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Figure 1

Monetary Base (in billions)

Reserves

proxy. Thus, the virtual freezing of reserves

may be too low, the Fed makes no such ad-

turns out to be the most salient yet ignored

justment. Doing so would reduce the annual

feature of Greenspan's tenure. Interestingly,

growth rate of the monetary base between

the late Milton Friedman, in the 1980s, had

December 1986 and December 2005 from 6.4

to 4.9 percent.9

recommended something similar to what

Greenspan did de facto: freeze the base.10

Furthermore, in a fully deregulated mone-

tary system, private banks--not the Fed--

Greenspan also helped deregulate the

would be the institutions issuing currency.

broader monetary aggregates: M2, MZM, and

Currency would become an additional bank

M3. The Depository Institutions Deregulation

Milton Friedman,

liability like deposits, responding to market

and Monetary Control Act of 1980 had begun

in the 1980s, had

forces. The Fed tries to duplicate this result by

phasing out interest-rate ceilings on deposits

recommended

allowing the public to determine how much of

and modified reserve requirements in complex

the base becomes currency. In other words, it

ways. Combined with subsequent administra-

something

controls only the total base whereas currency

tive deregulation under Greenspan through

similar to what

passively expands to accommodate people's

January 1994, these changes left all the finan-

preferences. This suggests that a more mean-

cial liabilities that M2 adds to M1--savings

Greenspan did

ingful approximation of the base would be

deposits, small time deposits, money market

de facto: freeze

simply to subtract all currency in circulation,

deposit accounts, and retail money market

the base.

leaving us with only aggregate reserves as our

mutual fund shares--utterly free of reserve

4