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By Root 358 0

to be used for buying still other goods and services. The empirical counterpart of this abstract concept is far less clear. For centuries, when gold and silver were the major mediums of exchange, economists and others regarded only coins as money. Later they added bank notes redeemable on demand for gold or silver specie. Still later, a little over a century ago, they accepted bank deposits payable on demand and transferable by check. Currently, in the United States, a number of monetary aggregates are regularly compiled, each of which may be regarded as the empirical counterpart of money. These range from currency, the narrowest total, to the total of specified liquid assets, the aggregate designated "L" by the Federal Reserve.*

We can bypass this highly technical issue by considering a hypothetical world in which the only medium of circulation is paper money like our five-dollar bill. For consistency with the present situation, we shall assume that the number of dollars of such money in circulation is determined by a governmental monetary authority (in the United States, the Federal Reserve System).

The Supply of Money

Analysis of the supply of money, and in particular of changes in the supply of money, is simple in principle but extremely complex in practice, both in our hypothetical world and in the current real world. Simple in principle, because the supply of money is whatever the monetary authorities make if, complex in practice, because the decisions of the monetary authorities depend on numerous factors. These include the bureaucratic needs of the authorities, the personal beliefs and values of the persons in charge, current or presumed developments in the economy, the political pressures to which the authorities are subject, and so on in endless detail. Such is the situation that prevails today. Historically, of course, the situation was very different because the commitment to redeem government- or bank-issued money in specie meant that the physical conditions of production played a significant role. Later chapters explore the consequences of the commitment to redeem in considerable detail.

It's simple to state how the money supply is so centrally controlled. It's hard to believe. I have observed that noneconomists find it almost impossible to believe that twelve people out of nineteen—none of whom have been elected by the public—sitting around a table in a magnificent Greek temple on Constitution Avenue in Washington have the awesome legal power to double or to halve the total quantity of money in the country. How they use that power depends on all the complex pressures listed in the previous paragraph. But that does not alter the fact that they and they alone have the arbitrary power to determine the quantity of what economists call base or high-powered money—currency plus the deposits of banks at the Federal Reserve banks, or currency plus bank reserves. And the entire structure of liquid assets, including bank deposits, money-market funds, bonds, and so on, constitutes an inverted pyramid resting on the quantity of high-powered money at the apex and dependent on it.

Who are these nineteen people? They are seven members of the Board of Governors of the Federal Reserve System, appointed by the president of the United States for fourteen-year nonrenewable terms, and the presidents of the twelve Federal Reserve banks, appointed by their separate boards of directors, subject to the veto of the Board of Governors. These nineteen constitute the Open Market Committee of the Federal Reserve System, though only five of the bank presidents have a vote at any one time (in order to assure that the seven members of the central board have ultimate authority).

The exercise of this arbitrary power has sometimes been beneficial. However, in my view, it has more often been harmful. The Federal Reserve System, authorized by the Congress in 1913 and beginning operations in 1914, presided over the more than doubling of prices that occurred during and after World War I. Its overreaction produced the subsequent sharp depression