The money supply is an important factor for any economy and is very misunderstood and very hard to measure. Money is obviously cash, but in today’s world, cash is not used as much as it once was. Credit cards, ACH and other payment methods have come to dominate retail shopping in particular and are almost always used in commercial transactions. Some economists, notably Milton Friedman, have theorized that the amount of money in an economy has a direct relation to inflation. If there is more money chasing the same amount of goods or services, there will be more inflation. While this may be true, it is quite simplistic, as Friedman recognized. More money also means more is available for investment, which tends to increase production and supply, which helps control price increases.
Their are several measures of the money supply in the US, with M2 being the most widely used. The M2 money supply includes cash, bank accounts and investment account balances that are readily available. You can find charts and definitions on money supply measures at the Federal Reserve Bank of St. Louis. (STL Fed.) Worth an occasional look. I think the best way to look at money supply is on a per capita basis, is it growing faster or slower than population growth. Another key concept is the velocity of use of money. If you simplify it by assuming a set supply of cash for a set population in an economy, how fast those dollars change hands can impact economic growth. If you pay cash to a small business for a product and they immediately turn around and spend that money with a supplier to make more product, versus sitting on the cash in a bank account, more economic activity is produced by the same dollar. Faster turnover usually means more growth. So velocity is important to watch as well.
What we see looking at M2 over the last few years is that there has been a pretty steady rate of growth for a few decades, particularly from a per capita perspective, with some acceleration as government deficits due to transfer payments to individuals picked up. Then in 202o the absurd government handouts associated with the epidemic created a massive burst of money supply growth, accompanied by, guess what, huge inflation. We have sort of returned to pre-epidemic trend, although the ongoing large deficits are accompanied by significant money supply increases. The velocity of M2 peaked in the late 1990s and has steadily declined, with a sharper decline in the epidemic because all that cash handed out by the government wasn’t spent quickly–you couldn’t travel or go out to eat, etc., so a lot went to savings and the stock market. Velocity has now returned to its prior level and even begun to accelerate a bit, which is consistent with some decline in the savings rate.
