Money Supply and How It Affects You

What It Means and How It Is Measured

Couple at bank discussing finances
Half of the money supply is held in checking accounts. Photo: Photo: Kate Sept 2004/Getty Images 

The U.S. money supply comprises 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-term investments, 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

The Federal 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 can cause inflation but not always. For example, in April 2008, M1 was $1.371 trillion and M2 was $7.631 trillion (both seasonally adjusted). The Federal Reserve doubled the money supply to end the 2008 financial crisis. It also added $4 trillion in credit to banks to keep interest rates down. 

Some may have concerned that the Federal Reserve's massive injection of money and credit would create inflation. 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.

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  1. Board of Governors of the Federal Reserve System. "What Is the Money Supply? Is It Important?"

  2. 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?"

  3. Board of Governors of the Federal Reserve System. "Federal Reserve Statistical Release," Page 1.

  4. Board of Governors of the Federal Reserve System. "Money Stock and Debt Measures - H.6 Release."

  5. Board of Governors of the Federal Reserve System. "Federal Reserve Statistical Release."

  6. Richard Robinson and Marwan El Nasser. "Decomposing US Money Supply Changes Since the Financial Crisis," International Journal of Financial Studies, 2013.

  7. Board of Governors of the Federal Reserve System. "Credit and Liquidity Programs and the Balance Sheet."

  8. Board of Governors of the Federal Reserve System. "Money Stock Measures."

  9. Board of Governors of the Federal Reserve System. "What Is the Money Supply? Is It Important?"

  10. Federal Reserve Bank of New York. "The Money Supply."

  11. International Monetary Fund. "Monetary Policy: Stabilizing Prices and Output."

  12. Board of Governors of the Federal Reserve System. "Monetary Policy."

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