The money supply is simply all the money available in the US economy at a given moment: the cash people hold, plus the money sitting in checking and savings accounts. Most of it is not paper in a wallet. If you are new to this, money supply explained in plain English means starting from the accounts you already have, not from a wall of acronyms.
Below is that version. It covers what the Federal Reserve actually counts, which of your own accounts land in the totals, how banks bring new money into existence every time they approve a loan, and what a growing money supply does (and does not do) to prices.
Table of Contents
- What Is Money Supply?
- What Counts as Money?
- Why Does the Money Supply Matter?
- How Does the Federal Reserve Change the Money Supply?
- What Is the Difference Between M1, M2, and M3?
- Is your money counted? Here is the account-by-account answer
- What Causes the Money Supply to Rise or Fall?
- Three motives for holding money
- How Does Money Supply Affect Inflation and Prices?
- What Does It Mean for Interest Rates and Investments?
- How to Read Money-Supply Data as an Everyday Investor
- Money supply explained in plain english: what a beginner should check first
- Frequently Asked Questions
- Is money in my savings account M1 or M2?
- What is the difference between M1, M2, M3 and M4 money supply?
- Does M2 money include M1 money?
- How does the money supply affect interest rates?
- Why did M1 grow so sharply in 2020?
- Does a bigger money supply cause inflation?
- What to Take Away
What Is Money Supply?
Money supply, or money stock, is the total amount of money available in an economy at a particular point in time, counting both the currency people hold and the deposits they hold at banks. Economists watch it because the growth rate of the money stock is one of the oldest clues we have about where prices are heading.
Two words do a lot of work here. An increase in the money supply is called expansionary, or loosening, and it usually means the Fed is trying to make money easier to get hold of. A decrease is called contractionary, or tightening, and it usually means the reverse.
What Counts as Money?
Money has to do three jobs to count as money. It has to be a medium of exchange (you can spend it), a unit of account (you can price things in it), and a store of value (it holds purchasing power over time). Anything that fails one of those tests gets classified somewhere else.
Broadly, the Fed counts cash sitting outside banks and at ATMs, checking account balances, savings balances, and a band of near-money that is close enough to count. Checks are not money, they are instructions to move money. Credit cards are not money either, they are a promise from a lender.
| Item | Counted as money supply? | Why |
|---|---|---|
| Currency in circulation | Yes | Cash outside banks and in ATMs, the final means of payment |
| Checking account balances | Yes | Demand deposits, spendable on demand |
| Savings account balances | Yes | Since May 2020 these sit inside M1 |
| Small-denomination time deposits | Yes | Held more than seven days, balances under 100,000 dollars |
| Retail money market fund shares | Yes | Counted inside M2 as near money |
| Cheques and credit cards | No | Instructions or credit lines, not money themselves |
| Car loans and mortgages | No | Credit, not a stock of spendable money |
| Gold, property, collectibles | No | Not a medium of exchange in daily use |
That last row surprises people. Gold is a store of value, sure, but it is not something you hand over for groceries, so the Fed leaves it out of the aggregates.
Why Does the Money Supply Matter?
Economists care about the money supply for three reasons: it has a bearing on inflation, it has a bearing on interest rates, and it moves with the business cycle. When the Fed loosens policy, more money is available, borrowing tends to get easier, and businesses hire more. When it tightens, the reverse tends to happen.
The catch is the word “tends.” The link between money and prices is not a mechanical switch, and anyone who tells you it is has oversold it. Money only becomes spending power when somebody actually spends it.
How Does the Federal Reserve Change the Money Supply?
The Fed does not simply decide to print a bigger number. It works through four levers, and each one affects the supply in a different way.
- Open market operations. The Fed buys or sells US Treasury securities in the market. Buying puts reserves into the banking system and pushes the money supply up; selling drains them.
- The federal funds target and interest on reserves. This is the main policy instrument today. Raising the interest rate the Fed pays banks pushes short-term rates up and tightens conditions across the whole economy.
- The discount rate. This is the rate the Fed charges banks for direct loans. Lowering it makes an emergency source of funding cheaper.
- Reserve requirements. The share of deposits a bank must hold rather than lend. Requirements have been set at zero since March 2020, so this lever does very little at the moment.
