James Turk

Originally published at King World News.

In the early 1930’s, the US dollar money supply as measured by M3 dropped by approximately 30%.  This deflation, i.e., drop in the quantity of money, was one of the steepest in history.  The purchasing power of the dollar -- until 1933 redeemable into gold and thereafter redeemable into silver -- rose dramatically because less money was in circulation compared to the quantity of goods and services available in commerce.

Today, the Federal Reserve no longer reports M3, which is unfortunate because it eliminates the possibility of accurate historical comparisons.  M3 is estimated by economists by modeling historic trends.  However, these models become less reliable as we move further from February 2006, the date the Federal Reserve stopped reporting M3.  Eurodollars, a major M3 component, is particularly difficult to model.

In any case, much attention is being given to these private estimates, even though the decline in M3 they are reporting stands in marked contrast to M1 and M2.  The Federal Reserve reports that these two money supply measures have grown 7.1% and 1.7% respectively over the past twelve months.  Thus, by these two measures, the dollar is inflating, i.e., the quantity of dollars is expanding -- particularly so for M1 -- relative to the available stock of goods and services being produced in today’s depressed economy.