Your Money Supply At Work

By Larry Teren

Did you ever wonder what the business and financial reporter on the radio means when he says M1 and M2 when referring to our money supply? M1 includes all physical money such as coins and currency as well as demand deposits such as checking and negotiable order of withdrawal (NOW) accounts. M1, therefore, refers to the amount of money that can quickly be converted to cash.

By law, a bank is not obligated to immediately give you the contents of your passbook savings account. They can tell you that the money will be delivered in a few days or so, depending on the size. Generally, they are not allowed to withhold access for more than thirty days from the time of request. A checking account, however, must be made immediately available, up to the amount that has cleared deposit into it.

M2 money supply includes M1 plus all time deposits, savings deposits and non-institutional money market funds. M2, therefore, is a broader category of monetary value to the economy.

Yes- there is an M3 and it is the broadest measure of money supply. It includes M2 plus institutional funds, large time deposits and short-term repurchase agreements. This is the figure that economists use to measure the entire money supply.

The United States went off the Gold Standard in 1971 but way back in 1933, President Roosevelt stopped the minting of gold coins as well as the opportunity for Americans to redeem currency for gold. Owning gold was made illegal and if you had it in your possession, you had to return it to the US Treasury for paper money. Coin collectors were allowed to keep gold but it was not usable as currency, only as an artifact. Paper money, or Federal Reserve Notes, are not backed by gold, period. Which, in a way, makes our money worth the paper it is printed on.

Silver is another story. Until 1964, the Feds mint silver coins. Most of us baby boomers have a few tucked away somewhere for a rainy day when we just know we will be back to bartering in precious metals.

For a few years, the Federal government allowed for the minting of partial silver coins but stopped it altogether in 1970. Due to inflation, the silver content in the coin made it more valuable to melt the coin down than to use it as currency. In 1971, the United States put an end to allowing foreign banks to redeem dollars for gold as well. That put the nail on the coffin of the Gold Standard.

Today, money has become more theoretical than something you hold in your hand. Most of us now regularly use credit and debit cards. We carry around very little cash or coins. Our own personal money supply is hardly something we can pull out of a shoe box, lay on a bed and count. It is more a matter of going online to our bank website and staring at the numbers associated with our accounts. In fact, we are less and less writing checks and more often electronically transferring money to a service provider. This does little to change the way we measure M1 and M2 because the use of credit and debit cards as well as online transfers is still within the category of M1 or liquid assets.

There was a time, though, when dollar bills and coins went from hand to hand without the government getting their hands on some of it. The video clip shown here is from our youtube.com channel. It was made as a public service in 1947 to show how money got circulated. In this story, a five dollar bill changes hands eight times before going back to the original owner. You will see examples of how wages were paid with a cash envelope as well as one shopkeeper paying a tradesman in cash that he had just received into his register. Enjoy!

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