[Edited September 7, 2022 to clarify that total M2 did not change. Only the M1 and M2 definitions are different. Essentially, some assets were moved from M2 to M1. But, as always, M2 includes M1 so there was no change in M2 totals.]
I have now seen two separate articles that are confused about what has happened to M1 and M2. The publications were Zerohedge.com and Redstate.com. The latter is the more egregious, starting with the headline “Why Is the Fed Not Reporting M1 and M2 Numbers?” The answer, of course, is that the Fed reports not only M1 and M2 using the current definitions, but also publishes comparisons of the two measures with the previous definitions. See Appendix Tables 2, 3, and 4 in the Fed’s H.6 report.
The main source of this misunderstanding is the definition of M1 and M2 changed in May, 2020. This is discussed in Table 1, footnote 1 of the March 23, 2021 H.6 report.’
As always, my methodology is transparent. Click here to download my Excel workbook.
Money Supply Definitions
The long-time definitions of M1 and M2 were:
M1 = Currency + Checkable Deposits + Travelers Checks
M2 = M1 + Savings Deposits + Other Checkable Deposits
+ Certificates of Deposit less than $100,000
Before delving into details, I’ll explain travelers checks. Those were added to M1 because the liabilities of American Express and Cook’s added to purchasing power as much as currency. But travelers checks became a victim of technology. Computer and related technology makes counterfeiting easy. The U.S. Treasury can afford to implement advanced security features. American Express can’t. On January 1, 2019, travelers checks were dropped from M1 mainly because the volume had become so low that the contribution to M1 was essentially zero. (The history of the U.S. Treasury’s battle against counterfeit U.S. currency is actually pretty interesting. For a good overview of security measures on various denominations, see the Banknote Identifiers page on USCurrency.gov.)
I was writing about inflation, so naturally I looked at money supply data. My first step was to download M1 and M2, then graph their growth rates. Here’s what I saw:
That looks really strange. Was I really supposed to believe M1 increased by about 350% in May 2020? I took a look at the levels of M1 and M2:
Is it possible that households and businesses voluntarily transferred the totality of
Savings Deposits + Other Checkable Deposits + Certificates of Deposit less than $100,000
to M1 assets? Highly unlikely. Thus began my trip into the Wonderland that is money supply definitions.
M1 and M2 Definitions Have Changed
On January 1, 1973 retail money market funds were added to M2. If anything, that change was later than it should have been. Here’s what M1 and M2 looked like using the pre-1973 definitions:
That looks about right. M2 is far greater than M1. But the next change is really important.
On May 1, 2020, Other Liquid Deposits were added to M1. That amount equals Savings Deposits + Other Checkable Deposits. Essentially those categories were moved from M2 to M1., Here’s what M1 and M2 look like using the pre-2020 (but post-1973) definitions.
And, presto, the world is once again as it should be. In other words, if you don’t like the new definitions of M1 and M2 you can calculate them using the old definitions with very little effort. But, of course, you’ll get the same dollar values for M2 either way. Shifting assets from M2 to M1 does not change total M2 because M2 includes M1.
Or, if you’re feeling lazy, you can just look at Appendix Tables 2, 3, and 4 to the H.6 report.
The point of all this is that we should use M2 exclusively. Remember, it includes M1. And this is consistent with the findings of Friedman and Schwartz.
- Global Intel Hub (April 12, 2021). “Hyperinflation Alert – 78% of US Dollars created in the last 12 months – Dollar Debasement Explained.” Zerohedge.com, publisher. Available at https://www.zerohedge.com/news/2021-04-12/hyperinflation-alert-78-us-dollars-created-last-12-months-dollar-debasement. Accessed April 15, 2021. ↑
- Stu Cvrk (April 15, 2021). “Why Is the Fed Not Reporting M1 and M2 Numbers?” Redstate.com, publisher. Available at https://redstate.com/stu-in-sd/2021/04/15/why-is-the-fed-not-reporting-m1-and-m2-numbers-n361319. Accessed April 15, 2021. ↑
- Board of Governors of the Federal Reserve System (March 23, 2021). “Money Stock Measures – H.6 Release.” Available at https://www.federalreserve.gov/releases/h6/current/default.htm. Accessed April 15, 2021. ↑
- Ibid. ↑
- U.S. Department of the Treasury, “Currency Identifiers.” Available at https://www.uscurrency.gov/denominations/bank-note-identifiers. Accessed March 25, 2021. ↑
- Federal Reserve Board (March 23, 2021). “Money Stock Revisions.” Available at https://www.federalreserve.gov/releases/h6/current/default.htm. Accessed March 25, 2021. ↑
- Here’s what the Fed says about M1 and M2 changes.Before May 2020, M1 consists of (1) currency outside the U.S. Treasury, Federal Reserve Banks, and the vaults of depository institutions; (2) demand deposits at commercial banks (excluding those amounts held by depository institutions, the U.S. government, and foreign banks and official institutions) less cash items in the process of collection and Federal Reserve float; and (3) other checkable deposits (OCDs), consisting of negotiable order of withdrawal, or NOW, and automatic transfer service, or ATS, accounts at depository institutions, share draft accounts at credit unions, and demand deposits at thrift institutions. Beginning May 2020, M1 consists of (1) currency outside the U.S. Treasury, Federal Reserve Banks, and the vaults of depository institutions; (2) demand deposits at commercial banks (excluding those amounts held by depository institutions, the U.S. government, and foreign banks and official institutions) less cash items in the process of collection and Federal Reserve float; and (3) other liquid deposits, consisting of OCDs and savings deposits (including money market deposit accounts). Seasonally adjusted M1 is constructed by summing currency, demand deposits, and OCDs (before May 2020) or other liquid deposits (beginning May 2020), each seasonally adjusted separately. For more information on the H.6 release changes and the regulatory amendment that led to the creation of the other liquid deposits component and its inclusion in the M1 monetary aggregate, see the H.6 announcement and Technical Q&As posted on December 17, 2020.Before May 2020, M2 consists of M1 plus (1) savings deposits (including money market deposit accounts); (2) small-denomination time deposits (time deposits in amounts of less than $100,000) less individual retirement account (IRA) and Keogh balances at depository institutions; and (3) balances in retail money market funds (MMFs) less IRA and Keogh balances at MMFs. Beginning May 2020, M2 consists of M1 plus (1) small-denomination time deposits (time deposits in amounts of less than $100,000) less IRA and Keogh balances at depository institutions; and (2) balances in retail MMFs less IRA and Keogh balances at MMFs. Seasonally adjusted M2 is constructed by summing savings deposits (before May 2020), small-denomination time deposits, and retail MMFs, each seasonally adjusted separately, and adding this result to seasonally adjusted M1. ↑
- Milton Friedman and Anna Schwartz (1963). A Monetary History of the United States 1867-1960. Princeton University Press, Princeton, NJ. ↑