5.4: Measures of Money I

M1 is a common measure of an economy’s money supply used by many countries, including the United States and Japan. However, the specific components included in M1 can differ across countries.

In the United States, M1 consists of currency, demand deposits, and other liquid deposits.

Currency refers to the paper notes and coins held by the public, which includes individuals and firms but excludes banks and other financial institutions.

Demand deposits are primarily funds held in checking accounts that can be withdrawn on demand.

The category of other liquid deposits expands M1 beyond currency and checking accounts. It includes Negotiable Order of Withdrawal accounts, Automatic Transfer Service accounts, share draft accounts offered by credit unions, and demand deposits at thrift institutions. Savings deposits also fall into this category. These are interest-earning deposits with no fixed maturity date.

M1 consists of the most liquid and commonly accepted assets for settling transactions, such as currency, demand deposits, and other liquid deposits.

M1 is one way to measure an economy’s money supply. Many countries, such as the United States and Japan, use this measure, and what it includes may vary from country to country.

Consider the United States, where M1 includes currency, demand deposits, and other liquid deposits.

Currency refers to notes and coins held by the public. The public includes persons and firms but excludes banks and other depository institutions.

Currency held by banks is excluded to prevent double-counting. A dollar bill in a bank vault is not yet available for the public to spend. It only becomes part of the M1 money supply when a person or firm withdraws it and holds it.

Next, 'Demand deposits' are primarily funds held in checking accounts. These funds are payable on demand.

Lastly, the category 'Other liquid deposits' includes several instruments. The key feature of these 'other liquid deposits' is that they act very much like checking accounts. They are funds that can be easily and quickly accessed to make payments, sometimes while also earning interest.

The M1 portion of the money supply shows the money that is available for immediate use in an economy.