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M1 Money Supply

Updated on January 29, 2024
Article byWallstreetmojo Team
Reviewed byDheeraj Vaidya, CFA, FRM

What Is M1 Money Supply?

The M1 money supply is the aggregation of money circulation in a nation’s economy, comprising all coins, currencies, banknotes, and overnight deposits. It is a category made up of the most liquid parts of the economyM1 money supply components, along with M2, are referred to as narrow money.

M1 Money Supply Definition

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Liquidity refers to the ability of a particular item of value that one can exchange for cash in a very short period. Narrow money, or M1, is mostly liquid, as it is easily obtainable and available for immediate spending. The aggregation of money supply helps understand how a country is performing economically.

Key Takeaways

  • The M1 money supply is a measure of the total amount of money in an economy. The most liquid components of the supply fall within the M1 group. 
  • Money, such as banknotes, coins, and overnight deposits, belongs to M1. M1 and M2 money supplies together form narrow money. 
  • The components of M0 and certain less liquid components are added to determine the M1 category of the money supply. In addition to the monetary base (M0), which consists of coins and cash in circulation, M1 also contains checkable (demand) deposits and traveler’s checks.

M1 Money Supply Explained

Global M1 money supply meaning implies the most liquid part of money circulation in an economy. In its narrowest aspect, the money supply can be defined as M1. It includes coins and currencies in circulation, which means the Federal Reserve Bank or the U.S. Treasury do not keep them. Instead, they move around (circulate) the economy.

Another component of M1 measure of money supply is checkable deposits, called demand deposits, which is closely associated with currency and therefore belong to this category. These represent the amounts held in checking accounts. Demand deposits are called when a cheque is written or a debit card is used, the financial institution must deliver the deposit holder’s money “on demand.” The majority of global M1 money supply comprises of these items—currency and bank checking accounts (along with other liquid components). 

Cash, checkable (demand deposits), and traveler’s checks are among the most liquid assets present in M1. Although they still belong to M1, people do not use travelers’ checks extensively these days. A few less liquid assets, in addition to those in M1 money supply components, such as savings and time deposits, certificates of deposit, and money market funds, make up M2.

The evaluation and analysis of M1 money supply chart aid economists and decision-makers in developing new policies or changing the existing ones that increase or decrease the money supply. The valuation is significant because it eventually impacts the business cycle, which has an impact on the economy. For example, when the M1 increase overtakes, the growth output can be an indicator of inflation.

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Formula

Let us understand how to find M1 money supply using a formula.

The M1 category constitutes the most liquid part of the currency circulation and encompasses the monetary base. Therefore, the formula is as follows:

 M1 = coins and currency in circulation + checkable deposits + traveler’s checks.

Another way of writing it is, M1 = M0 + Demand Deposits

Where, M0 = Currency notes + coins + bank reserves.

Thus, the above formula gives us a clear understanding about how to find M1 money supply.

Components

U.S. M1 money supply chart consists of the following:

M1 consists of:

  • Money held out of the United States Treasury, the Federal Reserve Bank, or depository institutions.
  • Commercial banks demand deposits (not including the cash held by depository institutions, the government of the U.S., foreign banks, and other official institutions), and fewer Federal Reserve cash items float those in the process of collection.
  • Other liquid deposits of M1 measure of money supply include checkable deposits (OCDs) that comprise negotiable orders of withdrawal (NOW), depository automatic transfer service (ATS) accounts, credit unions‘ share draft accounts, and thrift bank demand deposits, savings deposits, including money market deposits, etc. (Seasonally adjusted M1 money supply chart comprises of the sum of currency, demand deposits, and other liquid deposits)

M2 comprises the U.S. M1 money supply plus:

  • Time deposits with a value of less than $100,000 (small denomination time deposits), less IRA (individual retirement account), and Keogh balances with depository institutions.
  • Retail money market fund (MMF) balances, excluding IRA and Keogh balances in MMFs.
  • (Seasonally adjusted M2 involves adding small-denomination time deposits and retail MMFs to the seasonally adjusted M1 chart).

M1 Vs M2 Money Supply

M1 and M2 make up narrow money. Some countries also include M0, which becomes the monetary base. Money in circulation and reserve balances together make up the monetary base. Deposits and balances held by banks and other depository institutions with the Federal Reserve are the components of M0. M3 and M4 categories belong to broad money. However, the U.S has only M1, M2, and M3 categories of money supply, which considers M3 broad money.

However, let us understand the differences between the M1 and M2 money supply because they represent different liquidity levels.

  • The former is a more narrow form of supply of money whereas the latter is a more broad form of money supply because it includes M1 an some additional forms of money supply.
  • The former includes different forms of currencies, demand deposits and withdrawals through checks, credit cards, electronic transfer and traveller’s check. But the latter includes the M1 components plus savings and time deposit, mutual funds, etc.
  • The components of M1 are more liquid than that of M2.
  • M2 gives a broader outlook about the supply of money in the economy and covers many sources that can be easily converted to M1 type  of asset.

However, both the policy makers in a country and the central government monitor and evaluate the economic condition of a country through both M1 and M2 money supply. This helps in assessing the inflation rate and make decisions related to monetary policy. Which measure to choose will depend on the objective and analysis done by the government.

Frequently Asked Questions (FAQs)

1. How to calculate the m1 money supply?

M1 category of the money supply can be calculated by adding the components of M0 with some lesser liquid counterparts belonging to M1. M1 includes checkable (demand) deposits and traveler’s checks added to the monetary base (M0-coins and currency in circulation).

2. What is an important characteristic of the M1 money supply?

The basic characteristic that makes it important as a part of the money supply of an economy is its liquidity. Apart from the coins and currency of the banks, these are the easiest to be converted into cash in a short period.

3. Why has the m1 money supply increased?

In general, an M1 increase occurs to meet the cash demands of people. Therefore, it may be a result of policies taken by the government. On the other hand, it could be a result of its larger counterparts, such as M2 increasing.

4. What are m1 money supply and m2 money supply?

M1 and M2 are parts of the money supply of an economy. M1 and M2 money supply are referred to as narrow money (sometimes with M0 or the monetary base). M1 is the most liquid after M0; M2 is also liquid but less liquid comparatively.

This article is a guide to what is M1 Money Supply. We explain its differences with M2 money supply along formula and components. You can also go through our recommended articles on corporate finance –

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