View source for Finance:Money supply

{{Short description|Total value of money available in an economy at a specific point in time}}
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[[File:China M2 money supply vs USA money supply.png|thumb|260px|right|China M2 money supply vs USA M2 money supply]]
[[File:Money_supply_growth_vs_inflation_rates.png|260px|thumb|Comparative chart on money supply growth against inflation rates]]
[[File:M2 as a % of GDP.png|260px|M2 as a percent of GDP|alt=M2 as a % of GDP|thumb]]

In [[Finance:Macroeconomics|macroeconomics]], the '''money supply''' (or '''money stock''') refers to the total volume of [[Finance:Money|money]] held by the public at a particular point in time. There are several ways to define "money", but standard measures usually include [[Finance:Circulation (currency)|currency in circulation]] (i.e. physical cash) and demand deposits (depositors' easily accessed [[Finance:Asset|asset]]s on the books of [[Finance:Financial institution|financial institution]]s).<ref>Alan Deardorff. "Money supply," [http://www-personal.umich.edu/~alandear/glossary/m.html Deardorff's Glossary of International Economics]</ref><ref>Karl Brunner, "money supply," ''The New Palgrave: A Dictionary of Economics'', v. 3, p. 527.</ref> Money supply data is recorded and published, usually by the national statistical agency or the [[Finance:Central bank|central bank]] of the country. Empirical money supply measures are usually named '''M1''', '''M2''', '''M3''', etc., according to how wide a definition of money they embrace. The precise definitions vary from country to country, in part depending on national financial institutional traditions. 

Even for narrow aggregates like M1, by far the largest part of the money supply consists of deposits in [[Finance:Commercial bank|commercial bank]]s, whereas [[Finance:Currency|currency]] ([[Engineering:Banknote|banknote]]s and [[Finance:Coin|coin]]s) issued by central banks only makes up a small part of the total money supply in modern economies. The public's demand for currency and bank deposits and commercial banks' supply of [[Finance:Loan|loan]]s are consequently important determinants of money supply changes. As these decisions are influenced by central banks' [[Finance:Monetary policy|monetary policy]], not least their setting of [[Finance:Interest rate|interest rate]]s, the money supply is ultimately determined by complex interactions between non-banks, commercial banks and central banks. 

According to the quantity theory supported by the monetarist school of thought, there is a tight causal connection between growth in the money supply and [[Finance:Inflation|inflation]]. In particular during the 1970s and 1980s this idea was influential, and several major central banks during that period attempted to control the money supply closely, following a monetary policy target of increasing the money supply stably. However, the strategy was generally found to be impractical because money demand turned out to be too unstable for the strategy to work as intended. 

Consequently, the money supply has lost its central role in monetary policy, and central banks today generally do not try to control the money supply. Instead they focus on adjusting interest rates, in developed countries normally as part of a direct inflation target which leaves little room for a special emphasis on the money supply. Money supply measures may still play a role in monetary policy, however, as one of many economic indicators that central bankers monitor to judge likely future movements in central variables like employment and inflation.

==Measures of money supply ==
[[File:Credit_Mechanics_4_mechanical_interrelationships_governing_the_credit_volume_(Table_1_by_F._Decker_&_C._Goodhart_2021).PNG|thumbnail|right|In accordance to "credit mechanics": Bank money expansion or destruction (or unchangement) are depending on payment flows (after given loans by commercial banks to nonbank sector[s]).<ref>{{cite journal | url=https://www.tandfonline.com/doi/abs/10.1080/09672567.2021.1963796?journalCode=rejh20 | doi=10.1080/09672567.2021.1963796 | title=Wilhelm Lautenbach's credit mechanics – a precursor to the current money supply debate | date=2022 | last1=Decker | first1=Frank | last2=Goodhart | first2=Charles A. E. | journal=The European Journal of the History of Economic Thought | volume=29 | issue=2 | pages=246–270 | s2cid=158727007 }}</ref>]]

[[File:CPI_vs_M2_money_supply_increases.png|450px|thumb|right|CPI-Urban (blue) vs M2  money supply (red); recessions in gray]]

There are several standard measures of the money supply,<ref name="Is MS important">{{cite web |title=What is the money supply? Is it important? |url=https://www.federalreserve.gov/faqs/money_12845.htm |website=Board of Governors of the Federal Reserve System |access-date=16 August 2023 |language=en |date=December 16, 2015}}</ref> classified along a spectrum or continuum between narrow and broad ''monetary aggregates''. Narrow measures include only the most liquid assets: those most easily used to spend (currency, checkable deposits). Broader measures add less liquid types of assets (certificates of deposit, etc.).

This continuum corresponds to the way that different types of money are more or less controlled by monetary policy. Narrow measures include those more directly affected and controlled by monetary policy, whereas [[Finance:Broad money|broader measures]] are less closely related to monetary-policy actions.<ref name = "iwdef">{{cite web|url=http://www.investorwords.com/3110/money_supply.html|title=money supply Definition|access-date=July 20, 2008|archive-date=April 12, 2019|archive-url=https://web.archive.org/web/20190412051550/http://www.investorwords.com/3110/money_supply.html|url-status=dead}}</ref>

The different types of money are typically classified as "'''M'''"s. The "M"s usually range from M0 (narrowest) to M3 (and M4 in some countries<ref>{{cite web |title=Further details about M4 data |url=https://www.bankofengland.co.uk/statistics/details/further-details-about-m4-data |website=www.bankofengland.co.uk |access-date=20 August 2023 |language=en |date=31 January 2023}}</ref>) (broadest), but which "M"s, if any, are actually focused on in central bank communications depends on the particular institution. A typical layout for each of the "M"s is as follows for the United States:

