Howard Simons
The old breakdown of the money supply had:
M1: Currency and demand deposits such as checking accounts.
M2: M1 plus savings accounts, time deposits (such as CDs) and retail money-market mutual funds.
M3: M2 plus institutional money market funds, eurodollars, repurchase agreements and large time deposits.
The St. Louis Federal Reserve created a new measure of money, zero-maturity, known as MZM, to handle the distortions produced by deregulation and financial innovations. While the traditional Ms are additive up to M3, MZM moves differently; it doesn't include small time deposits, for example, which don't have a zero maturity.
| Seasonally Adjusted Money Supply Measures |
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| Source: Federal Reserve |
The Fed and Monetary Creation
The Federal Reserve can stimulate the expansion or effect the contraction of the money supply by its open-market operations. If it buys Treasury securities, it increases free bank reserves, and these reserves can be lent through the banking system. Conversely, the sale of Treasury securities contracts the supply of free reserves available for lending.These activities affect the final money supply only indirectly. The Fed can be quite active in supplying reserves and driving the federal funds rate, the rate at which banks lend to each other, down to a target, but it can neither force banks to lend nor force businesses to borrow. Recent concern about a slow or declining growth in the money supply has to focus here: The level of commercial and industrial lending as a percentage of the GDP is the lowest since the data became available in 1959.
| Where Has All the Lending Gone? |
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| Source: Federal Reserve. |
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