Monetary aggregates are measures of the total stock of money held by the public. Empirical measures of U.S. monetary aggregates have changed and adapted through time in response to changes in the range of available instruments and the transaction cost of exchanging one asset for another. Friedman and Schwartz (1970, p. 198) note that "the purpose of a definition is to facilitate organizing the data in a useful way, not to prejudge conclusions.”  As a result, monetary aggregates "cannot be defined by any single set of hard and fast rules. It is a question of judgment on the basis of criteria that are inevitably incomplete and often unformulated.”

Historically, alternative monetary aggregates have been constructed simultaneously at various levels of aggregation because of uncertainty regarding the correspondence among financial instruments, the functions of money, and the cost of converting less-liquid assets into a medium of exchange. Over time, financial innovation has both introduced new assets and changed the feasibility and cost of conversion among existing assets. As a result, definitions of U.S. monetary aggregates have changed. Prior to the imposition of federal statutory reserve requirements in 1914, for example, banks often did not distinguish sharply among demand, savings, and time deposits. Demand deposits sometimes paid interest, and time deposits sometimes were transferable via checks. During the 1980s, thrift institutions began offering checkable deposits, commercial banks began paying explicit interest on certain checkable deposits, and the popularity of money market mutual funds soared.

The U.S. economy comprises a wide variety of financial assets, and there is no simple rule for determining which assets should be included in a monetary aggregate. The tables in this chapter focus on four aggregates: currency, M1, M2, and M3. Two currency aggregates are included. The currency stock refers to the total amount of currency in the economy, including currency issued by U.S. firms and by the monetary authorities (the U.S. Treasury and, after 1914, the Federal Reserve), whether held in the United States or abroad. Currency in circulation refers to the currency stock minus currency held by the monetary authorities. Table Cj54–69 shows currency in circulation, by kind, and Table Cj70–74 compares the currency stock and currency in circulation. The Treasury has compiled figures on currency in circulation since 1800, and the tables are based on these data. Depending on date, the currency aggregates may include specie coin (gold and silver), nominal coin (nonprecious metals), paper currency legally convertible into specie coin or bullion, and paper currency not convertible into specie. Historically, many types of firms have issued currency. Prior to the Civil War, currency was issued, with the approval of state governments, by railroad and canal development companies as well as by banks. Following the Civil War, a federal excise tax on notes issued by state-chartered banks made their issue unprofitable; as a result, most currency came to be issued by national banks. Today, Federal Reserve notes are dominant (see Table Cj54–69, Table Cj70–74 for details).

The M1, M2, and M3 monetary aggregates in Table Cj84–99 are the measures currently published by the Board of Governors of the Federal Reserve System. Unfortunately, owing to limited source data, these figures begin only in 1959 (Anderson and Kavajecz 1994; Kavajecz 1994). Table Cj42–48, Table Cj49–53 display monetary aggregate measures for earlier years. Data in Table Cj42–48 are annual averages for years through 1947, calculated from the mixed-frequency figures compiled by Friedman and Schwartz; data in Table Cj49–53 are annual averages for 1947–1958 of the monthly figures compiled by Rasche (Friedman and Schwartz 1970; Rasche 1987, 1990).

The M1 aggregate includes currency in circulation outside the vaults of depository financial institutions; travelers' checks issued by nonbank financial institutions; and certain deposits, transferable by check, that are held by the nonbank public. The nonbank public is defined to consist of households, firms other than depository institutions, state and local governments, and federal government agencies other than the Treasury. The financial assets included in M1 function as a medium of exchange, that is, they are commonly used to settle debts resulting from the exchange of goods and services. Checks have been used in the United States to transfer ownership of deposits since at least 1800. Prior to the Banking Act of 1933, little distinction was drawn between demand deposits (which the bank was required to pay out immediately, on demand) and other types of savings deposits. Although only demand deposits could be transferred to third parties via negotiable instruments (checks), banks often allowed customers to shift funds among different types of accounts without penalty, and interest could be paid to customers. The Banking Act of 1933, however, prohibited banks from paying explicit interest on demand deposits, and it required banks to impose penalties on customers who withdrew time deposits prior to the contractual maturity. Since 1994, the Federal Reserve's published measure of M1 has been distorted by the operation of automated retail-deposit sweep programs. As of December 1999, such programs were estimated to have reduced the amount of checkable deposits included in M1 by approximately $369 billion, relative to the level of checkable deposits that the nonbank public perceives itself to be holding at depository institutions (for details, see Anderson and Rasche 2001).