{| class="wikitable"
!  Type of money
!  M0
!  MB
!  M1
!  M2
!  M3
!  MZM
|-
| Notes and coins in circulation (outside Federal Reserve Banks and the vaults of depository institutions) ([[Finance:Currency|currency]])
|  ✓<ref name="dollardaze.org">[http://dollardaze.org/blog/?post_id=00565 "Gold, Oil, Stocks, Investments, Currencies, and the Federal Reserve: Growth of Global Money Supply"] {{Webarchive|url=https://web.archive.org/web/20150915011923/http://dollardaze.org/blog/?post_id=00565 |date=September 15, 2015 }}. DollarDaze Economic Commentary Blog by Mike Hewitt.</ref>
|  ✓
|  ✓
|  ✓
|  ✓
|  ✓
|-
| Notes and coins in bank vaults (vault cash)
|
|  ✓
|
|
|
|
|-
| Federal Reserve Bank credit (required reserves and [[Finance:Excess reserves|excess reserves]] not physically present in banks)
|
|  ✓
|
|
|
|
|-
| [[Finance:Traveler's cheque|Traveler's checks]] of non-bank issuers
|
||
| ✓
| ✓
| ✓
| ✓
|-
| [[Finance:Demand deposit|Demand deposit]]s
|
|
| ✓
| ✓
| ✓
| ✓
|-
| Other checkable deposits (OCDs), which consist primarily of negotiable order of withdrawal (NOW) accounts at depository institutions and credit union share draft accounts.
|
|
| ✓<ref>[http://research.stlouisfed.org/fred2/series/M1 M1 Money Stock (M1) – FRED – St. Louis Fed]. Research.stlouisfed.org.</ref>
| ✓
| ✓
| ✓
|-
| Savings deposits
|
|
|✓<ref name="federalreserve.gov">{{Cite web|date=December 17, 2020|title=Revisions to the H.6 Statistical Release|url=https://www.federalreserve.gov/feeds/h6.html}}</ref>
| ✓
| ✓
| ✓
|-
| Time deposits less than $100,000 and [[Finance:Money market account|money-market deposit accounts]] for individuals
|
|
|
| ✓
| ✓
|
|-
|Large time deposits, institutional money market funds, short-term repurchase and other larger liquid assets<ref>[http://www.investopedia.com/terms/m/m3.asp M3 Definition]. Investopedia (February 15, 2009).</ref>
|
|
|
|
| ✓
|
|-
|All money market funds
|
|
|
|
|
| ✓
|}
* '''{{visible anchor|M0}}''': In some countries, such as the United Kingdom, M0 includes bank reserves, so M0 is referred to as the monetary base, or narrow money.<ref>[http://moneyterms.co.uk/m0/ M0 (monetary base)]. Moneyterms.co.uk.</ref>
* '''MB''': is referred to as the [[Finance:Monetary base|monetary base]] or total currency.<ref name="dollardaze.org"/> This is the base from which other forms of money (like checking deposits, listed below) are created and is traditionally the most liquid measure of the money supply.<ref>{{cite web|url= http://www.investopedia.com/terms/m/m0.asp|title= M0|access-date= July 20, 2008|publisher= Investopedia|archive-url= https://web.archive.org/web/20180330092457/https://www.investopedia.com/terms/m/m0.asp|archive-date= March 30, 2018|url-status= dead}}</ref>
* '''M1''': Bank reserves are not included in M1.
* '''M2''': Represents M1 and "close substitutes" for M1.<ref>{{cite web |url=http://www.investopedia.com/terms/m/m2.asp|title= M2|access-date=July 20, 2008 |publisher= Investopedia}}</ref> M2 is a broader classification of money than M1. 
* '''M3''': M2 plus large and long-term deposits. Since 2006, M3 is no longer published by the US central bank.<ref name="fedM3disc">[http://www.federalreserve.gov/Releases/h6/discm3.htm Discontinuance of M3], Federal Reserve, November 10, 2005, revised March 9, 2006.</ref> However, there are still estimates produced by various private institutions.
* '''MZM''': Money with zero maturity. It measures the supply of financial assets redeemable at par on demand.<ref>{{cite web|last=Thayer|first=Gary|title=Investors should assume that inflation will exceed the Fed's target|url=http://www.firstclearing.com/download/investors-should-assume-inflation-will-exceed-feds-target/|work=Macro Strategy|publisher=Wells Fargo Advisors|access-date=April 2, 2013|date=January 16, 2013|archive-url=https://web.archive.org/web/20140714220955/https://www.firstclearing.com/download/investors-should-assume-inflation-will-exceed-feds-target/|archive-date=July 14, 2014|url-status=dead}}</ref><ref>{{cite journal|last=Carlson|first=John B.|author2=Benjamin D. Keen|title=MZM: A monetary aggregate for the 1990s?|journal=Economic Review|year=1996|volume=32|issue=2|pages=15–23|url=http://clevelandfed.org/Research/Review/1996/96-q2-carlson.pdf|access-date=April 2, 2013|publisher=Federal Reserve Bank of Cleveland|archive-url=https://web.archive.org/web/20120904081918/http://clevelandfed.org/Research/Review/1996/96-q2-carlson.pdf|archive-date=September 4, 2012|url-status=dead}}</ref>

=== Creation of money ===

Both central banks and commercial banks play a role in the process of [[Finance:Money creation|money creation]]. In short, in the [[Finance:Fractional-reserve banking|fractional-reserve banking]] system used throughout the world, money can be subdivided into two types:<ref name="bis">{{cite book |title=The Role of Central Bank Money in Payment Systems |page=9 |section=The coexistence of central and commercial bank monies: multiple issuers, one currency |url=http://www.bis.org/publ/cpss55.pdf |publisher=Bank for International Settlements}}</ref><ref>{{cite book |title=The Role of Central Bank Money in Payment Systems |page=3 |url=http://www.bis.org/publ/cpss55.pdf |publisher=Bank for International Settlements |quote=Contemporary monetary systems are based on the mutually reinforcing roles of central bank money and commercial bank monies.}}</ref><ref name="ecb">{{cite book |publisher=European Central Bank |url=http://www.ecb.int/press/key/date/2000/html/sp001109_2.en.html |title=Domestic payments in Euroland: commercial and central bank money |date=November 9, 2000 |quote=At the beginning of the 20th almost the totality of retail payments were made in central bank money. Over time, this monopoly came to be shared with commercial banks, when deposits and their transfer via checks and giros became widely accepted. Banknotes and commercial bank money became fully interchangeable payment media that customers could use according to their needs. While transaction costs in commercial bank money were shrinking, cashless payment instruments became increasingly used, at the expense of banknotes.}}</ref>

* '''central bank money''' — obligations of a central bank, including [[Finance:Currency|currency]] and central bank depository accounts
* '''commercial bank money''' — obligations of commercial banks, including checking accounts and savings accounts.

