- the total amount of money (bills, coins, loans, credit, and other liquid instruments) in a particular economy
money supply - Investment & Finance Definition
The amount of money in the economy. There are three measures of money supply: M1, M2, and M3.
M1 is currency in circulation, travelers’ checks, and checking accounts or other accounts upon which checks can be written.
M2 includes M1, plus savings accounts, time deposits under $100,000, such as certificates of deposit, and funds in retail money market mutual funds.
M3 includes M2 plus time deposits over $100,000, balances in institutional money funds, repurchase liabilities issued by depository institutions, and eurodollars held by U.S. residents at foreign branches of U.S. banks and at all banks in the U.K. and Canada.
The New York Federal Reserve Bank releases money supply data every Thursday. The Full Employment and Balanced Growth Act of 1978 (also called the Humphrey-Hawkins Act), required the Federal Reserve to set one-year target ranges for money supply growth twice a year and report the targets to Congress.
Money supply was a widely watched economic indicator in the 1980s. If money supply jumped, the financial markets anticipated that the Federal Reserve might attempt to limit money supply growth by raising short-term interest rates. However, by 1993 Federal Reserve Chairman Alan Greenspan said that money supply, or M2, had been downgraded as a reliable indicator of financial conditions because its forecasting ability declined. As a result, money supply has decreased substantially in its importance to the financial markets. When the Humphrey-Hawkins legislation requiring the Fed to set target ranges for money supply growth expired, the Fed announced that it was no longer setting such targets because doing so wasn’t useful.