How to Calculate M1 and M2
M1 equals currency plus checkable deposits plus traveler's checks; M2 equals M1 plus savings, small time deposits, and retail money market funds.
The M1 and M2 formula
Calculator
Add currency, checkable deposits and traveler's checks for M1, then the near money items to reach M2.
Cash outside banks. Vault cash is reserves, not money in the public's hands.
Demand deposits you can spend straight away.
The smallest piece of M1 and the one students forget.
Near money. In M2 but not in M1.
Small certificates of deposit. Large time deposits stay out of M2.
Retail balances only, and they belong to M2.
M1 of $655 billion plus $850 billion of near money gives M2 of $1,505 billion. Every dollar of M1 is inside this total.
- M1
- $655 billion
- Near money in M2 but not M1
- $850 billion
- M1 as a share of M2
- 43.5%
- Nesting check
- M2 larger than M1
Currency, checkable deposits and traveler's checks come to $655 billion of instantly spendable money.
Savings, small time deposits and retail money funds. You have to convert these before you can spend them.
How much of the broad money supply is liquid enough to spend today.
How to calculate M1 and M2, step by step
- 1Add the most liquid items for M1. Sum currency held by the public, checkable (demand) deposits, and traveler's checks.
- 2Leave out what is not money. Exclude currency sitting in bank vaults, credit card limits, stocks, bonds, and large time deposits.
- 3Add near money for M2. Start from M1 and add savings deposits, small time deposits, and retail money market funds.
- 4Check the nesting. Every dollar in M1 is also inside M2, so M2 must come out larger than M1.
Worked example: M1 and M2
Suppose currency held by the public is $250 billion, checkable deposits are $400 billion, and traveler's checks are $5 billion, so M1 = 250 + 400 + 5 = $655 billion. Adding savings deposits of $600 billion, small time deposits of $150 billion, and retail money market funds of $100 billion gives M2 = 655 + 600 + 150 + 100 = $1,505 billion.
M1 and M2 questions
Are credit cards part of the money supply?
No. A credit card is a way to borrow rather than an asset you own, so an available credit limit never counts in M1 or M2.
Why is vault cash left out of M1?
Cash in bank vaults counts as reserves, not money in the hands of the public, and counting it would double count the deposits it backs.
Which is more liquid, M1 or M2?
M1 is more liquid, since it is cash and accounts you can spend right away. The extra items in M2 have to be converted before you can spend them.
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