What’s Behind the Surge in M1 Money Supply?

M1 Money Supply Components

Here’s a list of M1 components.

1. M1 consists of currency outside the U.S. Treasury, Federal Reserve Banks, and the vaults of depository institutions; plus
2. Demand deposits at commercial banks (excluding those amounts held by depository institutions, the U.S. government, and foreign banks and official institutions) less cash items in the process of collection and Federal Reserve float; plus
3. Other checkable deposits (OCDs), consisting of negotiable order of withdrawal, or NOW, and automatic transfer service, or ATS, accounts at depository institutions, credit union share draft accounts, and demand deposits at thrift institutions.

The St. Louis Fed M1 Description also includes Traveler’s checks, but the amount is tiny. The Traveler’s Check series was discontinued in 2018 with the last value at a mere $1.7 billion.

The St. Louis Fed description contains this lie: “M1 includes funds that are readily accessible for spending.”

Derived Number

The St. Louis Fed does not have data on #2 exactly as stated above. It does have OCD and Currency and M1. 

I derived Demand Deposits by subtracting Currency and OCDs from M1.

The jump in currency is likely an artifact of Covid. Some businesses want the exact change or don’t take it at all. People pile up coins and dollars in their pockets or at home. 

Important Background

I will tackle the rest of the current spike momentarily, but the background is important too.

What Happened in 1994? 

Note that M1 declined between December 1994 and September 2001.

M1 was $1.153 trillion in September of 1994. It did not exceed that amount until it hit $1.208 trillion in September of 2001. 

I discussed this on November 29,2007 in Where’s the Cash?

The answer is Sweeps.

What are Sweeps?

Sweeps are automated programs that “sweep” funds from one type of account into another type of account automatically. In this case we are talking about programs that allow banks to “sweep” funds from checking accounts to other types of accounts such as savings accounts that allow money to be lent out. Sweeps were initiated by Greenspan in 1994. 

Money that is supposed to be in your checking account isn’t really there at all. It is swept into savings accounts nightly so that it can be lent out. 

There are no reserves on savings accounts. Coupled with sweeps, that meant there really no reserves at all. 

That’s what inspired my 2009 post Fictional Reserve Lending and the Myth of Excess Reserves. 

Fictional Reserve Lending 

I did a follow up post on March 27, 2020 in Fictional Reserve Lending Is the New Official Policy.

Official Announcement

With little fanfare or media coverage, the Fed made this Announcement on Reserves. 

“As announced on March 15, 2020, the Board reduced reserve requirement ratios to zero percent effective March 26, 2020. This action eliminated reserve requirements for all depository institutions.” 

Amusingly, a few days ago yet another article appeared explaining how the Money Multiplier…