In the money supply statistics, central bank money is '''MB''' while the commercial bank money is divided up into the '''M1-M3''' components, where it makes up the non-'''M0''' component. 

By far the largest part of the money used by individuals and firms to execute economic actions are commercial bank money, i.e. deposits issued by banks and other financial institutions. In the United Kingdom, deposit money outweighs  the central bank issued currency by a factor of more than 30 to 1. In the United States, where the country's currency has a special international role being used in many transactions around the world, legally as well as illegally, the ratio is still more than 8 to 1.<ref name="Palgrave">{{cite book |last1=Friedman |first1=Benjamin M. |title=The New Palgrave Dictionary of Economics |chapter=Money Supply |chapter-url=https://link.springer.com/referenceworkentry/10.1057/978-1-349-95121-5_875-2 |website=The New Palgrave Dictionary of Economics |publisher=Palgrave Macmillan UK |access-date=29 August 2023 |pages=1–10 |language=en |doi=10.1057/978-1-349-95121-5_875-2 |date=2017|isbn=978-1-349-95121-5 }}</ref> Commercial banks create money whenever they make a loan and simultaneously create a matching deposit in the borrower's bank account. In return, money is destroyed when the borrower pays back the principal on the loan.<ref name=BoE>{{cite web |last1=McLeay |first1=Michael |title=Money Creation in the Modern Economy |url=https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf |publisher=Bank of England}}</ref> Movements in the money supply therefore to a large extent depend on the decisions of commercial banks to supply loans and consequently deposits, and the public's behavior in demanding currency as well as bank deposits.<ref name="Palgrave"/> These decisions are influenced by the monetary policy of central banks, so that money supply is ultimately created by complex interactions between banks, non-banks and central banks.<ref>{{cite web |title=The role of banks, non-banks and the central bank in the money creation process |url=https://www.bundesbank.de/resource/blob/654284/df66c4444d065a7f519e2ab0c476df58/mL/2017-04-money-creation-process-data.pdf |website=www.bundesbank.de |publisher=Deutsche Bundesbank Monthly Report |access-date=1 September 2023 |date=April 2017}}</ref> 

Even though central banks today rarely try to control the amount of money in circulation, their policies still impact the actions of both commercial banks and their customers. When setting the interest rate on central bank reserves, interest rates on bank loans are affected, which in turn affects their demand. Central banks may also affect the money supply more directly by engaging in various open market operations.<ref name=BoE/> They can increase the money supply by purchasing government securities, such as government bonds or treasury bills. This increases the liquidity in the banking system by converting the illiquid securities of commercial banks into liquid deposits at the central bank. This also causes the price of such securities to rise due to the increased demand, and interest rates to fall. In contrast, when the central bank "tightens" the money supply, it sells securities on the open market, drawing liquid funds out of the banking system. The prices of such securities fall as supply is increased, and interest rates rise.<ref name="Blanchard">{{cite book |last1=Blanchard |first1=Olivier |last2=Amighini |first2=Alessia |last3=Giavazzi |first3=Francesco |title=Macroeconomics: a European perspective |date=2021 |publisher=Pearson |location=Harlow |isbn=978-1-292-36089-8 |pages=78–86 |edition=4th}}</ref> 

In some economics textbooks, the supply-demand equilibrium in the markets for money and reserves is represented by a simple so-called [[Finance:Money multiplier|money multiplier]] relationship between the monetary base of the central bank and the resulting money supply including commercial bank deposits. This is a short-hand simplification which disregards several other factors determining commercial banks' reserve-to-deposit ratios and the public's money demand.<ref name="Palgrave"/><ref name=BoE/><ref>{{cite book |first1=Martijn |last1=Boermans |first2=Basil |last2=Moore |year=2009 |title=Locked-in and Sticky textbooks |url=https://issuu.com/martijnboermans/docs/boermans_moore__2009__-_locked-in_sticky_textbooks |publisher=Issuu.com }}</ref>

==National definitions of "money"==
===East Asia===
====Hong Kong====
[[File:HKD vs USD over the year.svg|thumb|right|250px|HKD vs USD over the year]]
In 1967, when sterling was devalued, the [[Finance:Hong Kong dollar|Hong Kong dollar]]'s peg to the pound was increased from 1 shilling 3 pence (£1 = HK$16) to 1 shilling 4½ pence (£1 = HK$14.5455) although this did not entirely offset the devaluation of sterling relative to the US dollar (it went from US$1 = HK$5.71 to US$1 = HK$6.06). In 1972 the Hong Kong dollar was pegged to the US dollar at a rate of US$1 = HK$5.65. This was reduced to HK$5.085 in 1973. Between 1974 and 1983 the Hong Kong dollar floated. On October 17, 1983, the currency was pegged at a rate of US$1 = HK$7.80 through the currency board system.

As of May 18, 2005, in addition to the lower guaranteed limit, a new upper guaranteed limit was set for the Hong Kong dollar at 7.75 to the American dollar. The lower limit was lowered from 7.80 to 7.85 (by 100 pips per week from May 23 to June 20, 2005). The Hong Kong Monetary Authority indicated that this move was to narrow the gap between the interest rates in Hong Kong and those of the United States. A further aim of allowing the Hong Kong dollar to trade in a range is to avoid the HK dollar being used as a proxy for speculative bets on a [[Finance:Renminbi|renminbi]] revaluation.

