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	Federal Reserve Money Supply Federal Reserve System: FED Fed. Funds Rates Discount Rate Prime Rate FDIC-Federal Deposit Insurance Corporation Federal Funds Float Money Supply Full-Reserve Banking Inflation Monetary Policy Money Supply Open Market Operations and the Federal Reserve Politics v. Independence Federal Reserve Setting Rates To maintain the complementary relationship of coinage and banknotes, they are issued in the same metric M0.   There are four symbols used in America to show how money is measured:  M0, M1, M2, and M3.  These definitions are also known as deposit accounts, though they have different terms.  Since money is technically anything that can be sued to settle a debt, it has a wide scope, and these measurements allow economists to narrow the scope for their purposes.  M0 has the narrowest scope, as it measures only physical currency.  It also includes any accounts at the Central Bank, as these accounts can be exchanged for physical currency.  This measure accounts for money that is immediately available for transactions. M1 is actually the result of a simple equation.  It is the addition of M0 plus the amount in checking accounts (also known as demand accounts). M2 is the addition of M1 to savings accounts (although there are some exceptions), money market accounts, and certificates of deposit (also known as CDs) under $100,000.  M3 is the sum of M2 and all other CDs, Eurodollar deposits, and repurchase agreements.  M3 is the only measure that is no longer being published by the Federal Reserve, although there have been efforts to bring it back.  The growth of M3 is controlled by the issuance of government debt instruments.  Money is no longer part of M3 when it is reinvested in government debt.  By increasing the interest rate and taking money out of M3, it prevents M3 from getting out of control. Another common measurement used by the Federal Reserve is the money multiplier. The money multiplier is the ratio of banknotes and coin that people have in their possession, sitting in bank vaults, and waiting in ATMs to the balance of financial accounts. This difference occurs because of the fractional reserve banking used by the Federal Reserve System. To compare the calculation of money supply in America to other countries, the U.K. uses only two measures of money supply, M0 and M4.  M0 is still the more narrow measure, as it only uses cash outside the Bank of England and operational deposits with the Bank of England.  This is why it is often called the "wide monetary base" or "narrow money."  However the M4 measurement uses cash that is in circulation and non-bank firms (basically cash outside of banks), private-sector retail banks and building society deposits, and private sector wholesale bank and building society deposits and CDs.  All of these factors combine so that M4 is often called "broad money" or "the money supply." Since M1, M2, and M3 are all deposit accounts, they can, depending on reserve requirements, lend out a portion or the whole of their deposits on an immediate basis.  The money supply will increase as the borrower purchases an asset and places the asset into another money supply constituent deposit because both the primary and secondary deposits are added into the money supply.  While these transactions can cause an unending increase in the money supply, the Federal Reserve maintains control by regulating the amount in reserves of depository institutions. The Relationship of Loans to the Money Supply The easing of the central bank increases the money supply through the purchase of Treasury Securities, making more money available for banks to lend out.  However, the central bank will also tighten, so it sells those securities, resulting in less money being available for loans. In order to allow banks to lend out more money, new bank reserves, or federal funds, are created.  When banks lend out the money, the loans are spent and deposited at another bank, where it is lent out once again.  The money multiplier makes the deposits increase several times over the initial amount of reserves. Yet in the 1970's a new creation, money market funds, changed the relationship of loans to federal funds.  These money market funds did not require any reserves, and by the 1990's savings deposits, CDs and Eurocurrency deposits no longer required reserves either.  Today only transaction deposits, or checking accounts, require reserves.  The resulting "bubble economies" and "moral hazard" created by the increased funding sources available to banks for lending has created some concern for economists.  There has been a significant increase in loans and a significant decrease in reserves.   These alternative sources include large denomination CDs, which allow for banks to make commercial and industrial loans, and money market deposits which help fund loans to companies issuing commercial paper.  For consumer loans, savings deposits are used, and they are even placed into securities and sold elsewhere.