Editing Money supply (section)

==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 and destruction (or unchangement) depend 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 (economics)|M2]] money supply (red); [[recession]]s 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 money supply|Narrow measures]] include those more directly affected and controlled by monetary policy, whereas [[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) ([[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 [[excess reserves]] not physically present in banks)
|
|  ✓
|
|
|
|
|-
| [[Traveler's cheque|Traveler's checks]] of non-bank issuers
|
||
| ✓
| ✓
| ✓
| ✓
|-
| [[Demand deposit]]s
|
|
| ✓
| ✓
| ✓
| ✓
|-
| Other checkable deposits (OCDs), which consist primarily of [[negotiable order of withdrawal account|negotiable order of withdrawal]] (NOW) accounts at depository institutions and credit union share draft accounts.
|
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| ✓<ref>[http://research.stlouisfed.org/fred2/series/M1 M1 Money Stock (M1) – FRED – St. Louis Fed]. Research.stlouisfed.org.</ref>
| ✓
| ✓
| ✓
|-
| [[Savings deposit]]s
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|
|✓<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 [[Money market account|money-market deposit accounts]] for individuals
|
|
|
| ✓
| ✓
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|-
|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>
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| ✓
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|All [[money market funds]]
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| ✓
|}
* '''{{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>
* '''{{visible anchor|MB}}''': is referred to as the [[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>
* '''{{visible anchor|M1}}''': Bank reserves are not included in M1.
* '''{{visible anchor|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. 
* '''{{visible anchor|M3}}''': M2 plus large and long-term deposits. Since March, 23, 2006, M3 is no longer published by the US central bank, as one of Alan Greenspan's last acts, because of its expense. <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.
* '''{{visible anchor|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 [[money creation]]. In short, in the [[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 [[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 |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 |publisher=Deutsche Bundesbank |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 bond]]s or [[treasury bill]]s. 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 [[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 |url-access=subscription |publisher=Issuu.com }}</ref>{{sps|date=August 2024}}