Monetary Economics

Lecture 4
Measures of Money Supply
A Brief History of Money
 Measures of Money supply
Definition of money
– M1 = Currency in the hands of the public + checkable
deposits in commercial banks + other deposits with
the RBI
– Other deposits – deposits of quasi government institutions,
foreign central banks, etc. They constitute lesser proportion
of M1
– M2 = M1 + savings deposits in commercial banks
– M3 = M1+ time deposits with the banking system
• Then, we have NM1, NM2, NM3
Latest Money stock Stats by RBI
 Reserve Money M0
• Reserve money = Currency in circulation +Bankers’
deposits with the RBI+ ‘Other’ deposits with the RBI
– High powered money/ base money/ central bank money
– Bankers’ Deposits with the RBI represent balances maintained
by banks in the current account with the Reserve Bank mainly for
maintaining Cash Reserve Ratio (CRR) and as working funds for
clearing adjustments.
– Other Deposits with the Reserve Bank for the purpose of
monetary compilation includes deposits from foreign central
banks, multilateral institutions, financial institutions
 A Brief History of Money
• Barter
• Commodity money – precious metal coins (gold or silver)
– This was made legal tender by the monarch
– Was supplemented by promissory notes by trustworthy people
• Emergence of private commercial banks in late 1700s
– Led to private notes being issued
– Orders of withdrawls were also issued (like cheques)
• By 1850s these demand deposits were common, more so
among the richer strata in Britain
• By the 1900s the demand deposits of these commercial banks
became more evolved and secure
• By 1930s the definition of money changed to currency with the
public + demand deposits
• By 1950s M1 was acceptable as a measure of money supply
 A Brief History of Money -
Continued
• By 1950s savings deposits (comparable to
time deposits today) came into existence
• These were controversial in that they were
debated to be included or excluded from the
definition of money
• In 1960s, Friedman advocated the use of M2
which included these savings deposits
• Friedman definition
• Since 1960s new financial innovations like
credit cards, debit cards, smart cards,
electronic banking, paytm, etc.
 readings
• SB Gupta Chap 1 – for measures of
money supply
• https://www.rbi.org.in/scripts/
PublicationsView.aspx?id=9455 – RBIs
website for the definitions of M1, M2, M3,
NM1,etc.
• Jagdish Handa’s Book – Chap 1 – For ‘A
Brief History of Money’