ONE CONGRESSMAN'S FIGHT TO SAVE M3

The Capital Spectator

There's less than two weeks of life left for the Fed's M3 series, the broadest measure of money supply. On March 23, the central bank plans to end publishing the data. But if one Congressman has his way, M3 will live on. It's an uphill battle, to be sure, but Ron Paul, a Republican who represents the 14th Congressional district of Texas, has sponsored legislation (H.R. 4892) to keep the data coming. (For the latest version of the legislation, visit Thomas at the Library of Congress and browse under Rep. Paul's bills.)

M3 is arguably all the more relevant these days since its rate of growth has been roughly twice as high as M2, a narrower gauge of money supply. The Fed claims that there's not a lot of difference between the two, although the numbers as reported suggest otherwise. (For previous CS posts on M3, see our February 28 article, with additional links for background information.)

Paul's attempt to keep M3 alive and kicking may be quixotic, but he's not giving up the fight, as becomes clear in an interview we conducted with the Congressman yesterday by phone. Here are some excerpts:

What's the goal of your M3 bill?
My legislation would require that the Fed continue to report M3. It's no more complicated than that.

So you think M3 is valuable as a measure of money supply?
I realize the shortcomings of some of these numbers, and M3 isn't an answer to all the information that we would like. But it's better than not having it. I think it does represent a reflection of Federal Reserve policy. For them to quit reporting it you have to ask, why?

Ok--we'll bite. Why?
I don't know exactly why, but the Fed gives answers. They claim that it costs too much money and they don't use M3 any more. My argument to [Fed Chairman] Bernanke the other day was: some of us like M3, and Congress has a right to this type of information. There are still a few people in the country that think money supply's important, and M3 is a reflection of money supply. I mentioned that there are a few economic schools of thought that are still concerned about M3, although some deny it has any value.

The most interesting thing was when he said it cost too much to collect [the data for compiling M3]. I kid the Fed about that, and say, I don't why you should be concerned about it. If you need to spend money you just print it.

Somehow we can't imagine the folks at the central bank laughing.
Well, the Fed makes a lot of money on interest, and of course it creates a lot of credit in order to buy Treasuries. So, I think the notion that it's costly is preposterous. In fact, the Fed probably has most of the numbers right there anyway.

What's the bigger picture here? What's your thinking on what the impending demise of M3 suggests, if anything, in a broader context when it comes to the Fed?
I think back to what Mises talked about in Human Action: he writes that there's always a deliberate attempt to deflect concern about the money supply so that the common person thinks that inflation is caused by other things.

Arguably, the buck stops at the Fed, literally and figuratively, when it comes to inflation, right?
I see that the real culprit is the increase in the money supply and the distortion of interest rates causing malinvestment, overinvestment, overcapacities and excessive debt. If you don't have the information to indicate that there's something going wrong with the money supply, then we're less likely to blame the Fed for the problem.

A lot of people would agree. How does the Fed see it?
As long as I've been here in Washington, the Fed officials have always blamed Congress because of the deficits. And I agree: the deficits are bad and they create problems. But I think the Fed and Congress work together. When we run up the deficits, there's not enough money in the market without raising interest rates, and so the Fed accommodates. So I see the Fed in collusion with the Congress.

In other words, the Fed is only too happy to print up dollars to clean up the mess of red ink.
I don't know about happy, but the Fed always claims it wishes it didn't have any deficits to deal with. But the Fed never argues [about printing more money]. The Fed says that what it's doing is keeping the economy going by keeping interest rates low. But there's no other way it can do that, other than buying Treasury bills to keep the overnight rates low. It creates its own credit, and that's where I see the problem. I think this denial of the M3 information is just another effort to direct attention to the Congress, or the Arabs charging too much for oil, or the price of education going up too much, or the cost of medical care rising too fast. The Fed wants to direct your attention away from the real culprit: the creation of money and credit.

So, in other words, inflation is only possible if the Fed allows it?
That's what I believe.

What's your take on the fact that M3 is growing at roughly twice the pace of M2 recently? The Fed says that M3's redundant in that M3 and M2 are comparable. But the trend in each series suggests otherwise. We've asked the central bank about this.
I'll be they didn't give you a good answer. I asked the same question to Bernanke, and he totally ignored it. I said, M3's growing twice as fast as M2. And the change in the growth is important too. A couple of years ago M3 wasn't growing quite as fast, and in the last eight or nine months it's accelerated.

Given M3's relatively high rate of growth, and the Fed's intent on killing the series, does it suggest something fishy is going on here, in terms of suppressing monetary information that could be embarrassing for the Fed?
That's the question, and of course the Fed would deny it.

