- US Economy
- Monetary Policy
What It Means and How It Is Measured
ByKimberly Amadeo
Updated on November 29, 2020
Reviewed by
Michael J Boyle
:max_bytes(150000):strip_icc()/image0-MichaelBoyle-30f78c37d3174fe298f9407f0b5413e2.jpeg "How Much Money Is There in the United States? (1)")
Reviewed byMichael J Boyle
Michael Boyle is an experienced financial professional with more than 10 years working with financial planning, derivatives, equities, fixed income, project management, and analytics.
learn about our financial review board
In This Article
In This Article
- Measurement of the Money Supply
- Money Supply's and Inflation
- Significance of the Money Supply
- Frequently Asked Questions (FAQs)
:max_bytes(150000):strip_icc()/GettyImages-644126220-5a55141a4e4f7d0037eb14a4.jpg "How Much Money Is There in the United States? (2)")
The U.S. money supplycomprises all of the physical cash in circulation throughout the nation, as well as the money held in checking accounts and savings accounts. It does not include other forms of wealth, such as long-terminvestments, home equity, or physical assets that must be sold to convert to cash. It also does not include various forms of credit, such as loans, mortgages, and credit cards.
Measurement of the Money Supply
TheFederal Reserve measures the U.S. money supply in three different ways: monetary base, M1, and M2.
- Monetary base is the sum of currency in circulation and reserve balances (i.e., deposits held by banks and other depository institutions in their accounts at the Federal Reserve).
- M1 is the sum of currency held by the public (i.e., currency outside the U.S. Treasury, Federal Reserve Banks, and the vaults of depository institutions); traveler's checks of non-bank issuers; and transaction deposits at depository institutions. Depository institutions obtain their funds mainly through deposits from the public, such as commercial banks, savings and loan associations, savings banks, and credit unions. M1 was $3.964 trillion in November 2019 (seasonally adjusted). Of that, $1.705 trillion was currency and the rest of the amount was deposits.
- M2 includes M1 along with savings accounts, money market accounts, money market funds, and time deposits under $100,000. It does not include IRA or Keogh retirement accounts. M2 was $15.327 trillion in November 2019 (seasonally adjusted). Of that, $9.769 trillion was in savings accounts; $1.003 trillion was in money markets; $591 billion was time deposits; and the rest was M1.
Money Supply's Intersection With Inflation
Expansion of the money supply cancauseinflation but not always. For example, in April 2008, M1 was $1.371 trillion and M2 was $7.631 trillion (both seasonally adjusted). TheFederal Reservedoubled the money supplyto end the2008 financial crisis. It also added $4 trillion in credit to banksto keepinterest ratesdown.
Some may have concerned that the Federal Reserve'smassive injection of money and credit would createinflation. As the chart below shows, it did not.
| Year | M2 (In Trillions) | M2 Growth | Inflation |
|---|---|---|---|
| 1990 | $3.2 | 3.7% | 6.1% |
| 1991 | $3.4 | 3.1% | 3.1% |
| 1992 | $3.4 | 1.5% | 2.9% |
| 1993 | $3.5 | 1.3% | 2.7% |
| 1994 | $3.5 | 0.4% | 2.7% |
| 1995 | $3.6 | 4.1% | 2.5% |
| 1996 | $3.8 | 4.9% | 3.3% |
| 1997 | $4.0 | 5.6% | 1.7% |
| 1998 | $4.4 | 9.5% | 1.6% |
| 1999 | $4.6 | 6.0% | 2.7% |
| 2000 | $4.9 | 6.2% | 3.4% |
| 2001 | $5.4 | 10.3% | 1.6% |
| 2002 | $5.7 | 6.2% | 2.4% |
| 2003 | $6.0 | 5.1% | 1.9% |
| 2004 | $6.4 | 5.8% | 3.3% |
| 2005 | $6.7 | 4.1% | 3.4% |
| 2006 | $7.0 | 5.9% | 2.5% |
| 2007 | $7.4 | 5.7% | 4.1% |
| 2008 | $8.2 | 9.7% | 0.1% |
| 2009 | $8.5 | 3.7% | 2.7% |
| 2010 | $8.8 | 3.6% | 1.5% |
| 2011 | $9.6 | 9.8% | 3.0% |
| 2012 | $10.4 | 8.2% | 1.7% |
| 2013 | $11.0 | 5.4% | 1.5% |
| 2014 | $11.6 | 5.9% | 0.8% |
| 2015 | $12.3 | 5.7% | 0.7% |
| 2016 | $13.2 | 7.4% | 2.1% |
| 2017 | $13.8 | 4.9% | 2.1% |
| 2018 | $14.5 | 5.1% | 1.9% |
| 2019 | $15.3 | 7.4% | 1.5% |
Significance of the Money Supply
Throughout U.S. history, the money supply has expanded and contracted along with the economy. For that reason, several economists like Milton Friedman pointed to the money supply as a useful indicator of the state of the national economy.
