M1

The M1 monetary aggregate includes currency (coins, treasury notes, and banknotes), which is allocated to a separate monetary aggregate M0, and funds in current accounts in banks, which are demand deposits and other liquid deposits. This monetary aggregate is the most liquid portion of the money supply, as it includes currency that can be converted to cash and can be available for immediate use as a means of payment, unlike M2 and M3. 

M1 explained 

M1 aggregate is the total volume of cash in circulation and funds in accounts held by individuals, legal entities, and the state. M1 takes into account demand deposits and other checkable deposits that are held at banks or other financial institutions and can be accessed at any point of time. The M1 monetary aggregate excludes financial assets like stocks. It is an indicator of the structure of the money supply, which is commonly used to record total currency in circulation. 

It should be mentioned that since May 2020, the aggregate includes savings accounts –  a deposit account that gives an opportunity to earn interest on money from storing funds and withdraw part of the deposit at any time. 

Measuring M1 money 

The Fed makes information on two indicators – M1 and M2 – available to the public. The M1 aggregate is the money supply, which includes all components of the M0 money and term and savings deposits in commercial banks (usually locked up for less than 4 years), i.e. savings that are easily convertible into cash. The broader indicator, M2, is the sum of M1, money markets deposit accounts at all depository institutions, savings account deposits, and small-denomination time deposits at all financial institutions. 

Economists often mention the term “Money Zero Maturity (MZM)”, when discussing M1 and M2 money aggregates. MZM is the sum of M1 and all money market deposit accounts. It measures liquid money in an economy of the country. 

The M1 money consists of Federal Reserve notes (paper currency) and coins that circulate in the economy. The share of paper currency in the money supply is significant. 

The calculation of the aggregate can vary from one country to another. For instance, in the eurozone, a monetary union operating within the EU, funds in circulation and overnight deposits are taken into account. The Bank of England calculates only M4 aggregate, which includes cash, deposits, promissory notes, debt securities, and repo transactions.