In The United States The Money Supply M1 Includes

You've probably seen M1 mentioned in Fed press releases, financial news, or that one economics class you barely passed. But here's the thing — most explanations make it sound more complicated than it actually is Most people skip this — try not to..

The short version: M1 is the narrowest measure of money the Fed tracks. It's cash, checking accounts, and a few other things you can spend right now without selling anything first Simple, but easy to overlook..

Let's break down what that actually means — and why it matters more than most people realize.

What Is M1 Money Supply

M1 is the Federal Reserve's most restrictive definition of money. Think of it as "spending power you can access instantly." No waiting for a transfer to clear. No selling a bond. No penalty for early withdrawal.

In the United States the money supply M1 includes three main components:

Physical currency

Coins and paper Federal Reserve notes in the hands of the public. Not in bank vaults. Not at the Fed. In your wallet, your pocket, the register at the coffee shop. This is the most tangible part of M1 — and the smallest by dollar value That's the part that actually makes a difference..

Demand deposits

Checking accounts at commercial banks. These are funds you can withdraw on demand by writing a check, using a debit card, tapping your phone, or walking up to a teller. No notice required. No limit on transactions (though Regulation D used to cap certain withdrawals — more on that later) Easy to understand, harder to ignore..

Other liquid deposits

This category catches things that function like checking accounts but technically aren't. Negotiable order of withdrawal (NOW) accounts at credit unions. Automatic transfer service (ATS) accounts. Share draft accounts. The labels differ, but the economic function is identical: you can spend this money today.

That's it. Three buckets. Everything else — savings accounts, money market funds, CDs, crypto, the Venmo balance you forgot about — lives in broader aggregates like M2 or MZM.

Why It Matters / Why People Care

You might wonder: why does the Fed obsess over these specific categories? Why not just track "all the money"?

Because M1 moves differently than broader measures. Worth adding: it's the transactional engine of the economy. When businesses make payroll, when you buy groceries, when the government sends a stimulus check — that activity flows through M1 components Simple, but easy to overlook..

It's a policy signal

The Fed doesn't target M1 directly anymore (they haven't since the 1980s). But they watch it. Sharp M1 growth can signal excess liquidity. A sudden contraction might mean credit is tightening. During the pandemic, M1 exploded — not because the economy was overheating, but because the Fed flooded the system with reserves and people parked cash in checking accounts Practical, not theoretical..

It affects velocity

Money velocity — how often a dollar changes hands — is calculated using M1 (or M2). When M1 balloons but GDP doesn't, velocity crashes. That's exactly what happened in 2020–2021. The denominator grew faster than the numerator. Economists argued for months about what it meant. Some said inflation was inevitable. Others said velocity would normalize. Turns out, both were partly right That's the part that actually makes a difference. But it adds up..

It matters for banking

Banks care about M1 because demand deposits are cheap funding. They pay near-zero interest on checking accounts but can lend those funds out at 6–7%. When M1 shifts — say, people move money from checking into high-yield savings or money market funds — banks lose that low-cost deposit base. That's been a real headache since 2022.

How It Works (and How It's Changed)

The definition of M1 hasn't been static. The Fed has tweaked it several times, and the most recent change — May 2020 — was a doozy Small thing, real impact..

The pre-2020 version

Before the pandemic, M1 included:

• Currency
• Demand deposits
• Traveler's checks (yes, really)
• Other checkable deposits (OCDs)

Savings deposits were explicitly excluded — they lived in M2. The logic: savings accounts had transaction limits (Regulation D's six-per-month rule), so they weren't "true" transaction money.

The 2020 redefinition

In May 2020, the Fed did two things simultaneously:

1. Eliminated the six-transfer limit on savings deposits (Regulation D suspension)
2. Retroactively redefined M1 to include savings deposits

Overnight, M1 jumped from about $4 trillion to $16 trillion. Not because new money was printed — because the definition changed. The Fed argued that since savings accounts were now functionally identical to checking accounts (unlimited transfers), they belonged in M1 Simple, but easy to overlook..

Critics called it statistical manipulation. The Fed called it modernization. Here's the thing — either way, it made year-over-year comparisons meaningless for a while. Because of that, if you're looking at FRED charts, you'll see a massive discontinuity in May 2020. That's not an economic event. It's a definitional one.

