Broad Money means the money stock under a wider statistical definition. It includes currency, selected bank deposits and, in some measures, other liquid instruments. Coverage also depends on issuers and holders; it is neither all wealth nor a simple sum of every financial account.
Liquidity matters: how easily something can be used for payment or converted to cash. Euro area M3 is the broadest of the area’s main money measures. It includes M2, a narrower total of cash and short-term deposits, plus additional instruments: repos, meaning sales of securities with an agreement to repurchase; shares in money market funds investing in short-term instruments; and debt securities issued by monetary financial institutions with an original maturity of up to 2 years. These institutions mainly include banks, but also money market funds. A house or long-term investment does not become money merely because you can find a buyer. [1] [6]
The same balance need not count for every holder. In euro area M3, the money-holding sector comprises residents other than monetary financial institutions and central government. Both the issuer and the holder therefore matter. The statistics also remove positions between institutions within the monetary financial institution sector, a process called consolidation. Simply adding all the rows of banks’ balance sheets would produce a different figure from money held by the defined part of the economy. [1]
In its H.6 release, the US Federal Reserve, known as the Fed, calculates M2 from M1, small time deposits and retail money market fund balances, after subtracting specified retirement-account balances. Retail funds serve individual investors. This list is not identical to euro area M3. Treating the figures as interchangeable just because both are called broad money is unsafe. When comparing them, check the currency, instruments, issuers and holders covered. A shared label helps classify the measures, but does not replace their precise definitions. [2]
Imagine a current-account deposit of 80 and savings of 20, both included in the same aggregate, or statistical total. You have 100 in all. Moving 30 into savings gives 50 + 50 = 100: the composition changed, but no new money appeared. Exchanging an included deposit for a newly issued long-term bank bond outside the aggregate is different. It can reduce the money total without reducing your assets by the same amount. Buying an existing investment from another person, however, may simply transfer the money to the seller. [1] [4]
The Bank of England describes how a bank loan creates a corresponding deposit, and repayment reverses the process. In our simplified example, a loan of 40 creates an included customer deposit of 40. Repaying principal of 40 from such a deposit reduces it by 40, assuming no other operations. Principal is the amount borrowed; interest is different because it is the cost of borrowing. This does not mean banks can lend without limit. Capital, risk, funding, rules and customers’ willingness to borrow constrain them. [4]
Monetary Base measures currency and banks’ reserves at the central bank. M2 has different coverage, but some cash appears in both measures. Adding the base to M2 would count that cash again. They are not independent piles that can simply be combined. Nor are banks’ reserves ordinary household deposits. There is no fixed automatic conversion between the base and broad money: more reserves alone do not determine an exact amount of future deposits. [2] [4]
The Fed included savings deposits in M1 retrospectively from May 2020. The change substantially increased reported M1 but did not itself change M2, which already included those deposits. It was not an equally large new inflow of money on the day the definition changed. Before calculating growth, check that the series and periods are comparable. Check seasonal adjustment too: it removes estimated patterns that recur during the year. Otherwise a chart may suggest a different story from what actually happened. [3]
Growth in broad money does not tell us who holds it or what they will do. One person may save, another repay debt, and another spend; the aggregate alone cannot tell us whether they choose bitcoin (BTC). Bitcoin.org explains price through supply and demand. Velocity of Money examines another relationship: the value of output over a period at current prices relative to the money stock. These measures do not offer a simple buying rule. Similar-looking charts do not establish causation, future price growth or profit; a claim needs a specific mechanism and an explanation of its timing. [5] [7]
For the clearest picture, read this entry together with Monetary Base, M1, M2, Velocity of Money. The reverse links also lead from Fiat money, Monetary Base, M0, M1.