Money Supply: Definition, Quantity, and Impact

The U.S. money supply is all the physical cash in circulation throughout the nation, as well…

The U.S. money supply is all the physical cash in circulation throughout the nation, as well as the money held in checking accounts and savings accounts. It does not include other forms of wealth, such as long-term investments, home equity, or physical assets that must be sold to convert to cash. It also does not include various forms of credit, such as loans, mortgages, and credit cards.

Measurement of the Money Supply

The Federal Reserve measures the U.S. money supply in three different ways: monetary base, M1, and M2.

  • Monetary base is the sum of currency in circulation and reserve balances (i.e., deposits held by banks and other depository institutions in their accounts at the Federal Reserve).
  • M1 is the sum of currency held by the public (i.e., currency outside the U.S. Treasury, Federal Reserve Banks, and the vaults of depository institutions); traveler’s checks of non-bank issuers; and transaction deposits at depository institutions. Depository institutions obtain their funds mainly through deposits from the public, such as commercial banks, savings and loan associations, savings banks, and credit unions. M1 was $3.964 trillion in November 2019 (seasonally adjusted). Of that, $1.705 trillion was currency and the rest of the amount was deposits.
  • M2 includes M1 along with savings accounts, money market accounts, money market funds, and time deposits under $100,000. It does not include IRA or Keogh retirement accounts. M2 was $15.327 trillion in November 2019 (seasonally adjusted). Of that, $9.769 trillion was in savings accounts; $1.003 trillion was in money markets; $591 billion was time deposits; and the rest was M1.

Money Supply’s Intersection With Inflation

Expansion of the money supply can cause inflation but not always. For example, in April 2008, M1 was $1.371 trillion and M2 was $7.631 trillion (both seasonally adjusted). The Federal Reserve doubled the money supply to end the 2008 financial crisis. It also added $4 trillion in credit to banks to keep interest rates down. 

Some may have concerned that the Federal Reserve’s massive injection of money and credit would create inflation. As the chart below shows, it did not.

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