Quantitative easing is the extreme version of the first tool. When rates are already near zero and the Fed still wants to loosen conditions, it buys large quantities of longer-dated securities. The reserves flood into banks, balance sheets swell, and the Fed’s stated aim is to bring down longer-term yields and pull investors out of safer assets into riskier ones. Nobody guaranteed any particular result.
What Is the Difference Between M1, M2, and M3?
The Fed publishes a set of measures, called monetary aggregates, each one a wider bucket than the last. M2 always contains everything in M1, plus a layer of savings that is slightly harder to spend on a whim.
| Measure | What it includes | Plain-English label | Still published? |
|---|---|---|---|
| M0 / MB (money base) | Currency in circulation plus commercial bank reserves at the Fed | Base money, what other money is built on | Yes |
| M1 | Currency in circulation, demand deposits, and other liquid checkable accounts, plus savings deposits since May 2020 | Narrow money, what you use to buy things | Yes |
| M2 | Everything in M1, plus small time deposits, money market deposit accounts and retail money market fund shares | Broad money, money plus near money | Yes, the main one |
| M3 | Everything in M2 plus larger time deposits and institutional money market funds | Very broad money | Discontinued in 2006 |
| M4 | A Bank of England measure, not a Fed measure, with its own definitions | UK broad money | Yes, in the UK only |
Is your money counted? Here is the account-by-account answer
Is money in your savings account M1 or M2? Both, as of May 2020. Before that change savings deposits sat only in M2; the Fed folded them into M1, which is the single biggest reason M1 looks so different in charts after 2020. Here is the mapping for everything most people hold.
| Where your money sits | M0 | M1 | M2 |
|---|---|---|---|
| Cash in a drawer or wallet | Yes | Yes | Yes |
| Checking account | No | Yes | Yes |
| Savings account | No | Yes, since May 2020 | Yes |
| Certificate of deposit under 100,000 dollars, held over seven days | No | No | Yes |
| Larger certificate of deposit | No | No | No, that is where M3 used to reach |
| Money market deposit account | No | Yes | Yes |
| Retail money market mutual fund | No | No | Yes |
| Retirement account such as a 401(k) or IRA | No | No | No |
| Stocks, bonds, crypto | No | No | No |
Two things stand out. Retirement accounts are not in the money supply at all, however large they are, because the money sits invested in assets rather than held as spendable deposits. And the CD line has a precise threshold: over seven days and under 100,000 dollars.
What Causes the Money Supply to Rise or Fall?
Most of the growth comes from ordinary lending, and the classic explanation is worth walking through once because it is where most people get lost.
Imagine you deposit 1,000 dollars into a checking account and the bank holds 10 percent back as a reserve. Your full 1,000 is now spendable, because the bank does not need to hand anyone cash to honour a cheque. The remaining 900 can be lent out, say to someone buying a used car. That borrower now has 900 in their account, and the bank can lend most of that too.
Keep going and the arithmetic looks spectacular: with a 10 percent reserve requirement, the theoretical multiplier suggests a 1,000 deposit could support 10,000 dollars of deposits. That is the classroom number, and almost nobody should use it.
In reality banks keep far more than the minimum, they decide how much to lend based on credit conditions and risk rather than on a fixed ratio, and people choose to hold cash instead of redepositing it. The Bank of England put it neatly: a bank deposit is a loan from the customer to the bank, which then lends it out. That is why the effective multiplier is unstable and hard to forecast.
On the other side of the ledger, the supply shrinks when loans are repaid, when people swap deposits for investment products, and when the Fed drains reserves. Households holding more of their money as savings rather than spending it is one of the reasons the money supply can grow without much inflation showing up.
Three motives for holding money
Transactional demand is money people hold to buy things. Precautionary demand is the buffer people keep for bad days. Speculative demand is money parked while waiting for a better price. When rates are low, that third motive is strong and money sits still.
How Does Money Supply Affect Inflation and Prices?
The classic equation, MV equals PY, says money times velocity equals the price level times real output. Read it as: if the money stock grows faster than the goods and services on offer, prices tend to rise.
Velocity is the number of times a dollar gets spent in a year, and this is exactly where the textbook story has been wrong for two decades. As a share of the money stock, money held for transactions has fallen sharply since the 1990s while the money stock kept growing, so velocity collapsed. You can create five dollars and spend none of them extra.
That is why the money supply alone is a weak standalone inflation predictor today. Households sitting on savings, cautious businesses not borrowing, and an economy with idle capacity can all absorb new money without bidding prices up. The honest answer is that money growth creates the conditions for inflation; spending patterns decide whether it arrives.
