Broad money
Money the public can actually spend — currency plus bank deposits and close substitutes — most of which is created by commercial banks when they lend.
Also called: M2, money supply.
When a bank grants a loan it credits the borrower's account. Both sides of its balance sheet grow at once: a new asset (the loan) and a new liability (the deposit). That deposit is new broad money, and no saver's balance fell to produce it.
The US M2 aggregate covers currency, chequing and savings deposits, small time deposits and retail money market fund shares. The precise boundary is a definitional choice, which is why 'did M2 rise?' sometimes has a less interesting answer than 'whose liability moved?'
Broad money shrinks when loans are repaid. Repayment destroys the deposit that the loan created — which is why deleveraging drains money from an economy rather than merely redistributing it.
The mechanics
- Created by
- Commercial bank lending, and by central bank purchases from non-banks.
- Destroyed by
- Loan repayment, and by banks selling assets to their own depositors.
- Not the same as
- Reserves. Broad money is a bank's liability; reserves are the central bank's.
The common misreading
That banks are intermediaries passing savers' money to borrowers. Causality runs the other way: loans create deposits, and deposits are the by-product of lending rather than its raw material.
Related terms
- Monetary baseThe total of banknotes in circulation and commercial bank reserves — every form of money that is a direct liability of the central bank.
- Money multiplierThe textbook ratio m = 1/R describing the maximum deposit money a banking system could support on a given reserve base — a ceiling, not a description of how banks actually operate.
- Bank reservesDeposits that commercial banks hold at the central bank — the settlement asset banks use to pay each other, and a liability of the central bank rather than an asset it owns.
Primary sources
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