The M2 aggregate equals the sum of M1 plus the nonbank public's holdings of certain savings and time deposits at depository institutions and of shares in retail-oriented money market mutual funds. These deposits, although not commonly used as a medium of exchange, are highly liquid (that is, they may be converted quickly and at very low cost into a medium of exchange). Deposits and mutual fund shares linked to retirement accounts, such as IRAs and Keoghs, are excluded because high penalties are imposed for their early conversion (prior to legal specifications) into a medium of exchange.

The M3 aggregate equals the sum of M2 plus the nonbank public's holdings of large-denomination time deposits at depository financial institutions, plus institutionally oriented money market mutual funds. The aggregate also includes certain repurchase agreements and Eurodollar deposits issued by depository institutions (see Table Cj84–99).

Traditionally, monetary aggregates have been constructed by summing, for each time period, the aggregate dollar values of the included assets. This practice ignores economic aggregation theory, which suggests that liquid financial instruments should be aggregated in a manner similar to durable goods. Barnett established that a superlative statistical index number, as defined by Diewert, provides an approximation to the appropriate economic aggregator function (Barnett 1980; Diewert 1976). Table Cj100–107 displays a set of such monetary index numbers and their (economically) dual user costs as produced by the Research Division of the Federal Reserve Bank of St. Louis (for details, see Anderson, Jones, and Nesmith 1997; or Barnett and Serletis 2000).

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Anderson, Richard G., Barry E. Jones, and Travis D. Nesmith. 1997. "Special Report: The Monetary Services Index Project of the Federal Reserve Bank of St. Louis.”  Federal Reserve Bank of St. Louis Review 79 (January/February): 25–82.

Anderson, Richard G., and Kenneth A. Kavajecz. 1994. "A Historical Perspective on the Federal Reserve's Monetary Aggregates: Definition, Construction and Targeting.”  Federal Reserve Bank of St. Louis Review 76 (March/April): 1–31.

Anderson, Richard G., and Robert H. Rasche. 2001. "Retail Sweep Programs and Bank Reserves, 1994–1999.”  Federal Reserve Bank of St. Louis Review 83 (January/February): 51–72.

Barnett, William A. 1980. "Economic Monetary Aggregates: An Application of Index Number and Aggregation Theory.”  Journal of Econometrics 13 (Summer): 11–48.

Barnett, William A., and Apostolos Serletis, editors. 2000. The Theory of Monetary Aggregation. Elsevier Science.

Diewert, W. E. 1976. "Exact and Superlative Index Numbers.”  Journal of Econometrics 4 (2): 115–45.

Friedman, Milton, and Anna Jacobson Schwartz. 1970. Monetary Statistics of the United States: Estimates, Sources, Methods. Columbia University Press.

Kavajecz, Kenneth A. 1994. "The Evolution of the Federal Reserve's Monetary Aggregates: A Timeline.”  Federal Reserve Bank of St. Louis Review 76 (March/April): 32–66.

Rasche, Robert H. 1987. "M1-Velocity and Money Demand Functions: Do Stable Relationships Exist?” Carnegie–Rochester Conference Series on Public Policy 27 (Autumn): 9–88.

Rasche, Robert H. 1990. "Demand Functions for U.S. Money and Credit Measures.”  In P. Hooper, Karen H. Johnson, et al., editors. Financial Sectors in Open Economies: Empirical Analysis and Policy Issues. Board of Governors of the Federal Reserve System.