What Is M3?

What Is M3?

Let me explain M3 to you directly: it's a measure of the money supply that builds on M2 by adding large time deposits, institutional money market funds, short-term repurchase agreements (repos), and other larger liquid assets.

These components in M3 are what we call 'near money'—they're less liquid than other parts of the money supply and connect more to the finances of big financial institutions and corporations rather than small businesses or individuals.

Key Takeaways on M3

To sum it up quickly, M3 gathers M2 along with those large time deposits, institutional funds, short-term repos, and bigger liquid assets, making it more aligned with large-scale finance than everyday small-scale operations.

Economists have used M3 to gauge the entire money supply in an economy, and governments relied on it to shape policy and manage inflation over medium and long terms. But since 2006, the Federal Reserve has stopped publishing M3 data, though you can still find it from other sources.

Understanding M3

When we talk about the money supply—or money stock—it's classified by liquidity levels, including everything from cash in circulation to liquid products like certificates of deposit (CDs).

M3 stands as the broadest measure, emphasizing money as a store of value over a medium of exchange, which is why it includes those less-liquid assets that aren't quickly convertible to cash for immediate use.

As of July 2023, M3 for the United States hit $20.9 trillion. Traditionally, economists used M3 to estimate the full money supply, and central banks like the Fed applied it to direct monetary policy for controlling inflation, consumption, growth, and liquidity in the medium to long term.

In calculating M3, every component gets equal weight—for instance, M2 and large time deposits are aggregated without adjustments. This simplifies things, but it assumes all parts impact the economy identically, which isn't accurate in reality.

That's a key flaw in M3, and it's part of why it's no longer seen as a true measure of the money supply.

Disuse of M3

The Federal Reserve stopped tracking M3 in 2006, but even earlier, in the 1980s, they shifted focus to M2 for policy guidance. By 1993, Fed Chairman Alan Greenspan stated they wouldn't use any money aggregates, including M2, to steer FOMC policy.

Still, sources like the Federal Reserve Bank of St. Louis publish M3 figures for economic data purposes.

M3 and the Other M Classifications

Think of M3 as combining all other money classifications—M0, M1, and M2—plus the least liquid parts of the money supply.

M0 is just the currency in circulation, like coins and cash. M1 adds to M0 with demand deposits such as checking accounts, traveler's checks, and readily available currency.

M2 includes everything in M1 (and M0) plus savings deposits and CDs, which are less liquid than checking accounts. M3 goes further by adding to M2 those non-circulating, least liquid elements like repos that mature over days or weeks.

What Is M1, M2, and M3 Money?

In the U.S., M1 covers money in circulation and bank deposits; M2 adds savings deposits and money market funds to M1; and M3, now discontinued, included M2 plus time deposits.

What Is M4 Money?

Over in the United Kingdom, M4 classifies money circulating among the public, non-financial institutions, private sector banks, and building society deposits.

How Much M1 Money Is in Circulation?

As of July 2023, the seasonally adjusted M1 in circulation stands at $18.4 trillion.

The Bottom Line

In essence, M3 encompasses M0, M1, M2, and additional money supply components. The Fed halted its publication in 2006, but other sources keep providing it for historical and comparative purposes.