Over recent decades, however, that perception of the money supply has changed. In the 1990s, people began to take money out of their low-interest bearing savings accounts and invest it in the booming stock market. As a result, M2 fell, even as the economy grew. Alan Greenspan, the Federal Reserve Chairman at the time, questioned the usefulness of the money supply measurement and concluded that if the economy were dependent on M2 for growth, it would be in a recession. The Federal Reserve no longer sets target ranges for money supply growth.
Frequently Asked Questions (FAQs)
What happens when the money supply increases?
An increase in the money supply may cause prices to inflate. The money supply is linked to demand. As demand increases, it can cause bidding wars that push up input costs.
Who is responsible for making policy decisions that change the money supply?
In the United States, the Federal Reserve handles actions and communications related to monetary policy. Congress determines the economic goals and instructs the Federal Reserve to use monetary policy to achieve them.
Was this page helpful?
Thanks for your feedback!
Tell us why!
Sources
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
Board of Governors of the Federal Reserve System. "What Is the Money Supply? Is It Important?"
Federal Reserve Bank of San Francisco. "Credit Cards Are Commonly Used to Buy Goods and Services Are Credit Card Transactions or Credit Card Debt Included in Demand Deposits or the Money Supply? If Not, Why Doesn’t the Definition of the Money Supply Include Them?"
Board of Governors of the Federal Reserve System. "Federal Reserve Statistical Release," Page 1.
Board of Governors of the Federal Reserve System. "Money Stock and Debt Measures - H.6 Release."
Board of Governors of the Federal Reserve System. "Federal Reserve Statistical Release."
Richard Robinson and Marwan El Nasser. "Decomposing US Money Supply Changes Since the Financial Crisis," International Journal of Financial Studies, 2013.
Board of Governors of the Federal Reserve System. "Credit and Liquidity Programs and the Balance Sheet."
Board of Governors of the Federal Reserve System. "Money Stock Measures."
Board of Governors of the Federal Reserve System. "What Is the Money Supply? Is It Important?"
Federal Reserve Bank of New York. "The Money Supply."
International Monetary Fund. "Monetary Policy: Stabilizing Prices and Output."
Board of Governors of the Federal Reserve System. "Monetary Policy."
Newsletter Sign Up
Newsletter Sign Up
We Care About Your Privacy
We and our 100 partners store and/or access information on a device, such as unique IDs in cookies to process personal data. You may accept or manage your choices by clicking below, including your right to object where legitimate interest is used, or at any time in the privacy policy page. These choices will be signaled to our partners and will not affect browsing data.
We and our partners process data to provide:
Store and/or access information on a device. Use limited data to select advertising. Create profiles for personalised advertising. Use profiles to select personalised advertising. Create profiles to personalise content. Use profiles to select personalised content. Measure advertising performance. Measure content performance. Understand audiences through statistics or combinations of data from different sources. Develop and improve services. Use limited data to select content.
