M1

What is M1? — Key takeaways

– M1 is the narrowest commonly used measure of a country’s money supply. It captures the most liquid forms of money used for everyday transactions: currency (paper bills and coins) in circulation, traveler’s checks, demand deposits, and other checkable deposits such as checking accounts and NOW/share draft accounts. (Investopedia)
– In May 2020 the Federal Reserve broadened its U.S. M1 series to include additional liquid deposits (notably certain savings accounts), producing a large one‑time increase in reported M1. (Investopedia)
– M1 is useful for understanding short‑term liquidity and payment flows; broader measures (M2, formerly M3) capture progressively less liquid stores of value. (Investopedia)

Understanding M1 (what it includes)

– Currency in circulation: Federal Reserve notes and coins held by the public (outside Fed vaults and depository institution vaults).
– Demand deposits: Commercial bank balances that depositors can access on demand (checking accounts).
– Other checkable deposits (OCDs): NOW accounts, share draft accounts at credit unions, and similar instruments.
– Traveler’s checks (non‑bank issuers).
– Since May 2020 the Fed’s published M1 also reflects other highly liquid deposits that function like checking balances—hence the reported level rose sharply when the definition changed. (Investopedia)

Why M1 matters

– M1 measures the funds immediately available for transactions. Large changes in M1 can signal shifts in spending capacity, liquidity preferences, and short‑term pressure on prices.
– Economists historically linked money growth to variables such as GDP and inflation (e.g., Milton Friedman’s monetary views), but in recent decades those relationships have been less stable. That weakens M1’s role as a single guide for monetary policy. (Investopedia)

Money supply and M1 in the United States

– The Federal Reserve (and data aggregators such as the St. Louis Fed’s FRED) publish time series for M1 and broader aggregates (M2). The Fed stopped publishing M3 in 2006. M0 (monetary base) is a different concept covering central‑bank issued currency plus reserves. (Investopedia; FRED)
– The Fed’s change to the M1 definition in May 2020 is important when comparing pre‑ and post‑2020 levels: a jump reflects a definitional change as well as underlying flows. (Investopedia)

How to calculate M1 (conceptual formula)

– Traditional (pre‑May 2020) M1 = Currency in circulation + Demand deposits + Other checkable deposits + Traveler’s checks.
– After May 2020 the published M1 includes those components plus certain other highly liquid deposits (e.g., some savings balances reclassified as “other liquid deposits” for M1). Always check the data provider’s notes for exact definitions. (Investopedia; FRED)

M1 vs M2 vs M3 — quick comparison

– M1: Most liquid money (currency, checkable deposits, traveler’s checks).
– M2: M1 + near‑money: savings deposits, small time deposits, retail money market funds. Less liquid than M1 but still quickly convertible.
– M3 (no longer published by the Fed since 2006): M2 + larger time deposits and institutional money market funds—most comprehensive. (Investopedia)

How the M1 money supply changes

Primary channels that change M1:
– Central bank actions:
– Open market operations (buying/selling securities) change bank reserves and can affect deposits and currency in circulation.
– Discount window lending or liquidity facilities increases reserves.
– Changes in reserve requirements (less commonly used) affect banks’ ability to create deposits.
– Commercial bank behavior:
– Lending creates new deposits (which can raise M1 if loans create checkable balances).
– Reclassification of deposit types or product changes (e.g., savings accounts made more transactionable) can move balances between aggregates.
– Fiscal policy and private flows:
– Government stimulus payments or large inflows (e.g., deposits from asset sales) increase bank deposits.
– Public preferences:
– Shifts from cash to deposits (or vice versa) and from non‑transaction assets into checking accounts alter M1 composition.

Why was M1 so high (recently)?

– Multiple factors contributed to the large observed increase in M1 around 2020–2021:
– Redefinition: the Fed’s May 2020 change to include more liquid deposits raised the reported level of M1. (Investopedia)
– Pandemic policy response: massive fiscal stimulus and central‑bank measures increased bank deposits and reserves, raising transactional balances.
– Household and corporate behavior: financial support and precautionary saving led to large deposit accumulation in liquid accounts (some of which counted in M1 after the redefinition).
– Distinguish between a structural increase in liquidity and a technical/definition‑driven jump when interpreting the data.

Why is M2 more stable than M1?

– M2 includes less liquid instruments (savings deposits, small time deposits, retail money market funds) that households and firms move into and out of less frequently. This broader base smooths short‑term transactional swings.
– M1 is concentrated on transaction accounts and cash, so it responds quickly to payments, transfers, and policy actions—causing higher volatility. (Investopedia)

Who controls M1?