What's not in M1 (but people think is)

• Savings bonds — not spendable instantly
• Money market mutual funds — retail MMMFs are in M2, institutional ones aren't in any M aggregate
• Crypto — the Fed doesn't count it as money, period
• Venmo/PayPal balances — these are claims on the platform, not on a bank. They're not in M1 or M2
• Foreign currency holdings — only USD counts
• Bank reserves — these are liabilities of the Fed to banks, not money held by the public

Common Mistakes / What Most People Get Wrong

Confusing M1 with the monetary base

The monetary base (MB) = currency in circulation + bank reserves at the Fed. M1 = currency in circulation + deposits at banks. They're related but different. Reserves aren't spendable by the public. Only banks hold them. When the Fed does QE, MB explodes but M1 might not — unless banks lend and create deposits And it works..

Thinking M1 growth = inflation

Not necessarily. 2020–2021 saw historic M1 growth. Inflation followed, but with a lag and for multiple reasons (supply chains, fiscal stimulus, labor market shifts). M1 growth can be inflationary if it outpaces real output and velocity stabilizes. But the relationship is loose, not mechanical. Anyone telling you "M1 up 40% means 40% inflation" is selling something.

Assuming the Fed "prints money" directly into M1

The Fed creates reserves. Banks create deposits when they lend. The public decides how much to hold as currency vs. deposits. M1 is the result of all three decisions interacting. The Fed influences it — heavily — but doesn't control it directly.

Using pre-2020 M1 data without adjustment

If you're modeling money demand or velocity using M1, you must account for the 2020 break. The Fed provides a "continuity series" (M1SL on FRED) that backdates the new definition. Use it. Otherwise your model will think the money supply quadrupled in one month.

Practical Tips / What Actually Works

For investors: watch the composition, not just the level

Total M1

Total M1 can grow while the transactional portion shrinks. On top of that, in 2022–2023, M1 contracted sharply — the first sustained decline since the Great Depression — but currency in circulation kept rising. Households weren't destroying cash; they were draining checking accounts to pay down credit cards, fund brokerage sweeps, or cover inflation-driven expenses. The aggregate fell, but the "hand-to-hand" money people actually use for daily commerce didn't. If you only watched the headline number, you missed the rotation That's the part that actually makes a difference..

Honestly, this part trips people up more than it should.

Track the sweep mechanics

Banks still run retail sweep programs — they just don't reduce reserve requirements anymore (those went to zero in 2020). Instead, sweeps now optimize for FDIC insurance limits, yield, or balance-sheet management. When you see a sudden drop in "Other checkable deposits" and a jump in "Savings deposits" (M2), it’s often not consumer behavior. It’s a bank reclassifying your money overnight to manage their liquidity coverage ratio. The Fed’s H.6 release shows the memo items. Learn to read them.

Velocity is a residual, not a driver

$V = PY/M$. It’s an accounting identity. When M1 exploded in 2020, velocity had to crash — arithmetic, not economics. The mistake is treating velocity as a stable behavioral parameter. It’s not. It absorbs every shift in payment tech, financial regulation, and portfolio preference. Don’t forecast inflation by assuming velocity "reverts to mean." It has no mean. It has a history.

Use the "M1 less currency" series for business cycle work

Currency is noisy — driven by tax refunds, holiday spending, foreign demand for $100 bills, and the shadow economy. Strip it out. The deposit-only component (M1SL minus CURRCIR on FRED) correlates far better with nominal GDP and credit conditions. It’s the money businesses actually use to make payroll and pay suppliers.

For policymakers: stop targeting aggregates

The Fed formally abandoned monetary targeting in 2000. Unofficially, commentators still treat M1/M2 as policy levers. They’re not. They’re outcomes — the equilibrium of bank lending, household portfolio choice, and Fed balance-sheet policy. Trying to "control M2" is like trying to control the temperature by holding a match to the thermometer. The Fed sets the price of reserves (IORB, ON RRP) and the quantity of its own liabilities. Everything else is endogenous It's one of those things that adds up. That's the whole idea..

