Level of Money

M1 money is  (1) currency outside the U.S. Treasury, Federal Reserve Banks, and the vaults of depository institutions; (2) traveler’s checks of nonbank issuers; (3) demand deposits; and (4) other checkable deposits (OCDs), which consist primarily of negotiable order of withdrawal (NOW) accounts at depository institutions and credit union share draft accounts.

The M2 measure of money is M1 plus (1) savings deposits (which include money market deposit accounts, or MMDAs); (2) small-denomination time deposits (time deposits in amounts of less than $100,000); and (3) balances in retail money market mutual funds (MMMFs).

Below is a graph of both the M1 and M2 money supply. Since February 2020, M2 is up more than $6 trillion. This, or any, expansion of the money supply, leads to inflation.

Velocity of Money

The velocity of money is the number of times that money moves from one entity to another, or how fast consumers and businesses in an economy collectively spend money. High money velocity is typically associated with a healthy, expanding economy. Conversely, low money velocity is typically associated with recessions and contractions. Inflation is not just about how many dollars are printed…it is about where those dollars go and how fast they are moving through the system.