The Monetary Supply – What’s In Your Wallet?

by Investing School on July 4, 2011

The monetary supply, more commonly named the money supply, is the sum total of bills, coins, credit, loans and other liquid instruments that are part of a country’s economy. That supply is divided in to several categories, based upon the type and size of the account in which the instrument is held.

There are four dynamic categories into which the money supply is split:

  • M0 – This indicates all base money, including money held in central banks, bills and coinage. Money required to be held by reserve banks is also part of this total.
  • M1 – Specifically money held by the public and demand deposits.
  • M2 – This includes M1 as well as time deposits, NCDs helped by the public and issued by licensed banks, as well as savings at those banks.
  • M3 – Includes M2 and deposits which are held by restricted companies or banks and NCDs granted by both reserve banks and public banks.

While M3 represents all types of money available, inclusive of credits, it can still be divided into local currency and foreign currency.

Understanding the money supply helps economists understand how financial policies might affect things such as the interest rate and economic growth. There is a great deal of evidence that there is a direct relationship between long-term inflation of prices and the growth of the monetary supply. The faster the supply of money is increased the more rapidly prices rise, creating a situation of hyperinflation.

Potentially, controlling the supply of money helps control the rise of prices and inflation.

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