What Is M1?
M1 is the money supply that is composed of physical currency and coin, demand deposits, travelers' checks, other checkable deposits, and negotiable order of withdrawal (NOW) accounts. M1 includes the most liquid portions of the money supply because it contains currency and assets that either are or can be quickly converted to, cash. However, "near money" and "near, near money," which fall under M2 and M3, cannot be converted to currency as quickly.
- M1 is a narrow measure of the money supply that includes physical currency, demand deposits, traveler’s checks, and other checkable deposits.
- M1 does not include financial assets, such as savings accounts and bonds.
- The M1 is no longer used as a guide for monetary policy in the United States due to the lack of correlation between it and other economic variables.
M1 money is a country’s basic money supply that's used as a medium of exchange. M1 includes demand deposits and checking accounts, which are the most commonly used exchange mediums through the use of debit cards and ATMs. Of all the components of the money supply, M1 is defined the most narrowly.
M1 does not include financial assets, such as savings accounts and bonds. M1 money 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, also includes savings account deposits, small time deposits, and retail money market accounts.
Closely related to M1 and M2 is Money of Zero Maturity (MZM). MZM consists of M1 plus savings deposits and all money market accounts, including institutional money market funds. MZM represents all assets that are redeemable at par on demand and is designed to estimate the supply of readily circulating liquid money in the economy.
How to Calculate M1
The M1 money supply 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. Paper money is the most significant component of a nation’s money supply.
M1 also includes 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.
For most central banks, M1 almost always includes money in circulation and readily cashable instruments. But there are slight variations on the definition across the world. For example, M1 in the eurozone also includes overnight deposits. In Australia, it includes current deposits from the private non-bank sector. The United Kingdom, however, does not have an M1 class of money supply, but only two measures of its money supply: M0 or the broad monetary base (cash outside the Bank of England) and M4 or broad money, also known as the money supply.
M2 and M3 include all of the components of M1 plus additional forms of money, including money market accounts, savings accounts, and institutional funds with significant balances.
Money Supply and the U.S. Economy
For periods of time, measurement of the money supply indicated a close relationship between money supply and some 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 some 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 monetary policy in the United States has substantially lessened.