatred of the class of entrepreneurs with the blow already given to social security by the violent and arbitrary disturbance of contract and of the established equilibrium of wealth which is the inevitable result of inflation, these Governments are fast rendering impossible a continuance of the social and economic order of the nineteenth century. But they have no plan for replacing it.”
“The inflationism of the currency systems of Europe has proceeded to extraordinary lengths. The various belligerent Governments, unable, or too timid or too short sighted to secure from loans or taxes the resources they required, have printed notes for the balance. In Russia and Austria-Hungary this process has reached a point where for the purposes of foreign trade the currency is practically valueless. The Polish mark can be bought for about three cents and the Austrian crown for less than two cents, but they cannot be sold at all. The German mark is worth less than four cents on the exchanges. In most of the other countries of Eastern and Southeastern Europe the real position is nearly as bad. The currency of Italy has fallen to little more than a half of its nominal value in spite of its being still subject to some degree of regulation; French currency maintains an uncertain market; and even sterling is seriously diminished in present value and impaired in its future prospects.
But while these currencies enjoy a precarious value abroad, they have never entirely lost, not even in Russia, their purchasing power at home. A sentiment of trust in the legal money of the state is so deeply implanted in the citizens of all countries that they cannot but believe that someday this money must recover a part at least of its former value. To their minds it appears that value is inherent in money as such, and they do not apprehend that the real wealth, which this money might have stood for, has been dissipated once and for all. This sentiment is supported by the various legal regulations. With which the governments endeavor to control internal prices, and so to preserve some purchasing power for their legal tender. Thus the force of law preserves a measure of immediate purchasing power over some commodities and the force of sentiment and custom maintains, especially amongst peasants, a willingness to hoard paper, which is really worthless.
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Money Supply Charts
Before May 2020, M1 consists of (1) currency outside the U.S. Treasury, Federal Reserve Banks, and the vaults of depository institutions; (2) demand deposits at commercial banks (excluding those amounts held by depository institutions, the U.S. government, and foreign banks and official institutions) less cash items in the process of collection and Federal Reserve float; and (3) other checkable deposits (OCDs), consisting of negotiable order of withdrawal, or NOW, and automatic transfer service, or ATS, accounts at depository institutions, share draft accounts at credit unions, and demand deposits at thrift institutions.
Beginning May 2020, M1 consists of (1) currency outside the U.S. Treasury, Federal Reserve Banks, and the vaults of depository institutions; (2) demand deposits at commercial banks (excluding those amounts held by depository institutions, the U.S. government, and foreign banks and official institutions) less cash items in the process of collection and Federal Reserve float; and (3) other liquid deposits, consisting of OCDs and savings deposits (including money market deposit accounts). Seasonally adjusted M1 is constructed by summing currency, demand deposits, and OCDs (before May 2020) or other liquid deposits (beginning May 2020), each seasonally adjusted separately.
Before May 2020, M2 consists of M1 plus (1) savings deposits (including money market deposit accounts); (2) small-denomination time deposits (time deposits in amounts of less than $100,000) less individual retirement account (IRA) and Keogh balances at depository institutions; and (3) balances in retail money market funds (MMFs) less IRA and Keogh balances at MMFs.
Beginning May 2020, M2 consists of M1 plus (1) small-denomination time deposits (time deposits in amounts of less than $100,000) less IRA and Keogh balances at depository institutions; and (2) balances in retail MMFs less IRA and Keogh balances at MMFs. Seasonally adjusted M2 is constructed by summing savings deposits (before May 2020), small-denomination time deposits, and retail MMFs, each seasonally adjusted separately, and adding this result to seasonally adjusted M1.
Works Referenced In Article
Webster, N. (1963). Webster's third new international dictionary of the English language unabridged. Merriam.
Merriam-Webster. (2019). Merriam-Webster Children’s Dictionary (third edition). DK Publishing, Inc
Abate, F. R., & Jewell, E. (2001). The New Oxford American Dictionary. Oxford University Press.
FRED Economic Data St. Louis Fed Chart, Personal income per capita: https://fred.stlouisfed.org/series/A792RC0A052NBEA
Milton Friedman speaks money and inflation: https://www.youtube.com/watch?v=B_nGEj8wIP0
Free to Choose Part 9: How to cure inflation featuring Milton Friedman: https://www.youtube.com/watch?v=u6GWm0GW7gk
Karlitz & Honig. (2010). Growing money: A complete investing guide for kids. Scholastic
Hazlitt, Henry. (1979). Economics in one lesson. Currency
Taylor, Frederick. (2013). The downfall of money: Germany’s hyperinflation and the destruction of the middle class. New York: Bloomsbury Press
Cagan, P. (1956) The monetary dynamics of hyperinflation. In: Friedman, M., Ed., Studies in the quantity theory of money, University of Chicago Press, Chicago.
Fergusson, Adam. (1975). When money dies: The nightmare of deficit spending, devaluation, and hyperinflation in Weimar Germany. William Kimber & Co. Ltd.
Williams, Walter. (1988). All it takes is guts: a minority view. Gateway Books
Friedman, Milton. (1992). Money mischief: episodes in monetary history. New York: Harcourt Brace Jovanovich
Keynes, John Maynard. (1919). The economic consequences of the peace. Cambridge: King’s College
