Money Supply

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The money supply refers to the total sum of money available to the public in the economy at a point of time. It is a stock concept in sharp contrast to the national income which is a flow representing the value of goods and services produced per unit of time, usually taken as a year.

It always refers to the amount of money held by the public. In the term public are included households, firms and institutions other than banks and the government. The rationale behind considering it as held by the public is to separate the producers of money from those who use money to fulfill their various types of demand for money.

Concept of Money Supply

1. Currency with the Public:

In order to arrive at the total currency with the public in India we add the following items:

  • Currency notes in circulation issued by the Reserve Bank of India.
  • The number of rupee notes and coins in circulation.
  • Small coins in circulation.

2. Demand Deposits with the Public:

Demand deposits in the banks are those deposits which can be withdrawn by drawing cheques on them. Through cheques these deposits can be transferred to others for making payments from which goods and services have been purchased.

Thus, cheques make these demand deposits as a medium of exchange and therefore make them to serve as money. It may be noted that demand deposits are fiduciary money. Fiduciary money is one which functions as money on the basis of trust of the persons who make payment rather than on the basis of the authority of Government.

Measures of Money Supply

Several definitions of money supply have been given and therefore various measures of money supply based on them have been estimated.

Narrow Money M1:

This is the narrow measure of money supply and is composed of the following items:

Ml = C + DD + OD

Where, C = Currency with the public

DD = Demand deposits with the public in the commercial and cooperative banks.

OD = other deposits held by the public with Reserve Bank of India.

Money Supply M2:

M2 is a broader concept of money supply in India than M1. In addition to the three items of M1, the concept of money supply M2 includes savings deposits with the post office savings banks. Thus,

M2 = M1 + Savings deposits with the post office savings banks.

Broad Money M3:

M3 is a broad concept of money supply. In addition to the items of money supply included in measure M1, in money supply M3 time deposits with the banks are also included. Thus

M3= M1+ Time Deposits with the banks.

Money Supply M4:

The measure M4 of money supply includes not only all the items of M3 described above but also the total deposits with the post office savings organization. However, this excludes contributions made by the public to the national saving certificates. Thus,

M4 = M3 + Total Deposits with Post Office Savings Organization.

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