What Does It Mean for Interest Rates and Investments?
Expansionary policy usually pushes short-term rates down, because banks can borrow more cheaply and there is less pressure to compete for scarce savings. Tightening does the reverse. That is the general pattern, not a rule with a date attached.
For savings, the practical read-through is about what your account pays. When the Fed is easing, high-yield savings products usually offer less, because rates have room to fall. When it is tightening, they tend to pay more, with a lag of months.
For investors, money growth has a loose connection to how hard it is to own assets priced in future dollars. But equity prices respond far more to earnings, and bond prices to expected future rates, than to any single money-supply print. Treat the number as context rather than as a signal. Rules and rates differ by country and change over time, and none of this is individual investment advice.
How to Read Money-Supply Data as an Everyday Investor
Here is a workable five-step routine for anyone who wants to follow this data without a terminal full of charts.
- Go to the primary source first. The Federal Reserve publishes the H.6 money stock release, and FRED carries the M1 and M2 series you can pull up free. Avoid summaries when the original is one click away.
- Check the as-of date before the number. Money supply figures are published with roughly a six-week lag, so you are reading history, not news.
- Compare M1 and M2 side by side. A gap that widens suggests money is moving out of transaction balances into savings, which is very different from genuine new spending power.
- Put it beside inflation, unemployment and output. The aggregates mean little on their own. The growth rate over several quarters matters more than any single month.
- Look at what the Fed is actually doing. Rate decisions tell you how policymakers read the same data, and they move markets before the money supply does.
Money supply explained in plain english: what a beginner should check first
If you read one number, make it the year-over-year growth rate of M2 rather than the headline total. Levels go up almost always, which tells you very little. The growth rate is what you compare against wage growth and inflation, and it is the piece that occasionally tells you something has shifted. When you do read the total, ask for the seasonally adjusted series and the as-of month, every time.
Forum threads on this topic often start from suspicion that the Fed is printing money and a conviction that this is why ordinary prices are high. That connection is weaker than it sounds. Bank credit creates most deposits, the Fed creates reserves to support stability, and the money that gets created is only dangerous if it gets spent faster than the economy can grow.
Frequently Asked Questions
Is money in my savings account M1 or M2?
Both, since May 2020. Before that, the Fed counted savings deposits only in M2. The redefinition is the main reason M1 charts look dramatically different after 2020, and it changed the definition without any new money being created. Checking account balances have always been in M1.
What is the difference between M1, M2, M3 and M4 money supply?
M1 is narrow money: currency plus checkable deposits plus, since 2020, savings deposits. M2 is broad money and contains everything in M1 plus small time deposits and retail money market funds. M3 was a wider Fed measure discontinued in 2006. M4 is a Bank of England measure and is not published by the Fed at all.
Does M2 money include M1 money?
Yes. The measures are nested, not separate. Everything counted in M1 is also counted in M2, which is why M2 is always the larger figure. M2 simply adds a layer of accounts that are close to money, such as small time deposits, without being instantly spendable.
How does the money supply affect interest rates?
When the Fed expands the money supply it usually wants conditions looser, and short-term rates tend to fall. When it contracts, rates tend to rise. The link works through what banks can borrow and what savers can earn, and it rarely moves overnight. There is often a gap of weeks or months between a policy shift and a change in what your account pays.
Why did M1 grow so sharply in 2020?
Mostly because the definition changed, not because of a sudden flood of new money. In May 2020 the Fed moved savings deposits into M1, and savings balances had swollen through the pandemic. That reclassification alone produced a large part of the jump. Part of the later fall in 2022 and 2023 was the same effect running in reverse as balances moved down.
Does a bigger money supply cause inflation?
Not automatically. Money only affects prices when it is spent, and velocity has fallen sharply since 2000, so money can grow while spending stays flat. If households save the money, or businesses are cautious and leave capacity idle, prices can stay calm. Money growth creates the conditions for inflation, but spending behavior decides whether it arrives.
What to Take Away
Money supply is a way of tracking how much money is circulating through the US economy, and most of that money is bank deposits rather than cash. It matters most when you read it next to prices, growth and employment, and least when you read it on its own.
Start with one action: pull up the latest Federal Reserve H.6 release and put it beside the most recent inflation reading. Two numbers, side by side, teach you more in five minutes than another week of news summaries.
