Money supply
Total money held by the public, measured in narrow to broad aggregates.
Money supply (or money stock) refers to the total volume of money held by the public at a particular point in time. Standard measures usually include currency in circulation and demand deposits, and are recorded and published by national statistical agencies or central banks. Empirical measures are named M1, M2, M3, etc., with definitions varying by country.
- field
- Macroeconomics
- known_for
- Total volume of money held by the public; measures M0, M1, M2, M3, MZM; central to monetarist quantity theory of inflation
Lore & Background
Both central banks and commercial banks play a role in money creation. In fractional-reserve banking, central bank money (MB) includes currency and central bank depository accounts, while commercial bank money (checking and savings accounts) makes up the non-M0 components. Commercial banks create money when they make a loan and simultaneously create a matching deposit; money is destroyed when the borrower repays the principal. Central banks can affect the money supply through open market operations—purchasing government securities increases liquidity and lowers interest rates, while selling securities tightens the money supply and raises interest rates.
Reader's Guide
The concept of money supply is significant because it underpins the monetarist view that inflation is driven by money growth, a view that shaped central bank policies in the 1970s–1980s. Although central banks no longer target money supply directly, the measures remain important as economic indicators. The distinction between narrow (M0, M1) and broad (M2, M3) aggregates reflects different degrees of liquidity and control by monetary policy. The creation of money through commercial bank lending illustrates the decentralized nature of modern money systems, where central bank actions influence but do not dictate the total supply. The Hong Kong example shows a unique currency board system where the monetary base is fully backed by US dollars, demonstrating an alternative approach to money supply management. Overall, money supply measures provide a framework for understanding the interplay between central banks, commercial banks, and the public in determining the volume of money available for economic activity.
Did You Know?
- By far the largest part of the money supply consists of deposits in commercial banks, not central bank currency.
- In the United Kingdom, deposit money outweighs central bank issued currency by more than 30 to 1.
- Commercial banks create money whenever they make a loan and simultaneously create a matching deposit in the borrower's account.
- Hong Kong's entire monetary base is backed with US dollars at the linked exchange rate through its currency board system.
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