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Money supply - Introduction

Money supply - Introduction: Encyclopedia II - Money supply - Introduction

The monetary sector, as opposed to the real sector, concerns the money market. The same tools of analysis can be applied as to other markets: supply and demand result in an equilibrium price (the interest rate) and quantity (of real money balances). When thinking about the "supply" of money, it is natural to think of the total of banknotes and coins in an economy. That, however, is incomplete. In the United States, coins are minted by the United States Mint, part of the Department of the Treasury, outside of the F ...

Money supply: Encyclopedia II - Money supply - Introduction

Money supply - Introduction

The monetary sector, as opposed to the real sector, concerns the money market. The same tools of analysis can be applied as to other markets: supply and demand result in an equilibrium price (the interest rate) and quantity (of real money balances).

When thinking about the "supply" of money, it is natural to think of the total of banknotes and coins in an economy. That, however, is incomplete. In the United States, coins are minted by the United States Mint, part of the Department of the Treasury, outside of the Federal Reserve. Banknotes are printed by the Mint on behalf of the Federal Reserve as symbolic tokens of electronic credit-based money that has already been created or more precisely, issued by private banks^[1] through fractional reserve banking.

In this respect, all banknotes in existence are systematically linked to the expansion of the electronic credit-based money supply. However, coinage can be increased or decreased outside this system by Legal Mandate or Legislative Acts. However, at present the coin base is held in check and used as a complementary system rather than a competitive system with private bank issue of electronic credit-based money. The common practice is to include printed and minted money supply in the same metric M0.

The more accurate starting point for the concept of money supply is the total of all electronic credit-based deposit balances in bank (and other financial) accounts (for more precise definitions, see below) plus all the minted coins and printed paper. The M1 money supply is M0, plus the total of all non-paper or coin deposit balances. The relationship between the M0 and M1 money supplies is the money multiplier — basically, the ratio of cash and coin in people's wallets and bank vaults and ATMs to Total balances in their financial accounts. The gap and lag between the two (M0 and M1 - M0) occurs because of the system of fractional reserve banking.