These liquid assets provide a pool of wealth that can be converted to money (currency or checkable deposits) with relative ease and minimal loss of value. The assets are not quite as liquid as the savings near monies found in M2 nor the investment near monies found in M3. But they are substantially more liquid than other financial or physical assets (corporate stocks, factories, housing, or furniture).

While the numbers are not readily available, when officially tracked by the Federal Reserve, about 80 to 85 percent of L was comprised of M3, with the remaining 15 to 20 percent consisting of the extra liquid assets.

Liquid Assets

The four primary liquid assets added to M3 to calculate L are: (1) commercial paper, (2) U.S. Treasury bills, (3) savings bonds, and (4) bankers' acceptances.

• Commercial Paper: These are unsecured, short-term promissory notes (usually less than nine months) issued by businesses to obtained working capital. Commercial paper is negotiable and, once issued, is commonly traded among investors through established markets until the maturity date. As such, commercial paper is relatively liquid. It can be easily sold to other investors, meaning it can be converted to currency or checkable deposits with little loss of value.


• U.S. Treasury Bills: These are short-term promissory notes (usually less than a year) issued by the federal government to finance the federal deficit. Like commercial paper, Treasury bills are negotiable once issued and can be easily converted to currency or checkable deposits through established markets.


• Savings Bonds: These are standard savings bonds issued by the federal government and typically purchased by members of the household sector. They are a notch down the liquidity ladder from other types of household savings, such as savings accounts and money market mutual funds. As such, they can be "cashed in" and converted to spendable M1, but not as easily as other savings.


• Bankers' Acceptances: These are short-term promissory notes issued by nonfinancial firms (such as a manufacturing firm) that are backed or underwritten by a commercial bank. Like commercial paper, bankers' acceptances are used to obtain short-term working capital, often for firms engaged in importing and exporting. Also like commercial paper and Treasury bills, once issued, these assets are exchange through markets, making them relatively liquid.

Three Monetary Aggregates

• Narrow-Range Money: M1: This is the combination of currency (and coins) issued by government and held by the nonbank public and checkable deposits issued by banking institutions. M1 contains the two items that function as THE medium of exchange for the U.S. economy.


• Medium-Range Money: M2: This is M1 plus the addition of highly liquid, savings-type near monies. The near monies added to M1 to obtain M2 include savings deposits, certificates of deposit, money market deposits, and money market mutual funds. Some folks consider M2 a better overall measure of the economy's money supply than M1.


• Board-Range Money: M3: This is M2 plus the addition of several slightly less liquid, investment-type near monies. The near monies added to M2 to obtain M3 include larger denomination certificates of deposit, larger money market deposits, repurchase agreements, and Eurodollars.