Lesson 5 of 9
Counting it
Deciding how much money exists means deciding which claims count. There is no neutral answer, and M1 and M2 make a choice this tradition disputes.
By Javier Sanz
Founder of ValueScreener. Built Ninety Nine, a securities services provider, and sold it to a tier-one global bank; ran operations and internationalization at Alpaca, the brokerage API.
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In one minute
- Counting money requires a rule about which claims are money, and every rule draws a line that somebody can reasonably object to.
- The published US aggregates are the Federal Reserve's H.6 release: M1 is currency plus demand deposits plus other liquid deposits, and M2 adds small time deposits and retail money market fund balances.
- This tradition's objection is not that the numbers are wrong. It is that a claim that will be honoured on demand and one that will not are different things, and no aggregate separates them.
The previous two lessons produced a problem. If a deposit balance spends like money and is not money proper, then the question of how much money exists has no answer until somebody decides what counts.
What the published aggregates include
Two lines, drawn by rule
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M1. Currency outside banks and the Treasury, plus demand deposits at commercial banks with specified exclusions, plus other liquid deposits, a category covering other checkable deposits and savings deposits.
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M2. All of M1, plus small-denomination time deposits, meaning deposits under $100,000, plus balances in retail money market funds, with retirement account balances removed.
Why any line is arguable
Move down the list from currency and each step asks the same question in a harder form: can the holder spend this now, and will it be there if they try.
Currency is unambiguous. A demand deposit is spendable now and is a claim on a bank. A savings deposit is spendable in practice and is a different contract. A time deposit is not spendable now at all, but it is close enough that the second aggregate includes it.
None of these is a mistake. They are choices about where something stops being money and starts being an asset that can be turned into money, and different choices give different totals for the same economy on the same day.
The objection this tradition makes
It is not an objection to the arithmetic. It is the distinction from lesson three, applied to counting.
A deposit fully covered by money proper and one that is not are the same line in an aggregate. But the first represents money that exists and is sitting still, while the second represents purchasing power created alongside a loan. Summing them produces a number whose movements mix two different things: the public choosing to hold money differently, and banks creating claims.
Rothbard makes the argument at length through the middle of The Mystery of Banking, separating loan banking, where a lender's own funds are lent for a term, from deposit banking, where a claim payable on demand is created. On his account the two belong to different categories and an aggregate that adds them hides the thing that matters.
What follows for a reader
Three practical things, and they are the reason this lesson exists.
A money supply figure is a definition applied to data, so two people quoting different totals may both be right. Any claim of the form that the money supply rose by some percentage is incomplete until the definition is named. And a change in an aggregate can come from banks creating claims or from the public moving between categories, which are different events that the number does not distinguish.
Check yourself
What does M1 include, in the published US measures?
- Currency only
- Currency outside banks and the Treasury, demand deposits, and other liquid deposits
- All deposits of any maturity
Show the answer
Answer: B.
The H.6 release defines M1 with those three components. M2 then adds small time deposits and retail money market fund balances.What is this tradition's objection to the aggregates?
- That the data is collected inaccurately
- That claims fully covered by money and claims created alongside a loan are added together as one figure
- That they are published too infrequently
Show the answer
Answer: B.
The objection is about the category, not the arithmetic. Summing them mixes changes in how the public holds money with claims banks create.Why can two people quote different money supply figures and both be right?
- Because the data is revised
- Because each aggregate applies a different rule about which claims count as money
- Because banks report at different dates
Show the answer
Answer: B.
A money supply number is a definition applied to data. Any claim about how much it moved is incomplete until the definition is named.Sources
- Federal Reserve statistical release H.6, Money Stock Measures, release of 25 August 2026, for the composition of M1 and M2 as stated in the release.
- Rothbard, The Mystery of Banking, 1983, chapters III to V on the supply of and demand for money, and chapters VI and VII on the difference between loan banking and deposit banking.
- Mises, The Theory of Money and Credit, German original 1912, English translation 1934, part three, chapters 16 and 17, for the categories the objection rests on.
What this leaves out
- This is a heterodox tradition. The mainstream account of the same phenomenon differs, and nothing here is a forecast or a view on any security.
- The M1 and M2 composition is taken from the release named above and is current as at that date. Definitions of these aggregates have been changed before and may be changed again.
- The $40bn shift is invented to show how two rules diverge. It describes no observed period.