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MONETARY AGGREGATES:

Any of three basic measures of money, and related liquid assets, for the economy that are tracked and reported by the Federal Reserve System. They are designated M1, M2, and M3, with higher numbers containing a wider variety of assets. The smallest, M1, is used as THE medium of exchange in the economy. However, M2 provides savings that are easily converted to M1 and is considered by many as the best measure of liquid, spendable assets.
Monetary aggregates are financial assets that either function directly as money and as the medium of exchange or they are extremely liquid and easily converted to money. The Federal Reserve System officially tracks and reports monetary aggregates for the United States.

The three monetary aggregates are labeled M1, M2, and M3. M1 is the official money supply, consisting of currency and checking account balances, that is used for transactions. M2 adds savings accounts to M1 and is considered by many as a more accurate measure of the "spendable assets." M3 broadens M2 by adding other, slightly less liquid assets.

Narrow-Range Money: M1

M1 is the narrow-range, most basic, monetary aggregate in the U.S. economy. It is the sum of currency (and coins) issued by government and held by the nonbank public and checkable deposits issued by banking institutions. M1 has been running over $1.3 trillion, which works out to about $4,500 per person.

As this definition indicates, M1 contains two key components:

  • Currency: This is the paper currency and metal coins issued by government. But it is ONLY the currency and coins held by the nonbank public, which is anyone and everyone EXCEPT commercial banks and government banking authorities. Currency and coins held by the nonbank public are commonly termed "currency in circulation." Currency has been about 50 percent of M1.

  • Checkable Deposits: This includes the checking account balances issued by banking institutions, including traditional banks, savings and loan associations, credit unions, and mutual savings banks. Checking account balances are also termed "transactions balances" or "transactions deposits." Checkable deposits have been about 50 percent of M1.
Currency and checkable deposits are the two items in the economy that are generally accepted in payment for goods and services and regularly used for market transactions. They are THE medium of exchange. In fact, there are NO other items that satisfy this criterion of "general acceptability."

Medium-Range Money: M2

M2 is the medium-range monetary aggregate in the U.S. economy. It is the sum of M1 (currency and checkable deposits) and a collection of financial assets termed near monies. M2 has surpassed $6 trillion in recent years and comes in about $20,000 per person. Approximately 20 percent consists of the currency and checkable deposits in M1 and 80 percent of M2 is comprised of near monies.

The near monies added to M1 to get M2 are best thought of as temporary, short-term savings, including savings deposits, certificates of deposit, money market deposits, repurchase agreements, and Eurodollars. These near monies provide a pool of funds that can be accessed and converted to M1 quickly and easily. In terms of liquidity, these funds are very liquid. They are not perfectly liquid like M1, but they are the next best thing.

The assets that best represent near monies are traditional, interest-paying, bank savings accounts. While savings account balances are NOT generally accepted for payments, they can be quickly and easily transferred into checking accounts or withdrawn as cash to make payments.

For example, suppose that Alicia Hyfield's checking account is hovering in the one-digit range, but her savings account is substantially bigger. Suppose that a potential purchase of designer jeans, running at $50, strikes her fancy. Will she pass on this purchase lamenting the minimal balance in her checking account? Or will she pursue it knowing that she has ample funds that can be easily transferred from savings to checking? If she leans toward the second option, then she is operating under the notion that are savings extremely liquid, and that M2 might be a better measure of total money for the economy than M1.

The ease with which near monies can be transferred into M1 motivates a lot of people, especially economists, to argue that M2 is the best measure of the total amount of money in circulation. As such, most government stabilization policies dealing with money primarily focuses on M2 rather than M1.

Wide-Range Money: M3

M3 is the wide-range monetary aggregate in the U.S. economy. It is the sum of M2 (currency, checkable deposits, and saving near monies) and another group of slightly less liquid near monies. M3 is over $9 trillion and is approximately $30,000 per person. Two-thirds of M3 is comprised of the assets found in M2 and the other one-third comes from these additional near monies.

The near monies added to M2 to get M3 are best considered as temporary, investments, including larger denomination certificates of deposit and longer-term repurchase agreements and Eurodollars. In comparison to near monies added to obtain M2, those included in M3 are less liquid and tend to be used as short-term investments rather than savings. While accounts and assets used as saving are more focused on temporarily storing funds, investment accounts and assets are more concerned with generating an return.

The four most important near monies added to M3 are large denomination certificates of deposit, longer-term repurchase agreements, longer-term Eurodollars, larger money market deposits. Consider how these compare to similar items added to M2.

  • M2 includes certificates of deposit of less than $100,000, what consumers tend to use for savings accounts. M3, in contrast, includes certificates of deposit over $100,000, what businesses and investors tend to use for short-term investing.

  • M2 includes overnight repurchase agreements and Eurodollars, what banks and businesses use for short-term (as in overnight) storage of funds. M3, however, includes repurchase agreements and Eurodollars with longer terms--several day or even weeks. These longer terms are better suited for investment.

  • M2 includes money market deposits primarily held by households for saving. M3 includes money market deposits held by institutional investors as part of their "investment portfolios."

Liquid Assets: L

While no longer reported by the Federal Reserve System, a fourth monetary aggregate historically included with M1, M2, and M3 is L. L, which stands for liquid assets, was once the broadest monetary aggregate for the U.S. economy, but its use has been largely discontinued. When measured, L was the economy's total collection of financial assets that could be converted to M1 relatively easily with minimal little loss of value.

L was derived by adding several big-time liquid assets to M3, including commercial paper, U.S. Treasury bills, savings bonds, and bankers' acceptances. These big-time liquid assets can be converted to M1 easily, with little loss of value, just not as easily as the near monies added to M2 and M3.

Historically M3 was about 80 percent of L, with the remaining 20 percent coming from the addition of extra liquid assets.

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Recommended Citation:

MONETARY AGGREGATES, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2018. [Accessed: October 18, 2018].


Check Out These Related Terms...

     | M1 | M2 | M3 | L | currency | checkable deposits | near monies | plastic money |


Or For A Little Background...

     | money | money functions | money characteristics | fiat money | commodity money | medium of exchange | liquidity |


And For Further Study...

     | money creation | fractional-reserve banking | banking | Federal Reserve System | monetary economics | monetary base | monetary policy |


Related Websites (Will Open in New Window)...

     | Federal Reserve System | Federal Reserve Education | U.S. Department of the Treasury |


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