Kenneth R. Szulczyk
Economists define the M1 as the narrowest definition of money supply because they use the
transaction approach to determine which financial instruments to include. M1 adds the following
three items together:
Currency held by the public and in bank vaults. It excludes currency held by the
government. All forms of checking accounts. Traveler’s Checks that are held by people and not by the banks.Economists define the M2 as a broader definition than M1 because they use the liquidity
approach to define the money supply. Economists add the following together for M 2 :
Include everything in M1. Include all small denomination savings deposits and time accounts at all financial
institutions. Small denomination in the U.S. means the bank account has a balance less
than a $100,000. Examples include Certificates of Deposit or savings accounts at banks.Economists define M3 broader than M2 and include the following items summed together: Include everything from M2. Include large denomination savings and time accounts, and liquid securities with longer
investment times than the financial instruments included in M2. For example, a corporation
holds a $1 million Certificate of Deposit.Economists define L for liquidity as the broadest measure of the money supply and include
all liquid assets. The Federal Reserve does control this measure. L sums the following items
together.
Include everything from M3. Include all short-term securities, such as Treasury Bills issued by the U.S. Federal
government. (Refer to Chapter 2 for examples of short-term securities).The Fed stopped publishing the M3 definition of the money supply on March 23, 2006. It
stated M3 does not provide any useful purpose, and the Fed does not use M3 in formulating
monetary policy. Some international investors believe the Fed stopped publishing M3 because
some people fear a U.S. dollar collapse on the international markets because the United States
suffers from large trade deficits and a massive national government debt. (We discuss these