Why the “Money Supply” Is Conceptually Incoherent

Economists’/monetarists’ use of the term Money “Supply” reveals multiple levels of deep confusion.

1. Supply implies a flow. But they’re clearly referring to a “stock” of money: what’s tallied in monetary aggregates.

2. Even if you’re think of a stock of money: Supply is not a quantity, an amount, a numeric measure. It’s a psychological/behavioral concept — willingness to produce and sell — commonly depicted in a curve representing that willingness at different price points. (All economics is behavioral economics.)

But “supply” is necessary to validate the incoherent ideas of the “price of” and “demand for” money — a set of financial instruments like checking deposits whose price never changes (relative to the Unit of Account). That price can’t change — by definition, by construction, and by institutional fiat.

Likewise, the aggregate stock or so-called “supply” of fixed-price instruments, money, changes only very slowly via bank net new lending. (That change in lending is determined by myriad economic behaviors and effects.)

If so-called demand for money can’t change the (P)rice of money (it can’t), or the collective (Q)uantity of money outstanding (it can but not much and very slowly), what exactly are we talking about here in our imagined supply-and-demand diagram toy thought-experiment?