How Much Money Inflation? - Howard S. Katz - Mises Institute

How Much Money Inflation? - Howard S. Katz - Mises Institute: "In pursuit of the answer to how the monetary base got to be bigger than the money supply itself, I called the St. Louis Federal Reserve, and they were good enough to send me the following reply:

Half of all transaction deposits do not appear in M1 [the money supply] due to retail deposit sweeping. Adding these back into M1 causes M1 to be larger than the monetary base. (In retail deposit sweeping, banks reclassify checkable deposits as savings deposits so as to reduce statutory reserve requirements. Within certain legal bounds, such behavior is acceptable to the Fed. Bank customers are unaware that such reclassification is occurring.)
Plus the FOMC has increased the Fed balance sheet to levels never before seen. Banks are holding deposits at the Fed and not making a great deal of new loans (they are making some, but it is a recession after all). If the banks made new loans, that would generate more deposits to be included in M1.
Transactions deposits are simply demand deposits plus other checkable deposits. That is, they are total bank deposits and, as such, are an important part of the money supply."