The money supply is the total amount of money in circulation in an economy at any given time. But money is not just notes and coins — it includes bank account balances, savings accounts, and a range of other financial instruments. To capture this, economists use a series of measures called monetary aggregates, labelled M0 through M3.
M0, or the monetary base, is the most basic measure: all physical currency — banknotes and coins — plus the reserves that commercial banks hold at the central bank. This is money in its most direct form: what the central bank has actually created.
M1 adds demand deposits — the money in your current account that you can access instantly. Still relatively narrow, but it captures the money most people consider immediately spendable.
M2 goes further, adding savings accounts, money market accounts, and small-denomination time deposits. These are not as instantly liquid as M1, but can be converted to cash fairly quickly. M2 is most frequently cited by central banks in the US and Europe because it correlates well with economic activity and inflation.
M3 adds larger, less liquid instruments: large time deposits, institutional money market funds, and short-term repurchase agreements. Some countries have stopped publishing M3 (the US Fed dropped it in 2006), though the European Central Bank still reports it.
Why does this matter? Because the money supply is a primary tool for managing the economy. When the Fed or Bank of England wants to stimulate growth, it expands the money supply. When it wants to rein in inflation, it contracts it.
Crucially, most money — the numbers in your bank account — is not created by central banks. It is created by commercial banks when they make loans. Understanding monetary aggregates helps explain how this works and why bank lending is so central to economic activity.