– The Federal Reserve influences M1 through monetary policy tools (open market operations, lending facilities, interest on reserves, reserve requirement changes).
– Commercial banks act as money creators: when banks make loans, they generally create deposits, expanding deposit components of M1 and M2.
– Fiscal authorities and private sector flows (taxes, transfer payments, large corporate deposits) affect deposits and currency holdings, so control is shared in practice. (Investopedia)

How M1 affects inflation

– Quantity theory intuition: if money supply grows faster than real output and velocity is stable, higher money growth tends to lead to higher prices (inflation).
– In practice: the relationship is complicated because velocity (how quickly money circulates) can change, and monetary transmission lags vary. Since the 1980s the link between simple money aggregates and inflation/GDP has been weaker, reducing M1’s reliability as a sole inflation predictor. (Investopedia)
– Use M1 growth as one input—combine it with data on velocity, credit growth, output gaps, and inflation expectations to assess inflation risks.

Practical steps — how to monitor and use M1 information

For analysts and researchers
1. Use authoritative data sources: Federal Reserve releases and the St. Louis Fed FRED series (e.g., M1SL) include historical data and methodological notes.
2. Adjust for the May 2020 definitional change when performing historical comparisons—work with rates of change or normalize series if needed.
3. Look at growth rates, M1/GDP ratios, and trends in velocity of money (GDP / money supply) rather than absolute levels alone.
4. Combine money‑supply analysis with other indicators: credit creation, bank lending standards, CPI/PCE inflation, unemployment, and real GDP.

For investors

1. Watch large sustained increases in M1 alongside rising velocity and strong demand as a potential early signal of inflationary pressure—actively reassess asset allocation (inflation‑sensitive assets vs. fixed income).
2. Be cautious: rapid M1 growth driven by definitional changes or one‑time transfer payments may not imply persistent inflation.
3. Monitor central bank communications—policy tightening to counter inflation can affect interest rates and asset prices.

For businesses and treasurers

1. Manage liquidity: track M1 and bank deposit trends to optimize cash buffers and short‑term investments.
2. Plan for payment flows: if M1 volatility rises, ensure payment systems and credit lines can handle higher transaction volumes.

For policymakers

1. Use money aggregates as one of multiple indicators, not the sole guide for policy decisions.
2. Communicate clearly about definition changes and temporary drivers (e.g., pandemic transfers) to avoid misinterpretation of money‑supply statistics.
3. Consider both supply (money stock) and demand (velocity/credit) when assessing inflation risks and setting policy.

Caveats and practical interpretation tips

– Watch for definitional breaks (e.g., May 2020 for M1) and one‑off fiscal events; raw levels can be misleading.
– Money supply measures do not automatically equal inflation; they interact with output, velocity, expectations, and policy responses.
– Cross‑country comparisons require caution—definitions of M1 vary across jurisdictions.

Where to find the data (quick list)

– Federal Reserve statistical releases and explanations: www.federalreserve.gov
– St. Louis Fed FRED site: search series M1SL (M1 Money Stock) and M2SL (M2 Money Stock) for U.S. time series and charts.
– Investopedia overview and explanation of terms: https://www.investopedia.com/terms/m/m1.asp (source for this summary)

The bottom line

M1 is the narrowest, most transaction‑oriented money aggregate: currency, demand deposits, and other highly liquid, checkable balances. It can move quickly in response to policy actions, fiscal flows, and changes in public payment behavior. While M1 offers useful insight into short‑term liquidity, it should be interpreted alongside broader aggregates (M2), measures of credit, and macro indicators (output, unemployment, inflation expectations) because the simple money‑supply→inflation relationship has grown less reliable over recent decades. Always account for definitional changes and underlying drivers when using M1 to form economic or investment views.

Sources

– Investopedia: “M1” — https://www.investopedia.com/terms/m/m1.asp
– Federal Reserve / St. Louis Fed FRED (data series and notes) — https://fred.stlouisfed.org/series/M1SL

…take a longer time to convert into immediately spendable funds. That makes M1 more sensitive to short-term shifts in payment behavior, cash needs, and policy actions than broader aggregates such as M2.

Below I continue with additional sections, practical steps, examples, and a concluding summary.

Why Is M1 Money Supply So High?

