M1 represents the money supply composed of currency, demand deposits, and other liquid deposits, including savings deposits. It captures the most liquid parts of the money supply because it includes currency and assets that are either already cash or can be quickly converted to cash. In contrast, “near money” and “near, near money,” classified under M2 and M3, are not as rapidly convertible.
Key Insights
- M1 is a narrow metric of the money supply encompassing currency, demand deposits, and other liquid deposits.
- It excludes financial assets such as bonds.
- The U.S. no longer uses M1 as a monetary policy guide, due to its dwindling correlation with other economic variables.
- M1 amounts to a restricted measure compared to broader M2 or M3 calculations.
- The Federal Reserve Bank of St. Louis reports M1 on a monthly basis.
Understanding M1
M1 money is a country’s foundational money supply used as a medium of exchange. It includes demand deposits and checking accounts, accessed commonly via debit cards and ATMs. Among the various components of the money supply, M1 is the most narrowly defined, excluding bonds and similar financial assets. Economists frequently reference M1 to determine the amount of money in circulation within a country. Notably, in May 2020, M1 saw an expansion to include savings accounts due to their enhanced liquidity.
M1 in the United States
Until March 2006, the Federal Reserve issued reports encompassing three monetary aggregates: M1, M2, and M3. Following 2006, M3 reports ceased. M1 specifically covers commonly used money forms for payments, including currency. The amount of currency either circulating or held in Federal Reserve deposits is known as M0, or the monetary base.
M1 is defined as the aggregate of all currency in circulation plus the value of the most liquid deposits at commercial banks, excluding those held by the government, foreign banks, or other financial institutions. Owing to its narrow scope, few components get classified as M1. The broader measure, M2, incorporates elements like savings deposits, small-time deposits, and retail money market accounts.
Closely related to M1 and M2 is Money Zero Maturity (MZM), encompassing M1 plus all money market accounts, including institutional funds. MZM estimates the supply of readily circulating liquid money within the economy.
The Federal Reserve graphically represents the money supply in billions of dollars on the Y-axis and time on the X-axis, with updates provided on the Federal Reserve of St. Louis’ website.
How to Calculate M1
M1 comes from circulating Federal Reserve notes (paper money) and coins reserved outside Federal Reserve banks and depository vaults. Paper money typically represents the most significant share of a nation’s money supply.
Additionally, M1 includes traveler’s checks (non-bank issuers), demand deposits, and other checkable deposits, encompassing NOW accounts at depository institutions and credit union share draft accounts.
However, the definition of M1 varies slightly worldwide. In the eurozone, M1 includes overnight deposits, whereas in Australia, it includes current deposits from the private non-bank sector. Contrastingly, the United Kingdom no longer uses M0 or M1, opting instead for M4, representing the broad money supply.
Money Supply and the U.S. Economy
Historically, measuring the money supply indicated a close relationship with economic variables such as GDP, inflation, and prices. Economists like Milton Friedman supported the theory that the money supply interrelates with these variables.
In recent decades, the link between money supply measurements and primary economic variables has become less certain, reducing their relevance as a U.S. monetary policy guide.
M1 vs. M2 vs. M3
M1 comprises all physical currency, traveler’s checks, demand deposits, and other checkable deposits (e.g., checking accounts), representing the most liquid money forms. M2 extends beyond M1 by including less liquid forms such as savings deposits, money market securities, and other time deposits. Although quickly convertible into cash, these elements are less immediate than M1’s components.
M3, the broadest, covers M1 and M2 while adding larger savings deposits, time deposits under $100,000, and institutional money market funds. M3 encompasses a broad range of easily convertible savings and investments.
How the M1 Money Supply Changes
Governments modulate the money supply to influence broader economic scenarios. For instance, during the COVID-19 pandemic, governments augmented the M1 money supply to stimulate the economy, retain employment, and encourage business activity. Central banks might manage this by increasing physical currency circulation, lending to banks, or purchasing securities. Post-COVID strategies included reverse policies to check inflation.
Both businesses and consumer spending impact the M1 money supply. Increased expenditure creates greater demand for local currency, thereby swelling the M1 supply.
Why Is M1 Money Supply So High?
In May 2020, the Federal Reserve revised the M1 money supply calculation methodology. Previously restricted to currency in circulation, demand deposits, and other checkable deposits, the new definition broadened to include other liquid deposits like savings accounts, inflating the reported M1 value.
Why Is M2 More Stable Than M1?
M2 surpasses M1 in stability as it accounts for more liquid components. It includes elements like savings deposits and money market accounts, less frequently in flux compared to M1, which encompasses the easiest assets to transact.
Who Controls the M1 Money Supply?
Federal Reserve banks manage the U.S. money supply, employing monetary and fiscal policies to influence economic conditions, create employment, and curb inflation.
How Does the M1 Money Supply Affect Inflation?
Increasing the money supply renders money more accessible, reducing debt costs and tax liabilities potentially. This empowers consumers with greater spending capacity, upping demand and inflating prices across goods. For instance, lower mortgage rates amidst increased money supply apply an upward surge on housing prices.
Conclusion
The M1 money supply encapsulates currency, demand deposits, and other liquid deposits. While each component is seasonally adjusted, M1 remains the narrowest money supply measure, closely tied to inflation. The Federal Reserve manipulates the money supply through policy to steer economic trajectories.
Related Terms: M2, M3, monetary policy, Federal Reserve.
References
- Federal Reserve. “Monetary Aggregates and Monetary Policy at the Federal Reserve: A Historical Perspective”.
- Federal Reserve. “Discontinuance of M3”.
- Federal Reserve Economic Data. “M1 (Discontinued)”.
- Federal Reserve Bank of St. Louis. “M1”.
- European Central Bank. “Monetary Aggregates”.
- Reserve Bank of Australia. “Money in the Australian Economy”.
- UK National Archives. “UK Monetary Aggregates: Main Definitional Changes”, Page 6.
- Bank of England. “Further Details About M0 Data”.
- Bank of England. “Further Details About M4 Data”.
- MInternet Archive. “A Monetary History of the United States: 1867–1960”, Pages 676–700.
- Federal Reserve Economic Data. “M1 (Discontinued)”.
