What is 'M1'
M1 is a metric for the money supply of a country and includes physical money — both paper and coin — as well as checking accounts, demand deposits and negotiable order of withdrawal (NOW) accounts. The most liquid portions of the money supply are measured by M1 because it contains currency and assets that can be converted to cash quickly. "Near money" and "near, near money," which fall under M2 and M3, cannot be converted to currency as quickly.
BREAKING DOWN 'M1'Using M1 as the definition of a country’s money supply references money as a medium of exchange, with demand deposits and checking accounts the most commonly used exchange mediums following the development of debit cards and ATMs. Of all of the components of the money supply, M1 is defined the most narrowly. It doesn’t include financial assets like savings accounts. It is the money supply metric most frequently utilized by economists to reference how much money is in circulation in a country.
Money Supply and M1 in the United States
Up until March 2006, the Federal Reserve published reports on three money aggregates: M1, M2 and M3. Since 2006, the Fed no longer publishes M3 data. M1 covers types of money commonly used for payment, which includes the most basic payment form, currency, which is also referred to as M0. Because M1 is so narrowly defined, very few components are classified as M1. The broader classification, M2, includes savings account deposits and various time deposits such as money market account deposits.
Specific Money Types Under M1
The largest component portion of a nation’s money supply under M1 is composed of Federal Reserve notes — otherwise known as bills or paper money _— and coins that are in circulation outside of the Federal Reserve Banks and the vaults of depository institutions. Traveler’s checks (of non-bank issuers), demand deposits and other checkable deposits (OCDs), including NOW accounts at depository institutions and credit union share draft accounts, are other major components of M1.
Money Supply and the U.S. Economy
For periods of time, measurement of the money supply indicated a close relationship between money supply and a number of economic variables such as the gross domestic product (GDP), inflation and price levels. Economists such as Milton Friedman argued in support of the theory that the money supply is intertwined with all of these variables. However, in the past several decades, the relationship between measurements of the money supply and other primary economic variables has been uncertain at best. Thus, the significance of the money supply acting as a guide for the conduct of fiscal policy in the United States has substantially lessened.