– Policy responses: Large-scale fiscal transfers (stimulus checks, expanded unemployment benefits) and central bank actions (quantitative easing—large purchases of securities) inject liquidity into the banking system and raise bank deposits, which, depending on classifications, raise reported M1.
– Deposit reclassification: The Federal Reserve’s May 2020 change to include certain liquid savings deposits (other liquid deposits) in M1 produced a mechanical increase in the published M1 level.
– Low interest rates and flight to liquidity: When yields on longer-term or riskier instruments are low or uncertain, depositors often prefer highly liquid, bank-deposit forms of money, boosting M1 balances.
– Payment behavior: Growth in digital payments, direct deposit payrolls, and use of debit cards can increase demand/deposit balances that sit in checking or other immediately-accessible accounts.

Why Is M2 More Stable Than M1?

– Composition: M2 contains M1 plus “near money” (savings deposits, small time deposits, retail money-market funds). These additional components are less frequently used for daily transactions and thus change more slowly.
– Sticky savings behavior: Consumers typically move savings less often than they use checking accounts for transactions, providing inertia that dampens short-term volatility.
– Broader smoothing: Added elements in M2 absorb flows that might otherwise appear as volatility in the narrower M1 series.

Who Controls the M1 Money Supply?

– Central bank (Federal Reserve in the U.S.): Primary control through monetary operations:
– Open market operations (purchases/sales of Treasury and agency securities) affect reserves and bank liquidity.
– Lending facilities (discount window, emergency facilities) provide liquidity directly to banks.
– Interest on reserve balances influences banks’ incentives to hold reserves vs. lend or create deposits.
– Reserve requirements used to be a direct lever; since 2020 the Fed has set required reserve ratios to zero for many institutions, changing the mechanics by which reserves affect deposit creation.
– Commercial banks and the public: Banks create deposit money through lending; public preferences (holding cash vs. deposits) also change the observable M1.
– Fiscal authority: Government spending and tax policy (via Treasury deposits and outlays) affect bank reserves and deposits, indirectly influencing M1.

How Does the M1 Money Supply Affect Inflation?

– Quantity theory (textbook): In a simplified view, MV = PY (money supply × velocity = price level × output). If velocity (V) and output (Y) are stable, growth in money supply (M) tends to raise prices (P).
– Empirical nuance: Since velocity has been volatile and the financial system has evolved, the direct predictive power of M1 for inflation is weaker than in earlier decades. Rapid M1 growth can signal inflationary pressure if accompanied by rising velocity and excess demand, but if liquidity sits idle (low velocity) or is absorbed by financial institutions, inflationary effects may be muted.
– Example (recent episode): M1 rose sharply in 2020–2021 due to policy and classification changes; inflation later increased in 2021–2022, but the causal chain included supply shocks, demand rebounds, labor market tightness, and fiscal stimulus—not M1 growth alone.

How the M1 Money Supply Changes — Practical Steps to Monitor and Analyze

1. Identify data sources:
– Federal Reserve H.6 statistical release: https://www.federalreserve.gov/releases/h6.htm
– FRED (St. Louis Fed) M1 series and charts: https://fred.stlouisfed.org/series/M1
– Investopedia primer for definitions and context: https://www.investopedia.com/terms/m/m1.asp
2. Choose frequency and adjustments:
– Decide on nominal vs. real (inflation-adjusted) series.
– Use seasonally adjusted data for month-to-month analysis where appropriate.
3. Calculate growth rates:
– Month-over-month % change = (M1_t / M1_t-1 − 1) × 100
– Year-over-year % change = (M1_t / M1_t-12 − 1) × 100
4. Compare with other indicators:
– M2 growth, CPI inflation, GDP growth, unemployment, and interest rates.
– Velocity proxies: GDP (nominal) / M1 or / M2 to see how quickly money is circulating.
5. Watch policy signals:
– Fed statements, minutes, and policy decisions (asset purchase programs, rate moves) often presage shifts in money aggregates.
6. Use visualization:
– Plot levels and growth rates; overlay policy events (QE announcements, fiscal stimulus dates) to interpret spikes or trends.

Examples and Case Studies

– May 2020 M1 Redefinition: The Fed broadened M1 to include more liquid savings deposits. This accounting change produced a noticeable step-up in reported M1 without an underlying single-day economic shock. Lesson: be mindful of definitional changes when interpreting series.
– COVID-19 response (2020–2021): Fiscal stimulus (CARES Act), unemployment boosts, and Fed asset purchases led to increased deposits at banks; much of this money showed up in M1/M2. Later, supply-chain bottlenecks and economic reopening contributed to rising inflation—an example of policy, real economy, and money aggregates interacting.
– Historical perspective (1970s vs today): In the 1970s, money-supply growth correlated more closely with inflation; since then, financial innovation and changes in velocity have weakened that relationship, complicating simple “print-more-money → inflation” rules.

