The 5 Measures Of Money

By Bryan Vieregge On March 7, 2011 · 1 Comment

The five measures of money are Bank Reserves, the Monetary Base, M1, M2, and MZM.

Bank Reserves equals the sum of vault cash in banks plus the Fed’s reserves. (R = V.C. + Deposits @ The Fed)
The Monetary Base equals the bank’s reserves plus the currency in circulation. (B = Reserves + Currency In Circulation)
M1 equals the currency in circulation plus bank deposits. (M1 = Currency In Circulation + Deposits)
M2 equals M1 plus timed deposits, certificates of deposits, and money market deposits (less than $50,000). (M2 = Currency In Circulation + Deposits + Timed Deposits + Certificates Of Deposits + Retail Money Market Deposits)
MZM equals M2 minus the smaller timed deposits plus money market deposts (greater than $50,000). (MZM = Currency In Circulation + Deposits + Large Timed Deposits + Certificates Of Deposits + Institutional Money Market Deposits)

M1 is typically the best measure of money. M1 is determined by changes in the Fed’s Assets (change in Monetary Base), the Currency Deposit Ratio (C/D) which is determined by the public sector, and the Reserves Deposit Ratio (R/D) which is determined by the banks. However, M1 can also be understated because of sweep accounts. Sweep accounts are basically accounts that banks will transfer money to in order to reduce reserves.

Approx. estimates of each (in billions)
Reserves = 1,076
Base = 1,991
M1 = 1,832
M2 = 8,804
MZM = 9,757

Normally, each level of money is less than the next level of money. For example, the Base is normally greater than Reserves. M1 is normally greater than the Base, and so on. But right now banks are holding a lot more in reserves than normal, causing the Monetary Base to be larger than M1.

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Bryan Vieregge (53 Posts)

Graduated from Texas Tech University in 2011 with a Bachelor's in Economics and Business Administration. I've been writing personal finance articles since 2010. I currently invest in stocks, bonds, real estate, and several business models.