Components of the American Money Supply

We have said that checking accounts are money in modern America. So is currency (federal reserve notes and coins), of course. What are the proportions of these different forms of money, and how large is the American money supply? In June, 1996, the proportions were as shown in Table 1, according to the Federal Reserve Bank of St. Louis.

"Demand deposits" and "other checkable accounts" are both checking accounts -- the difference is in the history of the banks that issue them, and isn't very important any more. We also include travellers' checks, which are even more like currency than ordinary checks are; but they are a small component. The figures in this table are in billions, so we see that the total of currency, checking accounts, and travellers' checks is over one trillion at the mid-way point of the year 1996.

What all these checkable accounts and travellers' checks have in common is that they are obligations of banks to individuals or non-bank companies. The checking account is an obligation of the bank to honor the checks, as long as the account is enough. Even currency, is, in a sense, an obligation of the Federal Reserve Banking system -- though in this case the obligation is toward the banks, in that the Federal Reserve System is obligated to accept currency as deposits toward the banks' reserves. But there are other bank obligations that are not included: savings accounts, for example. One might ask: should still other kinds of bank obligations be considered as money and included in the money supply? Some economists feel they should, and the result is that we have several different concepts of the money supply. The list we have given above, amounting to 1117.3 billion dollars in 1996, is called "M1" in the conventional system of measurement of the money supply. But many economists rely more on a broader concept of money known as M2, which includes savings deposits, small time deposits (a lot like savings deposits) and money market fund balances. Table 2 shows the makeup of M2 in June, 1996:

There are other, still broader concepts of money, that include other kinds of bank obligations, but we shall not go into more detail here.

You may ask, what about credit cards, so-called "plastic money?" Savings accounts are included in M2 for two reasons: they are bank obligations, assetd of the person who has the account, and they are also good substitutes for checking accounts (or currency). Credit cards are also good substitutes for checking accounts and currency, but they are different in other ways.

As we have seen, a credit card is a "line of credit" -- that is, an agreement with a bank whereby the bank prequalifies the card-holder for a loan, whenever the card-holder wants to take it out, at agreed-upon terms. But it does seem that the emergence of credit cards as an important means of payment has changed our money system in some important ways.

In the rest of this chapter, we will use the M1 concept of money -- currency plus checkable deposits. We will ignore the small amount of travellers' checks.

Clearing and Money Creation