The Hong Kong Basic Law and the Sino-British Joint Declaration provides that Hong Kong retains full autonomy with respect to currency issuance. Currency in Hong Kong is issued by the government and three local banks under the supervision of the territory's ''de facto'' central bank, the Hong Kong Monetary Authority. Bank notes are printed by Hong Kong Note Printing.

A bank can issue a Hong Kong dollar only if it has the equivalent exchange in US dollars on deposit. The currency board system ensures that Hong Kong's entire monetary base is backed with US dollars at the linked exchange rate. The resources for the backing are kept in Hong Kong's exchange fund, which is among the largest official reserves in the world. Hong Kong also has huge deposits of US dollars, with official foreign currency reserves of 331.3 billion USD {{as of|September 2014|lc=y}}.<ref>{{cite web|url=http://www.hkma.gov.hk/eng/key-information/press-releases/2014/20140905-3.shtml|publisher=Hong Kong Monetary Authority |title= Hong Kong's Latest Foreign Currency Reserve Assets Figures Released|access-date=November 20, 2016}}</ref>

====Japan====
[[File:Money supply of japan.gif|thumb|Japanese money supply (April 1998 – April 2008)]]
The Bank of Japan defines the monetary aggregates as:<ref>{{cite web |url=http://www.boj.or.jp/en/type/exp/stat/data/exms01.pdf |page=11 |publisher=Bank of Japan }}</ref>
* '''M1''': cash currency in circulation, plus deposit money
* '''M2 + CDs''': M1 plus quasi-money and [[Finance:Certificate of deposit|CDs]]
* '''M3 + CDs''': M2 + CDs plus deposits of post offices; other savings and deposits with financial institutions; and money trusts
* '''Broadly defined liquidity''': M3 and CDs, plus money market, pecuniary trusts other than money trusts, investment trusts, bank debentures, commercial paper issued by financial institutions, repurchase agreements and [[Finance:Securities lending|securities lending]] with cash collateral, government bonds and foreign bonds

===Europe===
====United Kingdom====
[[File:M4 money supply.svg|thumb|M4 money supply of the United Kingdom 1984–2007. In thousand millions (billions) of pounds sterling.]]

There are just two official UK measures. M0 is referred to as the "wide [[Finance:Monetary base|monetary base]]" or "narrow money" and M4 is referred to as "[[Finance:Broad money|broad money]]" or simply "the money supply".
* '''M0''': Notes and coin in circulation plus banks' reserve balance with Bank of England. (When the bank introduced Money Market Reform in May 2006, the bank ceased publication of M0 and instead began publishing series for reserve balances at the Bank of England to accompany notes and coin in circulation.<ref>{{cite web |url=https://www.bankofengland.co.uk/statistics/details/further-details-about-m0-data |publisher=Bank of England |title=Further details about M0 data |date=November 8, 2018}}</ref>)
* '''M4''': Cash outside banks (i.e. in circulation with the public and non-bank firms) plus private-sector retail bank and building society deposits plus private-sector wholesale bank and building society deposits and certificates of deposit.<ref>{{cite web |url=http://www.bankofengland.co.uk/mfsd/iadb/notesiadb/M4.htm |publisher=Bank of England |archive-url=https://web.archive.org/web/20070809085936/http://www.bankofengland.co.uk/mfsd/iadb/notesiadb/m4.htm |archive-date=August 9, 2007 |title=Explanatory Notes – M4 |access-date=August 13, 2007}}</ref> In 2010 the total money supply (M4) measure in the UK was £2.2 trillion while the actual notes and coins in circulation totalled only £47 billion, 2.1% of the actual money supply.<ref>{{cite book |last1=Lipsey |first1=Richard G. |last2=Chrystal |first2=K. Alec |date=2011 |title=Economics |edition=12th |publisher=Oxford University Press |page=455 |isbn=978-0199563388}}</ref>

There are several different definitions of money supply to reflect the differing stores of money. Owing to the nature of bank deposits, especially time-restricted savings account deposits, M4 represents the most [[Finance:Market liquidity|illiquid]] measure of money. M0, by contrast, is the most liquid measure of the money supply.

====Eurozone====
[[File:Money supply Euro.png|thumb|The [[Finance:Euro|euro]] money supplies M0, M1, M2 and M3, and euro zone GDP from 1980–2021. Logarithmic scale.]]

The European Central Bank's definition of euro area monetary aggregates:<ref>{{cite web |url=http://www.ecb.int/stats/money/aggregates/aggr/html/hist.en.html |title=Monetary aggregates |publisher=European Central Bank |access-date=November 20, 2016}}</ref>
* '''M1''': Currency in circulation plus overnight deposits
* '''M2''': M1 plus deposits with an agreed maturity up to two years plus deposits redeemable at a period of notice up to three months.
* '''M3''': M2 plus repurchase agreements plus money market fund (MMF) shares/units, plus debt securities up to two years

===North America===
====United States {{anchor|M0|M1|M2|M3}}====<!-- Many pages link to [[Finance:Money supply#M0|Money supply]], ... -->
[[File:US Monetary Base, M1, M2 January 1959 - October 2010.png|thumb|left|794x794px|MB, M1 and M2 from 1959 to 2021 (all shown in billions) [https://fred.stlouisfed.org/graph/?g=JEwV Link]. Note that before April 24, 2020 savings accounts were not part of M1<ref>{{cite web|url=https://fredblog.stlouisfed.org/2021/05/savings-are-now-more-liquid-and-part-of-m1-money/|title=Savings are now more liquid and part of "M1 money" |publisher=St. Louis Federal Reserve Bank}}</ref>]]
[[File:M0-Money supply of the USA.jpg|thumb|left|794x794px|M0, M1 and M3. US-GDP and M3 of Eurozone for comparison. Logarithmic scale.]]
{{clear}}
[[File:Money_supply_during_the_great_depression_era.png|400px|thumb|right| Money supply decreased by several percent between Black Tuesday and the Bank Holiday in March 1933 when there were massive bank runs across the United States.]]
[[File:Inflation M2 CPI.webp|thumb|400px|right| M2 vs [[Finance:Consumer price index|CPI]]]]
The United States [[Finance:Federal Reserve|Federal Reserve]] published data on three monetary aggregates until 2006, when it ceased publication of M3 data<ref name="fedM3disc"/> and only published data on M1 and M2. M1 consists of money commonly used for payment, basically [[Finance:Currency in circulation|currency in circulation]] and checking account balances; and M2 includes M1 plus balances that generally are similar to transaction accounts and that, for the most part, can be converted fairly readily to M1 with little or no loss of principal. The M2 measure is thought to be held primarily by households. Prior to its discontinuation, M3 comprised M2 plus certain accounts that are held by entities other than individuals and are issued by banks and thrift institutions to augment M2-type balances in meeting credit demands, as well as balances in money market mutual funds held by institutional investors. The aggregates have had different roles in monetary policy as their reliability as guides has changed. The principal components are:<ref name="paf">{{cite web|url=http://www.federalreserve.gov/pf/pf.htm |title=''The Federal Reserve – Purposes and Functions'' |publisher=Federalreserve.gov |date=April 24, 2013 |access-date=December 11, 2013}}</ref>

