Creature From Jekyll Island by G. Edward

Below is a copy of the author's letter to Mike Dubrow at the Public Information department of the Federal Reserve System. In a telephone conversation on February 14, 1994, Mr. Dubrow said that the assumption stated in the letter would be correct if it were not for the fact that the system is under the control of a central bank. The Federal Reserve, he said, would not allow that to happen, because it would be inflationary. The Fed would reduce the money supply to offset the effect of monetary expansion as dollars moved from M-l to M-2 and back to M-l again. In other words, the assumption is correct, but the Fed has the power to offset it—if it wants to. The bottom line is that M-l is accumulative. As such, it is the most meaningful measure of the money supply.

Q. Cdwwui Quffitt

33ax 4646, Weatlake. Viilage QKL 91359

January 19,1994

MikeDubrow

FAX # (202) 452-2707

FederalReserveSystem

WashingtonDC

DearMr. Dubrow,

As we discussed duringourphoneconversation this

morning, I am preparing a paper on the Federal Reserve

System, and an interesting question has arisen. Itisso

fundamental that almost everyone with whom I have spo-

ken thought they knew the answer but, uponanalysis, have concluded they were not so sure afterall.

IS Ml SUBTRACTIVE OR ACCUMULATIVE?

It is my understanding that there are three optional

definitions of themoneysupply:

Ml = currency + short-term deposits.

M2 = M1 + short-term time deposits.

M3 = M2 + insUtutional long-term deposits.

It is clear that, when money is paid out of a checking

account and put into a savings account, it increases M2,

but the question is: Does it remain as part of M1 or is it subtracted from it? Herbert Mayo, in his book Investments (Chicago: Dryden Press, 1983), says "If individuals shift funds from savings accounts to checking

accounts, the money supply is increased under the

narrow definition (M-l) but is unaffected if the

broader definition (M-2) is employed." This implies

that, when money is moved from a checking account

APPENDIX

595

to a savings account, it is subtracted from Ml. Other-

wise, it would not mcrease Ml when it is moved back

again from savings to checking. When we spoke on

the phone, you confirmed that his interpretation is

correct.

But how can that be? The money moved from check-

ing to savings or any other investment does not disap-

pear into a vault. It is spent in fulfillment of the

investment project. It is given to a vendor or a contractor or an employee and reappears in their checking accounts

where it becomes part of M1 once again. It would seem,

therefore, that it doesn't really leave M1 at all. It merely increases M2.

I have hypothesized one possible explanation. It is

that the money does, in fact, disappear into a vault, or at least into a bookkeeping ledger, for a short period of time. That would be the time between its deposit into the savings account and its subsequent transfer to

the checking accounts of borrowers. The time period

might be short—perhaps less than thirty days on the

average—but it still needs to be considered when cal-

culating the money aggregates. Therefore, Ml is reduced when money is transferred from checking to

savings, but that is only a temporary effect. Ml will

be increased once again just as soon as the new M2

money is redirected to borrowers. Is that a correct ex-

planation?

Thankyou for your help with these puzzling items.

Sincerely,

G. EdwardGriffin

(805)496-1649

596

BIBLIOGRAPHY

Adams, Charles. Fight, flight, Fraud: The Story of Taxation. Curacao, The Netherlands:Euro-Dutch Publishers, 1982.

Aldrich, Nelson W. Letters to John A. Sleicher, July 16, 1913; to W i l l i a m H o w a r d Taft,Oct. 3,1913. Nelson Aldrich Papers. Library of Congress.

Angell, Norman. The Story of Money. N e w York: Frederick A. Stokes Co., 1929.

Attali, Jacques. Translated by Barbara Ellis. A Man of Influence: Sir Siegtnund Warburg,

1902-82. London: Weidenfeld, & Nicolson, 1986.

A t w o o d , Harry. The Constitution Explained. Merrimac, Massachusetts: Destiny Publishers, 1927; 2nd ed. 1962

Ballard, Robert. "Riddle of the Lusitania." National Geographic. April, 1994, p. 68.