M3, M2, M1 Money Supply

M1, M2, M3 are all measures of money supply, that is the amount of money in circulation at a given time. Manipulating money supply is used in an attempt to control inflation, the idea being the more money in circulation leads to more money chasing fewer goods and hence prices increase to compensate and vice versa.

This ability for governments to control the amount of money in circulation allows them to stimulate demand by printing more money and reduce demand by removing money. This process is however difficult to achieve and governments often overshoot resulting in recessions and booms which form part of the economic cycle.

Often, in the financial press you hear the terms “Broad money” and “narrow money”. These are represented by M1, M2 and M3 (in US) with M1 being the narrowest measure and M3 being the broadest. In the UK there are only 2: M0 and M4. Narrow money refers to forms of money that are available immediately for use in transactions, broad those that are not immediately available.

More recently, the FED has stopped publishing information on the M3 money supply as it had been deemed no longer useful. Skeptics have argued however, that by no longer reporting the total amount of money in circulation the FED is hiding a huge amount of money creation which is being used to fund the US trade deficit. If you’re interested then you can read more about the feds manipulation of money supply here.