* '''M0''': The total of all physical currency including coinage. M0 = [[Finance:Federal Reserve Note|Federal Reserve Note]]s + US Notes + Coins. It is not relevant whether the currency is held inside or outside of the private banking system as reserves.
* '''MB''': The total of all physical currency plus [[Finance:Federal Reserve Deposits|Federal Reserve Deposits]] (special deposits that only banks can have at the Fed). MB = Coins + US Notes + [[Finance:Federal Reserve Note|Federal Reserve Note]]s + [[Finance:Federal Reserve Deposits|Federal Reserve Deposits]]
* '''M1''': The total amount of M0 (cash/coin) outside of the private banking system{{Clarify|reason=Is this M0 different from the M0 number above? Sounds like M0 above includes reserve balances, M0 here does not?|date=December 2020}} plus the amount of [[Finance:Demand deposit|demand deposit]]s, [[Finance:Traveler's cheque|travelers checks]] and other checkable deposits + most [[Finance:Savings account|savings account]]s. 
* '''M2''': M1 + [[Finance:Money market account|money market account]]s, retail money market mutual funds, and small denomination time deposits ([[Finance:Certificate of deposit|certificates of deposit]] of under $100,000).
* '''MZM''': 'Money Zero Maturity' is one of the most popular aggregates in use by the Fed because its [[Finance:Velocity of money|velocity]] has historically been the most accurate predictor of [[Finance:Inflation|inflation]]. It is M2 – time deposits + money market funds
* '''M3''': M2 + all other [[Finance:Certificate of deposit|CDs]] (large time deposits, institutional money market mutual fund balances), deposits of [[Finance:Eurodollar|eurodollar]]s and [[Finance:Repurchase agreement|repurchase agreement]]s.
* '''M4-''': M3 + Commercial Paper
* '''M4''': M4- + T-Bills (or M3 + Commercial Paper + T-Bills)
* '''L''': The broadest measure of liquidity, that the Federal Reserve no longer tracks. L is very close to M4 + Bankers' Acceptance
* '''Money Multiplier''': M1 / MB. As of December 3, 2015, it was 0.756.<ref>{{Cite web|title = M1 Money Multiplier|url = https://research.stlouisfed.org/fred2/series/MULT|website = research.stlouisfed.org|date = February 15, 1984|access-date = December 3, 2015}}</ref> While a multiplier under one is historically an oddity, this is a reflection of the popularity of M2 over M1 and the massive amount of MB the government has created since 2008.

Prior to 2020, savings accounts were counted as M2 and not part of M1 as they were not considered "transaction accounts" by the Fed. (There was a limit of six transactions per cycle that could be carried out in a savings account without incurring a penalty.) On March 15, 2020, the Federal Reserve eliminated reserve requirements for all depository institutions and rendered the regulatory distinction between reservable "transaction accounts" and nonreservable "savings deposits" unnecessary. On April 24, 2020, the Board removed this regulatory distinction by deleting the six-per-month transfer limit on savings deposits.  From this point on, savings account deposits were included in M1.<ref name="federalreserve.gov"/>

Although the Treasury can and does hold cash and a special deposit account at the Fed (TGA account), these assets do not count in any of the aggregates. So in essence, money paid in taxes paid to the Federal Government (Treasury) is excluded from the money supply. To counter this, the government created the [[Finance:Treasury Tax and Loan|Treasury Tax and Loan]] (TT&L) program in which any receipts above a certain threshold are redeposited in private banks. The idea is that tax receipts won't decrease the amount of reserves in the banking system. The TT&L accounts, while demand deposits, do not count toward M1 or any other aggregate either.

When the Federal Reserve announced in 2005 that they would cease publishing M3 statistics in March 2006, they explained that M3 did not convey any additional information about economic activity compared to M2, and thus, "has not played a role in the monetary policy process for many years." Therefore, the costs to collect M3 data outweighed the benefits the data provided.<ref name="fedM3disc"/> Some politicians have spoken out against the [[Finance:Federal Reserve|Federal Reserve's]] decision to cease publishing M3 statistics and have urged the U.S. Congress to take steps requiring the Federal Reserve to do so. Congressman Ron Paul (R-TX) claimed that "M3 is the best description of how quickly the Fed is creating new money and credit. Common sense tells us that a government central bank creating new money out of thin air depreciates the value of each dollar in circulation."<ref>[http://archive.lewrockwell.com/paul/paul319.html What the Price of Gold Is Telling Us]. Lewrockwell.com (April 25, 2006).</ref> [[Social:Modern Monetary Theory|Modern Monetary Theory]] disagrees. It holds that money creation in a free-floating [[Finance:Fiat money|fiat currency]] regime such as the U.S. will not lead to significant inflation unless the economy is approaching full employment and full capacity. Some of the data used to calculate M3 are still collected and published on a regular basis.<ref name="fedM3disc"/> Current alternate sources of M3 data are available from the private sector.<ref name="SgsM3Data">{{cite web |url=http://www.shadowstats.com/alternate_data |title=Alternate data |website=Shadowstats.com}}</ref>