The Bottom Line

M1 is a measurement convention, not a physical substance. That’s it. It captures the liquid claims the public holds on the banking system, plus the cash in their wallets. It doesn’t measure wealth, purchasing power, or financial stability. It measures one specific slice of the liability structure of the financial sector.

The 2020 redefinition didn’t change the economy. In practice, it changed the map. If you’re navigating by the old map — comparing 2024 M1 to 2019 M1, or plugging raw FRED data into a regression — you’re lost That's the part that actually makes a difference..

Use the continuity series. Watch the composition. Ignore the velocity fetishists. And remember: the Fed doesn’t print M1. The banking system creates it, the public allocates it, and the statisticians define it — sometimes retroactively.

Practical Takeaways for the Analyst

1. Switch to the “continuity” series on FRED – The “M1 Money Stock (Continuously Compounded)” (M1SL) and its sub‑components are the only series that preserve the pre‑2020 definition. When you need year‑over‑year growth or a rolling‑average, pull the continuity series, not the post‑2020 “M1” that includes savings reclassifications. The continuity series lets you compare apples‑to‑apples across the pandemic‑era redefinition That alone is useful..

2. Strip out currency early in the workflow – Currency (CURRCIR) is a noise generator. It spikes around tax refunds, holiday seasons, and foreign demand for $100 bills. For any model that aims to explain business‑cycle dynamics, start with M1‑less‑currency = M1SL − CURRCIR. This deposit‑only slice tracks payroll cycles, supplier payments, and the “real” liquidity that drives transaction volume.

3. Watch the bank‑sweep channel – A sudden dip in “Other checkable deposits” paired with a jump in “Savings deposits” (the M2 side) is rarely a household shift. It is the banking system’s response to the liquidity‑coverage ratio (LCR) and FDIC insurance limits. Monitor the Fed’s H.6 release for the memo items; they reveal when banks are reclassifying balances to stay within regulatory buffers. This helps you avoid misreading a policy‑driven reclassification as a change in consumer behavior.

4. Ignore the velocity fetish – Velocity is an accounting residual, not a behavioral driver. When you see a crash in velocity, treat it as a symptom of changes in payment technology, regulatory shocks, or portfolio rebalancing—not as a signal that “money is dead.” Trying to forecast inflation by assuming velocity “reverts to a mean” is a classic case of mistaking the thermometer for the heat source.

5. Treat aggregates as outcomes, not levers – The Fed sets the price of reserves (IORB, ON RRP) and the size of its own balance sheet. The resulting M1/M2 figures are the equilibrium of three endogenous forces: bank lending decisions, household portfolio choices, and the Fed’s own liabilities. Attempting to “target M2” is akin to trying to control temperature by holding a match to the thermometer. Focus on the price of reserves and the composition of bank liabilities instead Simple, but easy to overlook. That alone is useful..

What to Watch in 2025

• Regulatory‑driven reclassifications – As banks adjust to Basel III.2 and the new LCR calculations, expect more frequent swaps between checkable and savings categories. The H.6 memo items will become a daily read for market participants.
• Digital‑wallet deposit flows – Platforms such as PayPal, Venmo, and emerging central‑bank digital currencies (CBDCs) are blurring the line between “currency” and “deposits.” The deposit‑only M1 component will capture these shifts faster than headline M1.
• Interest‑rate transmission – The IORB and ON RRP rates will continue to be the primary transmission channels. Watch for divergences between the fed‑funds rate and the actual growth of deposit‑only M1; they signal whether banks are passing on policy changes or absorbing them through balance‑sheet management.

Final Thoughts

Money is a set of accounting relationships, not a monolithic force. The 2020 redefinition of M1 was a change in map, not in terrain. By using continuity series, stripping out noisy currency, and recognizing that velocity is a residual, you can manage the current monetary landscape without being misled by outdated conventions. Plus, the Fed no longer “prints” M1; it provides the scaffolding on which the banking system and the public build the liquidity they need. Understanding that scaffolding—through the lens of deposit‑only aggregates, regulatory reclassifications, and interest‑rate channels—will keep your analysis grounded, whether you’re forecasting GDP, pricing risk, or advising policymakers. In the end, the most reliable compass for monetary analysis is a clear view of the components that truly matter: the deposits that businesses actually move and the prices that the Fed sets for the reserves that support them.