True Money Supply

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True Money Supply (TMS), what Austrian economists call “money in the broader sense,” is based on the definition of money as originally formulated by Ludwig von Mises in his The Theory of Money and Credit.

Algebraically, TMS = Standard Money (held by the public) + Money Substitutes

True Money Supply

Within the Austrian School, there are three competing definitions of the Money Supply (known colloquially as 'True Money Supply' or 'TMS', as 'Austrian Money Supply' or 'AMS', and 'M prime' or M'), which are referred to respectively as 'TMS1', 'TMS2', and M Prime (the '1' and '2' are meant to refer to the fact that TMS1 closely follow M1 and TMS2 closely follows M2). TMS2 may often be referred to as just TMS, and TMS1 may be referred to as AMS (Austrian Money Supply) [1]. 'AMS' may also refer to another measurement known as 'M Prime', which is meant to be identical to TMS1, but is slightly different to enable a more easily computable metric.

In what follows, we will ignore the other names in use and only use the names 'TMS1', 'TMS2', and 'M Prime' to discuss these three competing metrics.

The Austrian money supply metric known as 'TMS2' has been proposed by Murray Rothbard [2] and Joseph Salerno [3], which competes with the second definition provided by Shostak that is referred to as 'TMS1' [4] [5], as well as competing with the definition by Shedlock of M' [6].

In order to compare with government definitions of money, the following is M2:

  • Base currency (not to be confused with the monetary base, which includes reserves and excess reserves): the face value amount of fiat physical U.S. notes, dollar bills, and coins circulating.
  • + Demand deposits: the amount held in checking accounts and other forms of immediately refundable deposits. This also does not need to be held physically and can be kept purely as an account balance, which is what is meant by most Austrian authors when they describe that the FED 'prints money out of thin air' [7].
  • - Demand deposits due to the Treasury and depository institutions
  • + Travelers checks
  • - Federal Reserve float and cash items in process of collection.
  • + Savings accounts
  • + Certificates of deposit of small denomination (under $100,000)
  • + Money market accounts
  • + MMMFs and other retail money market mutual funds


TMS2 consists of:

  • M2
  • - Traveler's checks
  • - Time Deposits (including certificates of deposit)
  • - MMMF
  • + U.S. Treasury and governments deposits held at the Federal Reserve

Where traveler's checks, time deposits, and MMMFs are not included because they represent a distinct credit transfer (in the case of time deposits, the individual purchasing, for example, a certificate of deposit, can not use this paper as cash) or because they do not represent a final medium of exchange (in the case of traveler's checks or MMMFs, they are ultimately redeemed for cash or checking deposits)


TMS1 consists of:

  • TMS2
  • - Savings Deposits
  • + Bank deposits sweeps: an accounting term meant to denote deposits that a bank denotes as part of their savings accounts in order to satisfy reserve requirements
  • - SFP

M Prime

M Prime consists of:

  • Base currency
  • Demand deposits
  • U.S. Treasury and governments deposits held at the Federal Reserve
  • Bank deposits sweeps

Debates in the Austrian definitions of the money supply

There are two contentious components of the Austrian Money Supply, and debate about whether they should be included or not.

Savings deposits

The biggest contention is the constituency of savings deposits, as evidenced by the definitions of TMS1 and TMS2. The reason for the disagreement relies on the definition of 'exchange' in the definition of money. Shostak notes that "claims on dollars held in savings deposits typically do not circulate in exchange," [8] and due to this argument, claims that savings should be treated as loans from the saver to the bank and therefore do not count as a multiple of the money supply. Salerno notes that savings accounts count because currently they function nearly identically to demand deposits; and that, therefore TMS1 is confusing savings deposits with just savings itself: "A source of confusion is the identification of savings deposits with savings. The former are no more and no less "saved" than are the funds put on a checking account or the currency held in stockings." [1]

(note that although "bank sweeps" are included in the definition of TMS1, and not in the definition of TMS2, the contention is still regarding whether or not to include savings as part of the money supply. This is because sweeps are used as an accounting device with respect to savings account management in banks.)

Supplementary Financing Accounts

The Supplementary Financing Account (SFP) was created by the Federal reserve as part of the Treasuries operations in TARP, and whether it is a reserve management accounting device or whether this is an accounting device used by the Treasury department to hide extramonetary reserves is not entirely known [9]. In particular, TMS1 does not include SFP, while TMS2 does [10].


  1. Joseph Salerno. Money: Sound and Unsound

External links