In the United States, a bank's reserves consist of U.S. currency held by the bank (also known as "vault cash"<ref>12 C.F.R. sec. 204.2(k).</ref>) plus the bank's balances in Federal Reserve accounts.<ref>12 C.F.R. sec. 204.5(a).</ref><ref>[http://www.investorwords.com/7260/vault_cash.html What is vault cash? definition and meaning]. Investorwords.com.</ref> For this purpose, cash on hand and balances in [[Finance:Federal Reserve|Federal Reserve]] ("Fed") accounts are interchangeable (both are obligations of the Fed). Reserves may come from any source, including the [[Finance:Federal funds|federal funds market]], deposits by the public, and borrowing from the Fed itself.<ref>{{cite web |url=http://research.stlouisfed.org/fred2/series/NFORBRES |title=Net Free or Borrowed Reserves of Depository Institutions (NFORBRES) – FRED |publisher=St. Louis Fed |website=research.stlouisfed.org|date=January 1929 }}.</ref>

As of April 2013, the [[Finance:Monetary base|monetary base]] was $3 trillion<ref>{{cite web|title=Aggregate Reserves of Depository Institutions and the Monetary Base – H.3|url=http://www.federalreserve.gov/releases/H3/Current/|publisher=[[Finance:Federal Reserve System|Federal Reserve]]|archive-url=https://archive.today/20130616092107/http://www.federalreserve.gov/releases/H3/Current/|archive-date=June 16, 2013|url-status=dead}}</ref> and M2, the broadest measure of money supply, was $10.5 trillion.<ref>{{cite web|title=H.6 Money Stock Measures|url=http://www.federalreserve.gov/releases/h6/current/h6.htm|work=Federal Reserve Statistical Release|publisher=[[Finance:Federal Reserve System|Federal Reserve]]|archive-url=https://archive.today/20130616092412/http://www.federalreserve.gov/releases/h6/current/h6.htm|archive-date=June 16, 2013|url-status=dead}}</ref>

===Oceania===
====Australia====
[[File:Australian_Money_Supply.PNG|thumb|The money supply of Australia 1984–2022]]
The Reserve Bank of Australia defines the monetary aggregates as:<ref>{{cite web |url=http://www.rba.gov.au/glossary/ |title=Glossary |date=November 11, 2015 |publisher=Reserve Bank of Australia}}</ref>
* '''M1''': [[Finance:Currency in circulation|currency in circulation]] plus bank current deposits from the private non-bank sector<ref>{{cite web |url=https://www.rba.gov.au/publications/bulletin/2019/mar/updates-to-australias-financial-aggregates.html |title=Updates to Australia's Financial Aggregates |date=March 21, 2019 |publisher=Reserve Bank of Australia |last1=Bank |first1=Joel |last2=Durrani |first2=Kassim |last3=Hatzvi |first3=Eden }}</ref>
* '''M3''': M1 plus all other bank deposits from the private non-bank sector, plus bank certificate of deposits, less inter-bank deposits
* '''Broad money''': M3 plus borrowings from the private sector by NBFIs, less the latter's holdings of currency and bank deposits
* '''Money base''': holdings of notes and coins by the private sector plus deposits of banks with the Reserve Bank of Australia (RBA) and other RBA liabilities to the private non-bank sector.

====New Zealand====
[[File:New zealand money supply 1988-2008.jpg|thumb|[[Earth:New Zealand|New Zealand]] money supply 1988–2008]]

The Reserve Bank of New Zealand defines the monetary aggregates as:<ref>[https://www.rbnz.govt.nz/statistics/c50-money-and-credit-aggregates Series description – Monetary and financial statistics]. Rbnz.govt.nz.</ref>
* '''M1''': notes and coins held by the public plus chequeable deposits, minus inter-institutional chequeable deposits, and minus central government deposits
* '''M2''': M1 + all non-M1 call funding (call funding includes overnight money and funding on terms that can of right be broken without break penalties) minus inter-institutional non-M1 call funding
* '''M3''': the broadest monetary aggregate. It represents all New Zealand dollar funding of M3 institutions and any Reserve Bank repos with non-M3 institutions. M3 consists of notes & coin held by the public plus NZ dollar funding minus inter-M3 institutional claims and minus central government deposits

===South Asia===
====India====
[[File:India Money Supply Components--Larger Label Fonts.png|thumb|Components of the money supply of India in billions of Rupee for 1950–2011]]

The Reserve Bank of India defines the monetary aggregates as:<ref>{{cite book |url=http://rbidocs.rbi.org.in/rdocs/Publications/PDFs/80441.pdf |title=Handbook of Statistics on Indian Economy |section=Notes on Tables |page=4}}</ref>
* '''Reserve money''' ('''M0'''): Currency in circulation, plus bankers' deposits with the RBI and 'other' deposits with the RBI. Calculated from net RBI credit to the government plus RBI credit to the commercial sector, plus RBI's claims on banks and net foreign assets plus the government's currency liabilities to the public, less the RBI's net non-monetary liabilities. M0 outstanding was {{INR}}30.297 trillion as on March 31, 2020.
* '''M1''': Currency with the public plus deposit money of the public (demand deposits with the banking system and 'other' deposits with the RBI). M1 was 184 per cent of M0 in August 2017.
* '''M2''': M1 plus savings deposits with post office savings banks. M2 was 879 per cent of M0 in August 2017.
* '''M3''' (the broad concept of money supply): M1 plus time deposits with the banking system, made up of net bank credit to the government plus bank credit to the commercial sector, plus the net foreign exchange assets of the banking sector and the government's currency liabilities to the public, less the net non-monetary liabilities of the banking sector (other than time deposits). M3 was 555 per cent of M0 as on March 31, 2020(i.e. {{INR}}167.99 trillion.)
* '''M4''': M3 plus all deposits with post office savings banks (excluding National Savings Certificates).<ref>{{Cite web |url=https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=50813 |title=Press Releases of Reserve Bank of India on 16 Dec 2020}}</ref>

