Money Supply
The money supply is the total amount of money available in an economy at a given time, usually measured in layers such as M0, M1 and M2 depending on how easily the money can be spent.
Measuring money in layers
Economists do not use a single number, because money comes in forms that are more or less ready to spend. Exact definitions vary by country, but the logic is similar everywhere.
The monetary base, often called M0, is cash plus the reserves banks hold at the central bank. M1 adds money you can spend immediately, mainly cash in circulation and current-account deposits. M2 also includes savings deposits and short-term time deposits. The euro area adds M3, which includes certain money market instruments. Broader measures move more slowly and are watched as a gauge of overall money in the economy.
Where money comes from
Central banks create the monetary base. Most of the money people actually use, however, is created by commercial banks when they lend: a new loan credits the borrower's account with a deposit that did not exist before. Repaying loans removes that money again. Central bank policy, from interest rates to QE and QT, influences how fast this process runs.
Why it matters
If the money supply grows much faster than the economy's output for a long time, it can contribute to inflation, though the link is loose in the short run. Some crypto analysts track global M2 as a rough indicator of liquidity and compare it with Bitcoin's price. Such charts can be informative, but the relationship is not stable, depends on the chosen time lag and is easy to overfit.
Money supply in crypto
Cryptocurrencies make their own supply transparent. Bitcoin's issuance is fixed by its protocol with a maximum supply of 21 million coins, while many tokens have schedules that release more units over time. Checking circulating, total and maximum supply is part of understanding any token.
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Frequently asked questions
What is the difference between M1 and M2?
M1 covers money that can be spent right away, such as cash and current-account deposits. M2 adds savings and short-term deposits that are slightly less liquid.
Does a growing money supply always cause inflation?
Not always. Inflation also depends on output, how often money changes hands and expectations. Over long periods, very fast money growth is usually associated with higher inflation.
Who controls the money supply?
The central bank controls the monetary base and influences the rest through rates and asset purchases, while commercial banks create most deposits through lending.
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