Defining the Money Supply by Mike Hewitt

The most common measures are named M0 (narrowest), M1, M2, and M3 (broadest).

M0 is the starting point for the concept of money supply. It is the total of all electronic, credit-based deposit balances in bank (and other financial) accounts plus all physical currency (minted coins and printed paper). In the U.S. it includes accounts at the central bank that can be exchanged for physical currency.

M1 includes M0, plus the total of (non-paper or coin) deposit balances without any withdrawal restrictions known as "demand accounts ("chequing" or "current" accounts"). We commonly think of saving accounts and chequing accounts as identical but they are not. Restricted accounts that you can't write checks on are put in the next level of liquidity, M2. In the U.S. M1 subtracts those portions of M0 held as reserves or vault cash.

M2 includes M1, plus most savings accounts, money market accounts, small denomination time deposits and certificate of deposit accounts (CDs) of under $100,000.

M3 includes M2, plus certificate of deposit accounts (CDs) of over $100,000, deposits of eurodollars and repurchase agreements. As of March 23, 2006, the U.S. Federal Reserve no longer publishes M3, citing "that the costs of collecting the underlying data and publishing M3 outweigh the benefits". A curious comment to come from the very institution responsible for creating trillions of dollars "out of thin air".

Another measure of money, known as MZM (Money Zero Maturity) is sometimes used. It is a measure of all liquid money supply within an economy. MZM represents all money in M2 less the time deposits, plus all money market funds. MZM has become one of the preferred measures of money supply because it better represents money readily available within the economy for spending and consumption.

IN CLOSING

Below is an excerpt from the Feburary 2000 question and answer session between Congressman Ron Paul and Fed Chairman Alan Greenspan before the House Committee on Financial Services. (For a complete transcription of all Q&A sessions between 1997-2005 click here).

ALAN GREENSPAN: As I've said earlier, the difficulty is defining what money truly is. We have been unable to define a monetary aggregate that will give us a reliable forecast for the economy. Until we find a reliable "M" we will go light on the use of monetary aggregates for monetary policy purposes.

RON PAUL: So it's hard to manage something you can't define.

ALAN GREENSPAN: It's impossible to manage something you cannot define.

Published on www.DollarDaze.org - June 24, 2007.

About the Author

Mike Hewitt is the editor of www.DollarDaze.org, a website pertaining to commentary on the unstability of the global fiat monetary system and investment strategies on mining companies.