== Importance of money supply ==

The importance which has historically been attached to the money supply in the monetary policy of central banks is due to the suggestion that movements in money may determine important economic variables like prices (and hence inflation), output and employment. Indeed, two prominent analytical frameworks in the 20th century both built on this premise: the Keynesian IS-LM model and the monetarist [[Finance:Quantity theory of money|quantity theory of money]].<ref name="Palgrave"/>

=== IS-LM model ===

The IS-LM model was introduced by [[Biography:John Hicks|John Hicks]] in 1937 to describe Keynesian macroeconomic theory. Between the 1940s and mid-1970s, it was the leading framework of macroeconomic analysis<ref>{{cite book |last=Bentolila |first=Samuel |chapter=Hicks–Hansen model |title=An Eponymous Dictionary of Economics: A Guide to Laws and Theorems Named after Economists |publisher=Edward Elgar |year=2005 |isbn=978-1-84376-029-0 }}</ref> and is still today an important conceptual introductory tool in many macroeconomics textbooks.<ref>{{cite journal |first=David |last=Colander |title=The Strange Persistence of the IS-LM Model |journal=History of Political Economy |volume=36 |issue=Annual Supplement |year=2004 |pages=305–322 |url=http://muse.jhu.edu/journals/history_of_political_economy/v036/36.5colander.pdf |doi=10.1215/00182702-36-suppl_1-305|citeseerx=10.1.1.692.6446 |s2cid=6705939 }}</ref> In the traditional version of this model it is assumed that the central bank conducts monetary policy by increasing or decreasing the money supply, which affects interest rates and consequently [[Finance:Investment|investment]], [[Aggregate demand|aggregate demand]] and output.

In light of the fact that modern central banks have generally ceased to target the money supply as an explicit policy variable,<ref>{{cite web |last1=Goodhart |first1=C.A.E. |title=The determination of the money supply: flexibility versus control |url=https://eprints.lse.ac.uk/84209/1/Goodhart_Determination%20money%20supply_2017.pdf |website=lse.ac.uk |publisher=London School of Economics and Political Science |access-date=3 September 2023 |date=September 2017}}</ref> in some more recent macroeconomic textbooks the IS-LM model has been modified to incorporate the fact that rather than manipulating the money supply, central banks tend to conduct their policies by setting policy interest rates more directly.<ref name="Blanchard"/>

=== Quantity theory of money ===

According to the [[Finance:Quantity theory of money|quantity theory of money]], inflation is caused by movements in the supply of money and hence can be controlled by the central bank if the bank controls the money supply. The theory builds upon [[Biography:Irving Fisher|Irving Fisher]]'s [[Finance:Equation of exchange|equation of exchange]] from 1911:<ref>The Purchasing Power of Money, its Determination and Relation to Credit, Interest and Crises, Irving Fisher.</ref>
: <math>M\times V = P\times Q</math>
where
* <math>M</math> is the total dollars in the nation's money supply,
* <math>V</math> is the number of times per year each dollar is spent ([[Finance:Velocity of money|velocity of money]]),
* <math>P</math> is the average price of all the goods and services sold during the year,
* <math>Q</math> is the quantity of assets, goods and services sold during the year.

In practice, macroeconomists almost always use real GDP to define {{var|Q}}, omitting the role of all other transactions.<ref name="Graff"/> Either way, the equation in itself is an [[Identity (mathematics)|identity]] which is true by definition rather than describing economic behavior. That is, [[Finance:Velocity of money|velocity]] is defined by the values of the other three variables. Unlike the other terms, the velocity of money has no independent measure and can only be estimated by dividing {{var|PQ}} by {{var|M}}. Adherents of the quantity theory of money assume that the velocity of money is stable and predictable, being determined mostly by financial institutions. If that assumption is valid, then changes in {{var|M}} can be used to predict changes in {{var|PQ}}.<ref>{{cite web|last=Aziz|first=John|title=Is Inflation Always And Everywhere a Monetary Phenomenon?|url=http://azizonomics.com/2013/03/10/is-inflation-always-and-everywhere-a-monetary-phenomenon/|work=Azizonomics|access-date=April 2, 2013|date=March 10, 2013}}</ref> If not, then a model of {{var|V}} is required in order for the equation of exchange to be useful as a macroeconomics model or as a predictor of prices.

Most macroeconomists replace the equation of exchange with equations for the demand for money which describe more regular economic behavior. However, predictability (or the lack thereof) of the velocity of money is equivalent to predictability (or the lack thereof) of the demand for money (since in equilibrium real money demand is simply {{sfrac|{{var|Q}}|{{var|V}}}}).

There is some empirical evidence of a direct relationship between the growth of the money supply and long-term price inflation, at least for rapid increases in the amount of money in the economy.<ref>{{Cite journal |last1=Sysoyeva |first1=Larysa |last2=Bielova |first2=Inna |last3=Ryabushka |first3=Luidmila |last4=Demikhov |first4=Oleksii |date=2021-05-29 |title=Determinants of Management of Central Bank to Provide the Economic Growth: an Application of Structural Equation Modeling |url=https://ojs.ual.es/ojs/index.php/eea/article/view/4803 |journal=Studies of Applied Economics |language=en |volume=39 |issue=5 |doi=10.25115/eea.v39i5.4803 |s2cid=236417850 |issn=1697-5731|doi-access=free }}</ref> The quantity theory was a cornerstone for the monetarists and in particular [[Biography:Milton Friedman|Milton Friedman]], who together with Anna Schwartz in 1963 in a pioneering work documented the relationship between money and inflation in the United States during the period 1867–1960.<ref name="Palgrave"/> During the 1970s and 1980s the monetarist ideas were increasingly influential, and major central banks like the [[Finance:Federal Reserve|Federal Reserve]], the Bank of England and the German Bundesbank officially followed a monetary policy objective of increasing the money supply in a stable way.<ref name="Graff">{{cite journal |last1=Graff |first1=Michael |title=The quantity theory of money in historical perspective |url=https://www.research-collection.ethz.ch/handle/20.500.11850/124095 |journal=Kof Working Papers |publisher=KOF Swiss Economic Institute, ETH Zurich |access-date=3 September 2023 |date=April 2008|volume=196 |doi=10.3929/ethz-a-005582276 }}</ref> 

