David Glasner has a good post on the recent Bank of England essay on money, but I’d like to respond to one of his comments:
What the authors mean by a “modern economy” is unclear, but presumably when they speak about the money created in a modern economy they are referring to the fact that the money held by the non-bank public has increasingly been held in the form of deposits rather than currency or coins (either tokens or precious metals). Thus, Scott Sumner’s complaint that the authors’ usage of “modern” flies in the face of the huge increase in the ratio of base money to broad money is off-target. The relevant ratio is that between currency and the stock of some measure of broad money held by the public, which is not the same as the ratio of base money to the stock of broad money.
Actually my claim also applies to currency. Here is the data for 1929 and today:
January 1929: Currency = $3.828b M1 = $26.109b M2 = $55.119b
Today: Currency = $1239b M1 = $2793b M2 = $11137b
I realize that “everyone knows” that the modern economy relies more on bank deposits and less on cash than in the old days, but I’m afraid that’s just one of the many things “everyone knows” that is not true. Note that the C/M1 ratio would have increased even if you had only looked at currency held within the US (believed to be as much as half of the total currency in circulation.) It’s unclear what would have happened to the C/M2 ratio.