Monetary creation and inflation

The money supply, even when those elements that are not payment instruments have been removed from it, and even when it is confined to notes and current account deposits (M1), is not a reliable indicator of the monetary effect resulting from financial exchanges; and yet this is the very purpose for which it is intended and the reason why it was devised. We have seen that it can be improved and made more representative by means of a corrective factor, which allows for identical monetary effects to those that derive from the quantity of money but which are caused by the velocity and the nature of the transactions in which money is involved. Credit cards provide an example of the mistakes that can arise if one neglects these last two factors.