Murray N. Rothbard, “Austrian Definitions of the Supply of Money” — Summary

Rothbard’s essay is a compact theoretical intervention: it asks how Austrians should define the money supply for price theory, monetary history, and business-cycle analysis. Its central claim is that money must be identified by economic function, not by legal form, central-bank convenience, or statistical fit.

The concept of the supply of money plays a vitally important role, in differing ways, in both the Austrian and the Chicago schools of economics.

Against the Chicago approach, Rothbard argues that selecting a monetary aggregate because it correlates with national income evades the prior conceptual question of what money is. Empirical regularity cannot substitute for causal theory; a monetary aggregate must first be grounded in the role money plays in exchange.

Furthermore, the approach overlooks the fact that statistical correlation cannot establish causal connections; this can only be done by a genuine theory that works with definable and defined concepts.

Rothbard therefore returns to Mises’s definition of money as the generally accepted medium of exchange: the final means of payment for goods and services. From this standpoint, demand deposits count as money-substitutes when the public treats them as redeemable at par in standard money. The point is not that all deposits could actually be redeemed under fractional-reserve banking, but that they function as present money so long as market participants accept them as such.

Deposits are not in fact all redeemable in cash in a system of fractional reserve banking; but so long as individuals on the market think that they are so redeemable, they continue to function as part of the money supply.

This functional test leads Rothbard to include more than narrow M1, but far less than “liquid assets” generally. Savings deposits, savings-and-loan shares, certain small time deposits or certificates at current redemption value, life-insurance cash surrender values net of policy loans, and savings bonds at their redemption value can enter the Austrian aggregate when they are fixed claims to money. By contrast, stocks, bonds, real estate, and other readily saleable assets are not money merely because they are liquid. They must first be sold for money; they are not themselves final payment.

The operative difference, then, is not whether an asset is liquid or not (since stocks are no more part of the money supply than, say, real estate) but whether the asset is redeemable at a fixed rate, at par, in money.

Rothbard names this broader Austrian money stock Ma. It includes cash outside banks and redeemable money claims while avoiding double counting of bank reserves or institutional cross-holdings. He also includes Treasury deposits, since taxation transfers money to government rather than extinguishing it. The resulting aggregate is meant to preserve the uniqueness of money while recognizing that modern monetary exchange occurs through redeemable claims as well as hand-to-hand currency.

The essay then distinguishes the money supply relevant to price theory from the monetary expansion relevant to Austrian business-cycle theory. Ma measures total money; Mb isolates newly created bank money that enters business credit. Rothbard argues that not every injection of bank credit generates the cycle in the same way. Deficit finance shifts resources toward government, and consumer credit favors present consumption, but business lending distorts the structure of production by artificially expanding investment in higher-order capital goods.

Rothbard admits that Mb cannot be measured with precision, since bank liabilities cannot be traced neatly to particular assets. Still, he treats the distinction as indispensable for historical interpretation: Austrians need both a theoretically coherent measure of money and a way to identify the channel through which credit expansion alters production. The essay’s contribution is thus definitional and analytical: it separates money from liquidity, present claims from future credit, and general inflation from cyclical credit expansion.