Omar Bennett
The largest component of the M1 money supply is currency and checkable deposits, which include checking accounts and are highly liquid. M1 is a narrow measure of the money supply that includes currency, demand deposits, and other liquid deposits, including savings deposits. M1 does not include financial assets, such as bonds. M1 money is a country's basic money supply that is used as a medium of exchange.
| Characteristics | Values |
|---|---|
| Definition | M1 is a narrow measure of the money supply that includes currency, demand deposits, and other liquid deposits, including savings deposits. |
| Components | Currency, demand deposits, checking accounts, savings deposits |
| Exclusions | Financial assets, such as bonds |
| Money Supply Metric | M1 is the money supply metric most frequently utilized by economists to reference how much money is in circulation in a country. |
| M1 Money Supply | As of January 2025, the seasonally adjusted M1 money supply according to the Federal Reserve. The US Money Supply M1 was reported at 18,455.900 USD bn in Jan 2025. The data reached an all-time high of 20,703.900 USD bn in Apr 2022. |
| M1 vs M2 | M2 is a broader classification of money than M1. M2 includes M1 plus short-term time deposits in banks and money market funds. |
| M1 vs M3 | M3 is an even broader measure of the money supply that includes all components of M1 and M2, as well as all forms of savings deposits, money market deposits, time deposits in amounts of less than $100,000, and institutional money market funds. |
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What You'll Learn
Currency in circulation
The amount of currency in circulation is monitored by central banks, as it represents one of the most liquid asset classes. An increase in the money supply typically leads to lower interest rates, which stimulates more investment and spending by consumers. Conversely, a decrease in the money supply can lead to banks lending less, a decline in consumer demand for loans, and businesses putting off new projects.
The amount of currency in circulation can be influenced by various factors, including the demand for electronic fund transfers, natural disasters, and the stability of a country's currency in comparison to others. In the case of the US, more than half of its currency in circulation is found overseas due to the relative stability of the US dollar.
The money supply is also influenced by the economic conditions of a country, especially in the case of fiat money, where the amount in circulation can be adjusted to respond to economic changes. This is in contrast to the Gold Standard, where the amount of money in circulation was limited by the amount of gold that could be mined.
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Checkable deposits
Checkable deposit accounts are the most liquid accounts a consumer can open, and they are used for managing daily expenses and offer immediate access to cash. They also include any kind of negotiable draft, such as a negotiable order of withdrawal (NOW) or Super NOW account. NOW accounts may require seven days' written notice before withdrawing money, but this is rarely required. Checkable deposit accounts are an excellent alternative to carrying cash, as they allow the account holder to conduct monetary transactions anywhere, at any time, without the need for physical money.
Money market accounts and funds are another option for investors seeking to accumulate wealth in liquid demand deposit accounts. Banks offer money market accounts with interest and invest these funds in short-term cash instruments, which allows them to pay out interest to money market account holders. Money market accounts typically have a limited number of withdrawals, due to the investments backing them, and they may have a limit on monthly withdrawals. They are usually insured by the Federal Deposit Insurance Corporation (FDIC).
Checkable deposit accounts may not be ideal for long-term financial targets, such as retirement, due to lower returns. Banks and other financial institutions may also offer special demand deposit accounts, such as Super NOW accounts, or accounts that allow for negotiable drafts and negotiable orders of withdrawal. These accounts often have transaction requirements, but they offer much higher interest rates than regular checking accounts.
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Demand deposits
Demand deposit accounts (DDAs) allow funds to be withdrawn at any time from the financial institution. Demand deposit accounts pay little or no interest—the trade-off for the funds being so readily available. Demand deposit accounts can have joint owners.
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Traveller's cheques
M1 money supply is a narrow measure of the money supply that includes currency, demand deposits, and other liquid deposits, including savings deposits. It does not include financial assets, such as bonds. M1 money is a country's basic money supply that is used as a medium of exchange. It is the money supply metric most frequently used by economists to reference how much money is in circulation in a country.
Travellers' cheques are a medium of exchange that can be used in place of the currency of a country. They were first issued on 1 January 1772 by the London Credit Exchange Company and became one of the main ways that people took money abroad for use in foreign countries without the risks associated with carrying large amounts of cash. They were widely used from the 1850s to the 1990s, mainly before the introduction of payment cards and other electronic payment methods. They could be exchanged for local currency at a bank, and many merchants accepted them as payment.
To use a traveller's cheque, the purchaser signs one panel of each cheque on receipt. To make a purchase or cash a cheque, the purchaser signs the cheque in the presence of the payee, who accepts it if the signatures match. It can then be deposited into a bank account in the same way as a normal cheque. Traveller's cheques are available in several currencies, such as US dollars, Canadian dollars, pounds sterling, Japanese yen, Chinese yuan, and euros. Denominations are usually 20, 50, or 100 (× 100 for yen) of whatever currency.
Travellers' cheques can be replaced if lost or stolen by providing the receipt issued with the purchase and showing the serial numbers. They are much safer for the traveller as their value can be reimbursed if stolen, unlike cash. However, with the introduction of more convenient methods of payment, travellers' cheques are no longer widely accepted in payment or cashed. New travellers' cheques are no longer issued, but existing cheques remain backed by issuers such as American Express and have no expiration date.
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Savings accounts
M1 is a narrow measure of the money supply that includes currency, demand deposits, and other liquid deposits, including savings deposits. M1 does not include financial assets, such as bonds. M1 money is the money supply metric most frequently used by economists to reference how much money is in circulation in a country. It is also referred to as
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 bonds, or money market accounts.
M1 is composed of Federal Reserve notes, 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.
In May 2020, the definition of M1 was changed to include savings accounts given the increased liquidity of such accounts. This means that M1 now covers the most common types of money used for payment, including the most basic payment form, currency.
The inclusion of savings accounts in M1 highlights the recognition of their liquidity and ease of access for individuals. With technological advancements, savings accounts have become more accessible and convenient, allowing for faster transfers and withdrawals. This change in the definition of M1 reflects the evolving nature of the financial landscape and the increasing importance of savings accounts as a component of the money supply.
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Frequently asked questions
M1 money supply is a narrow measure of the money supply that includes currency, demand deposits, and other liquid deposits, including savings deposits.
M1 money supply includes coins and currency in circulation—the coins and bills that circulate in an economy that the U.S. Treasury does not hold at the Federal Reserve Bank, or in bank vaults.
The largest component of the M1 money supply is currency and checkable deposits.
M1 money supply is a narrow measure of the money supply that includes currency, demand deposits, and other liquid deposits, including savings deposits. On the other hand, M2 money supply is a broader measure that includes all components of M1 as well as "near money".
