What is the money supply? Is it important?
The money supply is the total amount of money—cash, coins, and balances in bank accounts—in circulation.
The money supply is commonly defined to be a group of safe assets that households and businesses can use to make payments or to hold as short-term investments. For example, U.S. currency and balances held in checking accounts and savings accounts are included in many measures of the money supply.
There are several standard measures of the money supply, including the monetary base, M1, and M2.
- The monetary base: the sum of currency in circulation and reserve balances (deposits held by banks and other depository institutions in their accounts at the Federal Reserve).
- M1: the sum of currency held by the public and transaction deposits (inclusive of currency held by the public and transaction deposits—a category that includes balances held in checking accounts and other very liquid deposits) at depository institutions (which are financial institutions that obtain their funds mainly through deposits from the public, such as commercial banks, savings and loan associations, savings banks, and credit unions).
- M2: M1 plus small-denomination time deposits (those issued in amounts of less than $100,000) and retail money market mutual fund shares.
Data on money supply are reported in the Federal Reserve's H.6 statistical release ("Money Stock Measures").
Over some periods, measures of the money supply have exhibited fairly close relationships with important economic variables such as nominal gross domestic product (GDP) and the price level. The Federal Open Market Committee, the monetary policymaking body of the Federal Reserve System, still regularly reviews money supply data in conducting monetary policy, but money supply figures are just part of a wide array of financial and economic data that policymakers review.