What Is Narrow Money?
Let me explain narrow money to you directly: it's a category of the money supply that covers all physical money like coins and currency, plus demand deposits and other liquid assets that central banks hold.
In the United States, we classify narrow money as M1, which is M0 plus demand accounts. Over in the United Kingdom, the narrowest measure is just the notes and coins in circulation.
Key Takeaways
You should know that narrow money, also called M1, means physical money such as coins and currency, demand deposits, and other liquid assets that central banks can access easily.
It's a subset of broad money, which adds in savings deposits and other deposit-based accounts, known as M2 and M3.
Different countries classify their money supplies in their own ways, but the categories typically go from M0 to M4.
Understanding Narrow Money
The term comes from M0 and M1 being the narrowest or most restrictive forms of money, serving as the foundation for the medium of exchange in an economy. This is the money that's most readily available for transactions and commerce.
Narrow money supply only includes the most liquid financial assets, which must be accessible on demand. That limits it to physical notes and coins, plus funds in the most accessible deposit accounts. According to the OECD, as of 2024, the United States has the world's largest stock of narrow money, followed by Chile, Hungary, Israel, and Poland.
Typically, the availability of liquid money supply, whether short-term or long-term, directly affects economic health. But changes in the economy and finance industry have weakened that direct link. The Federal Reserve doesn't implement policy by changing the money supply; it focuses on interest rates instead. Still, it tracks changes in narrow and broad money to shape its response to the economy's state.
Qualifying Accounts
The most accessible accounts, like savings and checking deposits, qualify as narrow money. You can access the funds in these accounts on demand, even if you use mechanisms other than physical currency, such as debit card transactions or checks.
Narrow Money and Broad Money
While M0 and M1 describe narrow money, M2, M3, and M4 qualify as broad money, with M4 being the largest concept of the money supply. Broad money can include various deposit-based accounts that take more than 24 hours to mature and become accessible. These are often longer-term time deposits, restricted by specific time requirements.
Narrow Money and the Money Supply
M0 and M1 are just a portion of the overall money supply, which includes everything from M0 to M4. So it covers both the most liquid and the least liquid cash and deposit-based assets in a nation, including funds in bonds, other securities, and institutional money market accounts.
For M4, the broadest definition, investments considered part of the money supply are those scheduled to mature in five years or less, though this isn't a strict rule. Countries classify funds differently; some exclude M0 or M4 and divide the money supply into just M1, M2, and M3.
What Is M1, M2, and M3 Money Supply?
M1, M2, and M3 are different categories of money in an economy. M1 is money in circulation plus demand deposits in banks. M2 adds to M1 savings deposits, money market deposits, and time deposits under $100,000. M3 includes M2 plus long-term time deposits at banks.
How Much M1 Money Is There?
As of December 2024, the M1 money supply in the U.S. is $18.45 trillion, and the M2 money supply is $21.53 trillion.
Is M1 the Narrowest Money?
Yes, M1 is the narrowest money because it's the most liquid, consisting only of money in circulation and demand deposits in banks. M2 and M3 are broad money, including M1 plus other forms like savings deposits and long-term time deposits.
The Bottom Line
Narrow money, known as M0 and M1, refers to the most liquid forms of money, including physical currency and demand deposits. It serves as the basic medium of exchange in an economy, unlike M2 and M3, which include less liquid assets like long-term deposits.
While narrow money is essential for day-to-day transactions, central banks focus on interest rates rather than changing the money supply to influence economic conditions.
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