What Is the Money Supply?

How Much Money Is There in the United States?

money supply
The money supply keeps the economy moving. Illustration: Andy Baker/Getty Images

Definition: The money supply is physical cash in circulation plus the money held in checking and savings accounts. 

It does not include other forms of wealth, such as investments, home equity, or assets. They must be sold to convert them to cash. It also does not include credit, such as loans, mortgages and credit cards. People use these as money to improve their standard of living, but they aren't part of the money supply.

How Is the Money Supply Measured?

​The Federal Reserve measures the  U.S. money supply with M1 and M2. The most liquid form of money is M1. It includes currency in circulation. It doesn not include currency held in the U.S. Treasury, Federal Reserve banks, and bank vaults. It includes all traveler's checks. It includes checking account deposits, including those that pay interest. It does not include checking deposits held in U.S. government accounts and in foreign banks. 

M2 includes everything in M1. It adds savings accounts, money market accounts, and money market mutual funds. It includes time deposits under $100,000. It does not include any of these accounts held in IRA or Keogh retirement accounts. The Fed reports on them every week. (Source: "," Federal Reserve Board.)

M3 includes everything in M2, as well as some longer-term time deposits and money market funds.

M4 includes M3 plus other deposits. Some countries' central banks include additional forms of the money supply, although the definitions are vague and differ from country to country. (Source:  "Money Supply," Financial Times Lexicon.)

How Useful Is the Money Supply Measurement?

The money supply traditionally expanded and contracted along with the economy and inflation.

For that reason, the economist Milton Friedman said the money supply was a useful indicator. (Source: "" The Board of Governors of the Federal Reserve System.)

But in the 1990s, that relationship changed. People took money out of low-interest bearing savings accounts and invested it in the stock market. M2 fell as the economy and inflation grew. Former Federal Reserve Chairman Alan Greenspan questioned the usefulness of the money supply measurement. He said if the economy were dependent on the M2 money supply for growth, it would be in a recession.  For that reason, the Federal Reserve no longer sets a target for the money supply. (Source: "," Federal Reserve Bank of New York.)

What Is the Current U.S. Money Supply?

In November 2016, M1 was $3.354 trillion. More than half was held in checking accounts. The rest ($1.4 trillion) was cash and traveler's checks. More than $1 trillion is in $100 bills. Another $300 billion is in $20 bills and other lower denominations. There's $300 million in higher-denomination bills that are collectors' items.

Banks don't hold that currency. It's all in circulation. That's $11,000 in cash per household. Most people use debit and credit cards instead of cash.

That means it's probably used by those who don't want their income reported to the IRS. That includes criminals, for whom a briefcase can hold a million dollars worth of $100 bills.

Of this, an astonishing two-thirds was held outside of the country. Many emerging market economies use the greenback as a substitute for their volatile currency. As many travelers know, a $20 bill is good throughout the world. 

It could also include those who filed for Social Security disability benefits. An increasing number of people under 60 have done so since the recession. They may be working in underground jobs that only pay cash. That way they don't have to report it to the IRS and lose their benefits. (Source: Gene Epstein, "Cash Might Be Dethroned, But It Hasn't Gone Away," Barron's, May 18, 2015.)

M2 was $13.223 trillion.

 Most of it ($8.7 trillion) was in savings accounts. Money markets held $712 billion and time deposits held $376 billion.

Does Expansion of the Money Supply Create Inflation?

In April 2008, M1 was $1.4 trillion and M2 was $7.7 trillion. The Federal Reserve doubled the money supply to end the 2008 financial crisis. The Fed's quantitative easing program also added $4 trillion in credit to banks to keep interest rates down. (Source: ", The Economist, August 6, 2011. "," Forbes, March 22, 2012.)

Many people worried that the Fed's massive injection of money and credit would create inflation. As the chart below shows, it didn't. 

Money Supply (as of December)
Year  M2 (trillions)M2 GrowthInflationBusiness Cycle Phase
1990$3.23.7%6.1%Recession
 
1991$3.43.1%3.1%
1992$3.41.5%2.9%Expansion
1993$3.51.3%2.7%
1994$3.50.4%2.7%
1995$3.64.1%2.5%
1996$3.84.9%3.3%
1997$4.05.6%1.7%
1998$4.49.5%1.6%
1999 $4.66.0%2.7%
2000 $4.96.2%3.4%
2001 $5.410.3%1.6%Recession
2002 $5.76.2%2.4%Expansion
2003 $6.05.1%1.9%
2004 $6.45.8%3.3%
2005 $6.74.1%3.4%
2006 $7.05.9%2.5%
2007 $7.45.7%4.1%
2008 $8.29.7%0.1%Recession
2009 $8.53.7%2.7%
2010 $8.83.6%1.5%Expansion
2011 $9.69.8%3.0%
2012$10.48.2%1.7%
2013$11.05.4%1.5%
2014$11.65.9%0.8%
2015$12.35.7%0.7%
2016$13.27.4%1.0%

(Source: Federal Reserve, )

That's because the Fed's expansion of credit benefited investors instead of consumers. The Fed gave banks the credit to lend to consumers and small businesses. That would have stimulated demand. Banks complained they couldn't find credit-worthy borrowers.

Instead, the Fed's money created a series of asset bubbles.  In 2011, investors turned to commodities, sending gold prices to a record high. Investors then switched to Treasury notes in 2012, then stocks in 2013, and the U.S. dollar in 2014 and 2015. For more, see Causes of Inflation.