Practical Steps for Different Audiences

– Policy makers:
– Monitor both levels and velocities; track how monetary injections translate into bank credit and spending.
– Communicate clearly about definitions and temporary measures (facility expirations) to reduce market confusion.
– Businesses:
– Hedge for inflation risks if you expect sustained rise in prices (index contracts, price escalators).
– Manage working capital: consider the impact of rate moves and cash yields on inventory and receivables.
– Investors:
– Use M1 and M2 trends as one input for macro allocation (inflation-sensitive assets, equities vs. bonds).
– Consider TIPS, commodities, real estate, or equities in sectors benefiting from higher inflation.
– Individuals:
– Maintain a cash buffer for liquidity but avoid excessive cash if inflation erodes purchasing power.
– Use high-yield savings or short-term Treasuries to preserve liquidity while earning some real return.
– Consider dollar-cost averaging into longer-term investments if inflation expectations rise.

Limitations of M1 as a Policy Tool

– Narrow scope: M1 captures the most liquid forms of money but omits broader stores (M2/M3) that can affect spending over longer horizons.
– Velocity variability: Changes in how often money circulates can alter the inflationary impact of a given change in M1.
– Financial innovation and regulation: New account types, sweep arrangements, and money-market instruments complicate consistent measurement.
– Cross-border flows and central bank accounting: International factors and institutional holdings (e.g., Treasury’s operating balances) influence domestic aggregates.

Measuring M1 Growth — Short Example Calculation

Suppose:
– Currency in circulation outside banks = $2.0 trillion
– Demand deposits and other checkable deposits = $4.5 trillion
– Traveler’s checks and other included items = $0.1 trillion
– (After May 2020) Selected liquid savings deposits classified into M1 = $0.4 trillion

M1 = 2.0 + 4.5 + 0.1 + 0.4 = $7.0 trillion

If one month earlier M1 was $6.8 trillion, then monthly growth = (7.0 / 6.8 − 1) × 100 ≈ 2.94%.

Interpreting this: a near-3% month-over-month rise is large annualized, so you’d want to check whether the increase reflects reclassification, transfers from non-M1 accounts, fiscal inflows, or temporary swaps before inferring broader inflationary pressure.

Additional Sections: International Variation and Measurement

– Different countries define M1 differently (e.g., eurozone M1 includes overnight deposits). When comparing across borders, confirm each jurisdiction’s definitions.
– Some countries focus on broader measures (U.K.’s M4) rather than M1—use the measure most relevant to local monetary transmission.

Frequently Asked Questions (brief)

– Q: Does a rising M1 always cause inflation?
– A: No. A rising M1 can contribute to inflationary pressure, but the outcome depends on velocity, output gaps, supply conditions, and expectations.
– Q: Is M1 the same worldwide?
– A: No—definitions vary. Always check the central bank’s definition for the country you study.
– Q: Where do I get reliable data?
– A: The U.S. Federal Reserve (H.6 release) and FRED (St. Louis Fed) are primary sources for U.S. aggregates.

Concluding Summary

M1 is the narrowly defined money aggregate that captures the most liquid instruments used for transactions—currency, demand deposits, checkable deposits, and (since May 2020 in the U.S.) some other liquid deposits. Its narrow composition makes M1 sensitive to short-term shifts in payment behavior, policy decisions, and deposit classifications. While M1 growth can signal inflationary pressure under certain conditions, the relationship is moderated by velocity, economic output, and other structural factors. For policymakers, businesses, investors, and individuals, monitoring M1 alongside broader aggregates (M2), inflation measures, and policy signals provides a fuller picture for decision-making. Practical steps include regularly checking Fed releases and FRED charts, calculating growth rates, and interpreting changes in the context of policy and real-economy events.

Key sources and further reading

– Federal Reserve H.6 Release (Money Stock Measures): https://www.federalreserve.gov/releases/h6.htm
– Federal Reserve Economic Data (FRED) – M1 Series: https://fred.stlouisfed.org/series/M1
– Investopedia — What Is M1?: https://www.investopedia.com/terms/m/m1.asp

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