About M1 Money Supply
M1 is a category of the money supply that includes all physical currency in circulation, demand deposits, traveler's checks, and other checkable deposits. It is the most liquid portion of the money supply.
Components of M1
- Physical currency: All coins and paper money in circulation.
- Demand deposits: Checking accounts at commercial banks.
- Traveler's checks: Prepaid checks that function as cash but can be replaced if lost or stolen.
- Other checkable deposits: Negotiable order of withdrawal (NOW) accounts and credit union share draft accounts.
Importance of M1
M1 is a critical economic indicator for several reasons:
- Monetary policy: Central banks monitor M1 to assess the effectiveness of monetary policy.
- Economic activity: Changes in M1 can indicate shifts in economic activity and consumer behavior.
- Inflation forecasting: Rapid growth in M1 can sometimes precede inflationary pressures.
- Liquidity analysis: M1 provides insights into the most liquid assets in the economy.
Historical Context
The definition and measurement of M1 have evolved over time. In May 2020, the Federal Reserve included savings deposits as part of M1, which led to a significant increase in the reported M1 money supply. This change reflected the increasing similarity between checking and savings accounts in terms of liquidity and accessibility.
The COVID-19 pandemic also led to unprecedented growth in M1 due to government stimulus measures, quantitative easing, and changes in consumer saving behavior.
M1 vs. Other Monetary Aggregates
M1 is just one of several monetary aggregates used to measure the money supply:
- M0 (Monetary Base): Physical currency in circulation and bank reserves.
- M1: Physical currency, demand deposits, traveler's checks, and other checkable deposits.
- M2: M1 plus savings deposits, small-denomination time deposits, and retail money market funds.
- M3: M2 plus large-denomination time deposits, institutional money market funds, and other larger liquid assets.