Thursday, February 18, 2016


Stacked graphs, showing each component of the money measure as a percent of total.

Components of Base Money

Graph #1
Based on what I figured out after beating my head against the H.3 Release (link provided by Jim),

Base Money is composed of "balances" at the Fed and "currency in circulation". Balances are reserves, and currency in circulation ain't. Except that "vault cash" is included with currency in circulation, and the better part of vault cash is used to satisfy required reserves. The worse part of vault cash is called "surplus".
On the graph I split vault cash into its circulating and reserve components. This all gave me a headache.

Not sure why vault cash is used to satisfy required reserves, when there are trillions of dollars of excess reserves that could heva been used to satisfy required reserves instead.

Components of M1 money:

Graph #2
FRED: "M1 consists of: (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."

Components of M2 money:

Graph #3
FRED: "M2 consists of 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)."

Components of MZM money:

Graph #4
FRED: "M2 less small-denomination time deposits plus institutional money funds."

I thought I would be able to find similar data on M3 at ALFRED. Silly me.


jim said...

Graph 1 is not accurate. Vault cash is included in currency in circulation and also required reserves is mostly made up of vault cash so
vault cash is being counted multiple times.

The Arthurian said...

Jim, thanks for the link. I had to work thru it about three times before I figured it out, but I think I got it now. I plan to have a follow-up post tomorrow, an expanded version of the notes below Graph #1 above. Eyeball that one if you have a chance. Thanks.

jim said...

"Not sure why vault cash is used to satisfy required reserves, when there are trillions of dollars of excess reserves that could have been used to satisfy required reserves instead."

Trying to use excess reserves to satisfy reserve requirements would be a little like trying to convince a cop that has stopped you for a seat belt violation that the excess seat belts in the car can be used to meet your seat belt requirement.

Required Reserves are there mostly to make sure banks have liquidity to meet draws on deposits. I know a part-time farmer that raises beef cattle. Once or twice a year he sells some. He takes the check (say $6000)to his local small town bank and has it converted to cash. He usually has to wait several days for the bank to get the cash delivered from the Fed. The bank is very small, which means it has no reserve requirements and thus it has no incentive to hold large quantities of cash on site.

In your graph #1 you can see that in 1960 banks were allowed to count vault cash as meeting reserve requirements and then in 1980 the law was changed so that the smallest bank were given reduced or no reserve requirements so their surplus vault cash no longer counted towards meeting reserve requirements.