A Suggestion for Changing the Definition of the U.S. Money Stock

This paper proposes a modest change in the definition of the demand deposit component of the U.S. money stock. The proposed change would not in principle affect the size of the money stock; however, it would improve the accuracy of money stock estimates and thereby contribute to the ability of the Federal Reserve authorities to control the money stock. There are some rather complicated aspects of money stock measurement which involve Edge Act corporations, branches and agencies of foreign banks in New York, and New York state investment companies. The proposal contained in this paper is not primanly directed at these aspects of money stock measurement. Therefore, in order to keep the argument for the proposal as simple and straightforward as possible, the complexities connected with these international banking institutions are ignored throughout the first three sections of the paper. Section 1 presents both the current and proposed approaches to measuring the demand deposit component of the money stock. Section 2 explains why the proposed approach would result in more accurate estimates of the money stock. Section 3 explains why the proposed approach would contribute to more precision in money stock control. The complexities of money stock measurement resulting from international financial transactions are discussed in Section 4.