Paper money and coins were originally used as the only mediums of exchange, but the sophistication of financial needs has expanded the types of financial instruments used today. In order to monitor the money supply, the Federal Reserve System, the nation's central bank and controller of the monetary policy of the country, uses four measures:
M1 is the base measurement of the money supply and includes currency, coins, demand deposits, traveler's checks from non-bank issuers, and other checkable deposits.
M2 is equal to M1 plus overnight repurchase agreements issued by commercial banks, overnight Eurodollars, money market mutual funds, money market deposit accounts, savings accounts, time deposits less than $100,000.
M3 is M2 plus institutionally held money market funds, term repurchase agreements, term Eurodollars, and large time deposits.
L, the fourth measure, is equal to M3 plus Treasury bills, commercial papers, bankers, acceptances, and very liquid assets such as savings bonds.
For further information, consult the Irwin Business & Investment Almanac from Irwin Professional Publishing, (800) 634-3966; also The Vest-Pocket MBA from Prentice Hall, (800) 223-1360, a reference containing all the formulas, guidelines, ratios, and rules of thumb needed to evaluate and solve dozens of business problems.