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What is M2 Money Supply?

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  • Written By: John Lister
  • Edited By: Kristen Osborne
  • Last Modified Date: 10 November 2016
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The M2 money supply is a particular method of measuring how much money exists within a country's economy. In the United States, the M2 money supply is the broadest definition currently used for official figures. Tracking the figure is of particular interest to those economists who believe controlling the supply of money is an effective way to influence the economy.

The precise definitions of monetary supply measures can vary from country to country. This means it is usually only possible to fairly compare figures from one country, on a historical basis, rather than from country to country. The general principles of the definitions are the same in each system; the higher the M number, the more factors are taken into account.

Within the United States, the narrowest definition is M0, which covers all physical notes and coins, plus the deposits that banks themselves have placed in the Federal Reserve and could demand to exchange for cash. M1 adds in the money that is deposited into checking accounts and could thus theoretically be accessed immediately. In reality this couldn't happen, as the banks don't hold enough cash to cope with everyone withdrawing their cash at once.

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M2 money supply adds in most money that savers and investors could access in a relatively short time with little or no costs or penalties. This includes savings accounts and money market accounts. It also includes certificates of deposit for less than $100,000. These are included as in most cases the time before the certificate can be cashed in without penalty is lower, or the penalty for early cashing in is lower, than with the majority of investments.

Until 2005, the Federal Reserve also kept track of M3. This adds in all other forms of certificates of deposit, plus a limited range of financial products involving securities or foreign currency. The Federal Reserve decided this measure didn't add enough useful information to make it worth calculating.

The M2 money supply is most closely followed by supporters of monetary policy. These are economists that believe measures that control the availability of money and credit are the best ways to control the economy. This includes techniques, such as setting interest rates in an attempt to influence inflation and employment levels. This is in contrast to fiscal policy that concentrates more on government spending and taxation designed to stimulate demand for products and services through a self-perpetuating cycle of government spending being used to create jobs so that enough people have the spending power to create demand satisfied by private enterprise.

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