by Vinayak Maheswaran

Created on: July 25, 2011

First, I would like you to check out this article that excellently answers the question of what money is, Money, Inflation and Interest Rates.

The Federal Reserve has developed various measures of money.

The most restrictive (narrow) measure of the money supply counts only government-issued currency held by the non-bank public. This aggregate is included in all broader definitions of money and is called the currency component of the money supply.

A somewhat broader definition of the money supply includes the total monetary liabilities of the federal government and is known either as high-powered money or the monetary base, denoted MB. This broader definition includes currency held by the non-bank public as well as reserves held by commercial banks as backing for their deposit liabilities. Banks can hold reserves in either of two forms, vault cash held directly by the commercial bank and reserve deposits maintained by the commercial bank at one of the twelve regional Federal Reserve Banks.

An even broader definition of money is known as M1. It includes currency held by the non-bank public, travelers checks, and checkable deposits at commercial banks. (Note that bank reserves do not appear directly in M1. Instead, they back deposits at commercial banks.) A still broader definition of the money supply, known as, M2 includes M1 plus savings deposits, small time deposits (under $100,000), money market mutual fund shares (MMMFs) held by the public, money market deposit accounts (MMDAs), overnight Eurodollar deposits in foreign branches of U.S. banks, and overnight repurchase agreements whereby a bank sells a security overnight to a non-bank institution.

The components of the various measures of money as of March 2001 are now discussed. Currency accounts for $539 billion and M1 which includes currency plus demand deposits, traveler’s checks, and other checkable deposits accounts for $1111 billion. Additionally, M2 which is M1 plus retail money market mutual fund balances, savings deposits( including money market deposit accounts), and small time deposits is about $5100 billion. M3 was $7326 billion and this was M2 plus large time deposits, repurchase agreements, Eurodollars, and institution-only money market mutual fund balances.

For comparison, nominal GDP in 2001 was around $10000 billion. It is worth noting that what you might commonly think of as money, currency, is only a small fraction of these broader measures. But it is clear that all of these other components of money are available, to some degree or other, for transactions. Note that Federal Reserve has tight short-term control over the monetary base but not over broader monetary aggregates.

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