Economists had noticed by the mid-1970’s that what they thought were steady money relationships with the economy had broken down. This divergence was not slight; how could it be given that the era still stands today as the Great Inflation? Ostensibly, a great deal of research on the topic was devoted to monetary policy implications which is a direct assault on any idea of monetarism as some static and universal set of laws by which to guide economic management for all time. More and more through the worst part of the Great Inflation, the later 1970’s, this became a search for “missing money.”

What was in many ways frustrating was that this “money” was never really missing at all. Almost everyone knew where it was and what it was; the problem was that economists resisted and resisted declaring the products of financial innovation as “money.” While technology and originality had created NOW accounts, surplused repos and, yes, euro/dollars, the mainstay of economics continued to assert them as nothing more than exotic forms of assets. It didn’t matter that they were being used in practice as transactionable substitutes, what mattered to them was that quantity theory was never truly jeopardized.

In 1976, the Brookings Institute published a paper by three staff members of the Board of Governors of the Federal Reserve System, Jared Enzler, Lewis Johnson, and John Paulus, titled Some Problems With Money Demand. It declared:

The current economic upturn has been characterized by unusually low rates of money growth relative to the increase in nominal gross national product. Even more surprising, the unusual rise in velocity has occurred while short-term interest rates have remained largely unchanged or even fallen slightly (see table 1). This development contradicts much of the supposed knowledge about the public’s demand for money and its determinants.

There were drafts on credit union shares, money market funds, and foreign-owned demand deposits (euro/dollars). In money market funds, for instance, there were practically none in early 1974; the Brookings Paper estimated $174 million in MMF’s and $143 million of NOW balances in January 1974. Only two years later, however, MMF’s had exploded to $3.6 billion while NOW balances had accumulated to $839 million. Neither of those was included in the aggregate money statistics of that time.

The conclusion of the paper was rather stark in that it detected the first hints of a permanent rupture in the assumed stability of money that had dominated since the Great Depression.

At this point it seems unlikely that we can develop a simple, reliable, money-demand equation. Our best efforts so far, using published demand deposit data, overestimate by about 6 percent in the first quarter of 1976.

Part of the problem was repos. Even by 1979, there was still no consensus on what repos actually were – were they repurchase agreements, separate buys and sells in full exchange of ownership of the security; or were they collateralized short-term loans where ownership never changed hands at all? The truth was that they were both and that the exact structure of any repo was treated as idiosyncratic. The litter of court cases (usually suit brought for tax purposes) only made matters worse, as some courts suggested actual purchases and sales, while other rulings determined collateralized lending. The confusion only aided the resistance of accepting monetary purposes for repos.

No matter what a repo was or was not, it was becoming likewise a similar substitute for a demand deposit. Because of the way repos were structured in most circumstances, corporate customers, the largest segment of repo users, could and did write checks against repo balances knowing full well that the checks would clear after the repo had expired and federal funds had been delivered (making them available immediately). As this 1979 article in the Federal Reserve Bank of St. Louis Bulletin suggested, no matter what economists determined about repos as money they were being treated as such on both sides of banking:

Preliminary analyses suggest that the apparent shift in the money demand function would have been somewhat smaller if RPs are included in the stock of money. The evidence does not settle the conceptual issue of whether RPs are money, but the studies do provide some empirical support for including RPs in the definition of money for policy purposes. Even if RPs are not judged to be money, they are closer substitutes to it than other near monies and help explain the problems in estimating the money demand function.