What about your colleagues in Congress? Is anyone else asking questions about M3?
Other members of Congress have no interest in it; there's very little interest in monetary policy. I couldn't get anyone to pay much attention to it. In fact, there are a lot of misconceptions. For example, one day I was talking to Greenspan, and one of the members in Congress came up and asked, "Isn't the dollar backed by gold?" This was a member of Congress! That's when I realized we have a lot of work to do. I argue that Congress, either deliberately or inadvertently, doesn’t think about [monetary policy] because the Fed irons out some of our problems when it comes to deficit spending.

What are the prospects that your M3 legislation will be enacted? Is the bill getting any attention?
It's not going to get attention unless the financial people help. Only if people like you, and all the way to Barron's and the Wall Street Journal and everybody else decided that this is an outrage. So, I make the point, and explain what the correction is, and talk about it when I get the chance. Hopefully, someone will pay attention. But I figure that no one will pay attention until they really ruin the dollar, which I think is on the verge of happening.

But isn't the stated rate of inflation quite low?
That's deceptive. The rate of inflation is actually horrendous, especially for low-to-middle-income people, who spend their money on food and fuel, and clothing and medical care. Even if inflation was as low as stated, it's the same type of deception that occurred in the 1920s. They kept saying there's no inflation. Inflation is measured by the increase in the money and credit. The distortions sometimes lead to higher prices, but many times you can't predict where those higher prices will emerge. Sometimes it's in a stock market bubble, sometimes it's in commodities, sometimes it goes into the consumer price index. So inflation emerges in different ways. Meanwhile, the biggest problem is the deception that interest rates are low, which causes people who save, people who invest, people who spend to do things they otherwise wouldn't do. For example, if interest rates are 2%, you're more likely to overbuild houses than you would if the market rate was 4% or 5%.

To me, it's a moral issue to. What if you're old-fashioned and frugal and you've saved your money, and you don't like stocks, because you know about stock market crashes? And so you put your money in CDs, and they get 2% instead of 5%. The market might have given them 5%. And it just makes it harder for them to live. I brought that up once to Greenspan, and he said, Well, sometimes you just can't take care of everybody at one time. He said, some people do suffer from it; he didn't deny it.

Some people argue that the Fed is forced to make compromises because of the twin mandates imposed on it of minimizing inflation and maximizing employment.
Yes, but that endorses the false concept of central planning, and we all seem to defer to the Fed to be very much involved in central economic planning, whether it's prices or interest rates or full employment, or whatever. Any time you give that much authority you can be sure there's going to be some deception, even in the collection of the numbers. Figures come out, and CPI's up at a rate of, say, 7%. Oh, but the core rate is lower, some respond, and so it's okay, and everyone's reassured. Anything to fool the people for as long as possible.

What do you think the Fed should be doing these days?
Ultimately, I wouldn't even have a Federal Reserve system, because you don't need one. Even Friedman, with his monetarism, thinks we shouldn't have a Federal Reserve manipulating interest rates.

Call us crazy, but we assume the Fed will endure. If so, in this less-than-perfect realm, what advice do you have for the central bank?
In a way, you can't argue with the techniques of Alan Greenspan. He was able to take one problem, and create another bubble and keep things going. Some of us believe that just builds a bigger problem into the system, and the correction will be that much worse. I have to say, if I couldn't get out of the system, I'd have some sort of Friedman-type of approach where we wouldn't manipulate interest rates. Instead we'd increase the money supply at a 2% or 3% rate. That would be entirely unsatisfactory for me, but if that's the only choice....

What should eventually happen is that the Fed shouldn't be able to buy Treasury bills. The Fed should never be able to finance government spending by buying Treasury bills with credit they create out of thin air. That's the high powered money, but when that gets into the banking system you then have the fractional-reserve-banking principle that allows that to expand that credit by six or seven fold. You expand money supply that way, and that's how M3 expands.

So, you think that particular aspect of how the Fed operates should end?
Like I say, it's far from my ideal solution, but, if you had to do something right now, yes. It's the type of thing that Volcker did. He said, we're cutting back, and interest rates went to 21% and he saved the dollar. If we get into a crisis again, that's what they're going to be forced to do. There are some that believe the crisis is going to be much worse than it was in 1979 and 1980.

We already know your answer, but we'll ask the question anyway: Are you worried about inflation?
To me, inflation is printing money. That's going to continue, and it's going to get worse. The conventional definition of inflation is rising prices for consumers. I think we're going to see a lot more of it.