The near monies added to M2 to derive M3 are best thought of as short-term, interest-generating, but liquidity-maintaining, investments. These are commonly used by banks, businesses, and other organizations to temporarily store stockpiles of funds. These near monies provide a significant degree of liquidity, but also to generate a modest interest return. Institutions make use of these financial assets when they do not want to tie up their funds in long-term investments (thus maintaining liquidity), but they also want to generate at least some interest return.

The key for the M3 monetary aggregate is that these financial assets are relatively liquid and can be converted to spendable money in a short period with little or no loss of value. While they are extremely liquid, they are just not quite as liquid as the near monies contained in M2.

Some Recent Numbers

• First, in early 2004 M3 was running at just over $9.2 trillion. This was approximately $31,400 for every man, woman, and child in the United States. This average amount includes both spendable money (M1), the near monies added to M2, plus a stockpile of institutional investments and savings.


• Second, M2 is about two-thirds of M3, with the remaining one-third comprised of the four institutional near monies--institutional money market mutual funds, large-denomination certificates of deposit, repurchase agreements, and Eurodollars. These institutional near monies are used by banks, businesses, and other organizations as short-term, interest-generating, but liquidity-maintaining, investments.


• Third, the M3 near monies contain about equal proportions of institutional money market mutual funds and large-denomination time deposits (certificates of deposit). The remainder is comprised of repurchase agreements and Eurodollars.

Near Monies

The four primary near money assets added to M2 to calculate M3 are: (1) institutional money market mutual funds, (2) large-denomination certificates of deposit, (3) repurchase agreements, and (4) Eurodollars.

• Institutional Money Market Mutual Funds: These are deposits with nonbank mutual fund companies that are typically owned by institutions (rather than consumers). More specifically they are money market mutual funds with a minimum initial deposit of $50,000.


• Large-Denomination Certificates of Deposit: These are certificates of deposits issued by banks with a minimum deposit of $100,000. Such certificates of deposits also tend to be owned by businesses and other institutions, rather than consumers.


• Repurchase Agreements: These are short-term transactions in which a financial asset is sold, then automatically repurchased after a specified time (often overnight). The difference between the sale price and repurchase price is the interest payment on this short-term loan. Overnight repurchase agreements are commonly used by banks to generate interest on business checking accounts (which cannot legally receive interest payments).


• Eurodollars: In general, these are deposits in one bank that are designated in the currency of a foreign bank. The "Eurodollar" term arose because these deposits were originally in European banks and denominated in U.S. dollars. In particular, the Eurodollar deposits included in M3 are those held by U.S. residents at banks Britain and Canada.

The Other Two

• 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.