Changes in M1 Money Supply & Velocity
Chart of the Week for May 29 - June 04, 2009
The chart above illustrates the quarterly year-over-year percentage change in U.S. M1 money supply and M1 money velocity over time. M1 money supply is a measure of how much money is currently in circulation. It includes all physical currency, as well as demand deposits (like checking accounts). Money velocity is a measure of the rate at which the existing money supply is being used to purchase goods and services. It is typically calculated as the ratio of GDP to money supply.
From the chart, it appears that money supply tends to decrease during times of economic prosperity and increase during times of economic distress. The opposite appears true for money velocity. For example, during the tail end of the most recent economic expansion, the twelve months ending in December 2007, year-over-year M1 money supply fell by 0.1%, and M1 money velocity increased by 5.05%. In contrast, during the twelve months ending in March 2009, a period of severe economic contraction, the M1 money supply increased by 13.8%, while M1 money velocity decreased by 12.59%.
The Federal Reserve attempts to smooth economic cycles by increasing or decreasing the monetary base, which is presumed to affect M1. In late 2008 and so far in 2009, the U.S. government has instituted a variety of fiscal and monetary policies designed to unlock credit and increase the amount of money moving through the economy, which may lead to an easing of the recession. Over the same twelve-month period, M1 money velocity has decreased. This may reflect unwillingness on the part of consumers and businesses to spend money in the current difficult economic environment, even if that money is plentiful.
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