Money And Statistical Delusions

I can prove anything with statistics, except the truth -- Lord Canning, c. 1819

Does Canning’s aphorism still hold true, given that data collection and statistical analysis have progressed beyond all recognition in the last two hundred years? This article tests that proposition.

It is still true, because of the interests for which statistics are deployed. We know, or should know, that CPI indexation of prices fails to reflect the true rate of decline in the purchasing power of fiat currencies. That is at least a simple case of governments saving money on indexation. But being economical with the statistical truth is a far wider practice encompassing input suppression, misleading deployment, and their use to support beliefs and preferred outcomes instead of backing up properly reasoned economic and monetary a priori theory.

This article finds that the application of all these methods corrupt monetary statistics, including the three principal components of the equation of exchange. This analysis is sparked by recent changes to the definition of M1 money supply in the US.


Monetarists have long held that there is a relationship between changes in the quantity of circulating currency and the general level of prices. It is not the only factor governing the relation, but it has been generally established to be true. So persuasive is the theoretical case, that no one — not even modern monetary theorists — deny it. We generally assume that the monetary statistics, the sheet anchor to the equation of exchange that emerged over a century ago, are reliable. But even monetary statistics whose components drop out of accounting identities end up being sliced and diced at the behest of the authorities, raising the question as to what we should regard as money at a time of unprecedented peacetime global monetary expansion. And the monetary policy planners moving the goal posts question by their actions the macroeconomic habit of relying solely on statistical evidence for predicting outcomes.

In February, the Fed changed the definition of M1 to include “Savings deposits” and “Other checkable deposits”. They are now combined and reported as “Other liquid deposits”. The effect is to increase M1 but to leave M2 unchanged, as illustrated in Figure 1.

The change accepts the reality, long recognized in the Austrian school’s definition of money supply (AMS), that depositors and banks assume savings accounts are just another form of money available for spending on day-to-day transactions. Monetary policy planners generally circumvent such considerations, looking at monetary definitions from their policy viewpoint instead of the perspective of money’s users.

For statistics junkies, there is a disadvantage in that the new M1 is only readily available as a retrospective monthly average instead of a more current weekly average. This has the effect of under recording the increase of M1 in this statistic at times of rapidly rising monetary inflation. And importantly, M1 is so much modified by these changes as to be rendered useless as a statistical record of monetary inflation.

This raises other questions, such as should we regard broad money or narrow money as the primary indicator of changes in the money supply? And, more deeply, should we ignore the statistical detail and try to understand money from an a priori analysis of the theory of exchange? This is the key difference in the approach of establishment monetarists compared with the Austrian school. Monetarists today, in common with other macroeconomic schools, test propositions by statistical correlation, thereby avoiding the necessity of sound theoretical analysis. Consequently, the definition of money rarely progresses beyond simplistic propositions. And its true use value, which is defined by less predictable human action, is ignored.

The Austrian school generally disregarded the statistical approach to money, until Murray Rothbard attempted to define circulating currency solely in the context of US monetary statistics, work that was consolidated by Joseph Salerno.[i] But slotting different monetary statistics into any combination has never been standardized, so what applies in America, which cannot be precisely defined anyway, doesn’t apply elsewhere. Nor does it when the makeup of a monetary component is altered, excluded or included, such as the current modifications to M1.

Therefore, whatever statistical evidence there is can only be used to corroborate a theoretical analysis, and not be accepted as prima facie evidence. As Lord Canning put it two centuries ago, you can prove anything with statistics but the truth.

Defining money

A theoretical approach to understanding money must start by defining it. This definition is taken from the glossary to von Mises’s Human Action: “The most commonly used medium of exchange in society. A community’s most marketable economic good, which people seek primarily for the purpose of later exchanging units of it for the goods or services they prefer. The circulating media most readily accepted for the payment for goods, services, and outstanding debts. Money is an indispensable factor in the development of the division of labor and the resulting indirect exchanges upon which modern civilization is based.”In other words, money is the medium that links production with consumption through the division of labor. It must be immediately available for that purpose. That certainly includes cash in circulation and money in the bank. Correctly, it is now argued by the Fed that because in practice savings are instantly available to bank depositors, that they are cash equivalents. But there are other important aspects of money, such as unspent government balances. Because that can be drawn down at any time, it is money as well, just as if it were money due to an ordinary depositor. But that is not included in the Fed’s definition of M1 (renamed M1 SL), which is an important omission given recent balances on the government’s general account of as much as $1.7 trillion. If, as well as savings deposits, unspent government balances had been included, M1 SL money supply would have looked more like Rothbard’s Austrian money supply (AMS) in Figure 2.[ii]

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Disclaimer: The views and opinions expressed in this article are those of the author(s) and do not reflect those of Goldmoney, unless expressly stated. The article is for general information ...

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