In the United States the Federal Reserve gathers information on the amount of fiat money and near monies that exist, classifying them by how close a substitute they are for fiat in scope and liquidity. In the United States, the GDP for 1998 was around $8.5 trillion; the amount of coinage and currency was $459.5 billion; M1 which consists of currency, travelers’ checks, short term deposits and other checkable accounts was $1,097.4 billion. M2 adds in retail money market funds and small savings accounts and was $4,397 billion; M3 which includes the above plus large time deposits, Eurodollars and institutional money market funds stood at $5,997 billion. The national debt was $16,230.9 billion. The New York Federal Reserve has estimated the velocity of M1 in the years 1978–1996 as varying between 5.9–7.4 and M2 from 1.6–2.05. There are considerable empirical difficulties in obtaining good velocity estimates, and modern texts play down velocity, but velocity fluctuations appear to be substantial and are probably related to expectations in a complex way. A quotation from Alfred Marshal is relevant:
Petty thought that the money “sufficient for” the nation is “so much as will pay half a year’s rent for all the lands of England and a quarter’s rent of the Housing, for a week’s expense of all the people, and about a quarter of the value of all exported commodities” (Quantulumcunque, Queries 23 and 25: see also his Political Arithmetic, ch. IX and
Verbum Sapienti, Ch. VI). Locke estimated that “one-fiftieth of wages and one-fourth of the landowner’s income nd one-twentieth part of the broker's yearly returns in ready money will be enough to drive the trade of any country.” Cantillon (A.D. 1755) after a long and subtle study, concludes that the value needed is a ninth of the total produce of the country, or, what he takes to be the same thing, a third of the rent of the land. Adam Smith has more of the skepticism of the modern age and says: “it is impossible to determine the proportion,’ though `it has been computed by different authors at a fifth, at a tenth, at a twentieth and at a thirtieth part of the whole value of the annual produce.” As Adam Smith noted, the calculation of the appropriate amount of money for the economy is difficult, but for some purposes, especially given the improvements in information, computation and the gathering of economic statistics it is not out of the question. A useful way of approaching this problem is to imagine that each instrument which is used as a means of payment in any major market is described by a different color Poker chip and the domain of use and the method of production and destruction of the instrument is fully specified in each instance. The ideal world of the tax collector would be to have all assets turn over once during the tax period so that in each period all wealth is “marked to market.” This would wipe out creative accounting. Undisclosed wealth and disclosed wealth would coincide (except for the valuation of individual talent). The world would be an easier place for the economic theorist and if all trade were simultaneous the amount of money required to run the private sector would equal the total physical wealth (leaving out the human capital) and the velocity of the money would be one. The world is far from perfect. The network of payments is far more complex than in the time of Adam Smith yet the means for observing and measuring the flows are better. Once one is willing to consider the physical approximations of the transactions structure and understand how it depends