=== Declining importance ===

Starting in the mid-1970s and increasingly over the next decades, the empirical correlation between fluctuations in the money supply and changes in income or prices broke down, and there appeared clear evidence that money demand (or, equivalently, velocity) was unstable, at least in the short and medium run, which is the time horizon that is relevant to monetary policy. This made a money target less useful for central banks and led to the decline of money supply as a tool of monetary policy. Instead central banks generally switched to steering interest rates directly, allowing money supply to fluctuate to accommodate fluctuations in money demand.<ref name="Palgrave"/> Concurrently, most central banks in developed countries implemented direct [[Finance:Inflation targeting|inflation targeting]] as the foundation of their monetary policy,<ref name=Holdingline>{{cite web |title=Inflation Targeting: Holding the Line |url=https://www.imf.org/external/pubs/ft/fandd/basics/72-inflation-targeting.htm |website=www.imf.org |access-date=3 September 2023}}</ref> which leaves little room for a special emphasis on the money supply. In the United States, the strategy of targeting the money supply was tried under Federal Reserve chairman Paul Volcker from 1979, but was found to be impractical and later given up.<ref name="Historical">{{cite web |title=Federal Reserve Board - Historical Approaches to Monetary Policy |url=https://www.federalreserve.gov/monetarypolicy/historical-approaches-to-monetary-policy.htm |website=Board of Governors of the Federal Reserve System |access-date=12 August 2023 |language=en |date=8 March 2018}}</ref> According to [[Biography:Benjamin M. Friedman|Benjamin Friedman]], the number of central banks that actively seek to influence money supply as an element of their monetary policy is shrinking to zero.<ref name="Palgrave"/> 

Even though today central banks generally do not try to determine the money supply, monitoring money supply data may still play a role in the preparation of monetary policy as part of a wide array of financial and economic data that policymakers review.<ref>{{cite web |title=What is the money supply? Is it important? |url=https://www.federalreserve.gov/faqs/money_12845.htm |website=Board of Governors of the Federal Reserve System |date=16 December 2015 |access-date=31 July 2023 |language=en}}</ref> Developments in money supply may contain information of the behavior of commercial banks and of the general economic stance which is useful for judging future movements in, say, employment and inflation.<ref>{{cite web |last1=Haltom |first1=Renee |title=Does Money Still Matter for Monetary Policy? |url=https://www.richmondfed.org/-/media/richmondfedorg/publications/research/economic_brief/2013/pdf/eb_13-05.pdf |website=www.richmondfed.org |publisher=Federal Reserve Bank of Richmond |access-date=3 September 2023 |date=May 2013}}</ref> Also in this respect, however, money supply data have a mixed record. In the United States, for instance, the [[Finance:Conference Board Leading Economic Index|Conference Board Leading Economic Index]] originally included a real money supply (M2) component as one of its 10 leading indicators, but removed it from the index in 2012 after having ascertained that it had performed poorly as a leading indicator since 1989.<ref>{{cite web |title=Real M2 and Its Impact on The Conference Board Leading Economic Index® (LEI) for the United States |url=https://www.conference-board.org/pdf_free/economics/BCI_March_Essay.pdf |website=www.conference-board.org |publisher=The Conference Board |access-date=3 September 2023 |date=March 2010}}</ref>

==See also==
{{div col|colwidth=16em}}

* [[Finance:Bank regulation|Bank regulation]]
* [[Finance:Capital requirement|Capital requirement]]
* [[Finance:Chartalism|Chartalism]]
* [[Finance:Chicago plan|Chicago plan]]
* [[Finance:Debt levels and flows|Debt levels and flows]]
* Economics terminology that differs from common usage
* [[Social:Financial capital|Financial capital]]
* FRED (Federal Reserve Economic Data)
* Full reserve banking
* [[Finance:Macroprudential regulation|Macroprudential regulation]]
* [[Finance:Monetary economics|Monetary economics]]
* [[Finance:Monetary reform|Monetary reform]]
* Money circulation
* [[Finance:Money market|Money market]]
{{div col end}}

== References ==
{{Reflist|33em}}

==Further reading==
* [http://www.dictionaryofeconomics.com/article?id=pde2008_M000236&goto=moneysupply&result_number=2372 Article in the New Palgrave on Money Supply] by [[Biography:Milton Friedman|Milton Friedman]]
* [http://research.stlouisfed.org/aggreg/ St. Louis Fed: Monetary Aggregates]
* [http://www.investopedia.com/terms/m/moneyzeromaturity.asp Investopedia: Money Zero Maturity (MZM)]

==External links==
* [http://www.federalreserve.gov/releases/h3/Current/h3.htm Aggregate Reserves Of Depository Institutions And The Monetary Base (H.3)]
* [https://fraser.stlouisfed.org/title/88 Historical H.3 releases]
* [http://www.federalreserve.gov/releases/h6/current/default.htm Money Stock Measures (H.6)]
* [https://web.archive.org/web/20050618181347/http://www.rba.gov.au/Statistics/AlphaListing/alpha_listing_m.html Data on Monetary Aggregates in Australia]
* [http://www.info.gov.hk/hkma/eng/press/category/statistics_index.htm Monetary Statistics on Hong Kong Monetary Authority]
* [http://www.pbc.gov.cn/english/ Monetary Survey] from [[Company:People's Bank of China|People's Bank of China]]

<!-- The charts in this article should all have a logarithmic scale on the y-axis, otherwise, they give the wrong impression! -->
{{Economics}}

[[Category:Monetary policy]]
[[Category:Inflation]]

{{Sourceattribution|Money supply}}