The remaining 92–97% is created with a single keystroke inside commercial banks through lending.
To understand this, you need to know the different levels of the money supply: M0, M1, M2, M3, and M4.
These are not just academic terms they determine your money’s purchasing power, inflation trends, and the financial system’s ability to create credit.
M0: The Monetary Base — what we consider “real money”
It consists of:
Physical cash in circulation
Bank reserves held at the central bank
This money is created directly by the central bank and forms the foundation of the monetary system yet it represents only a tiny fraction of total liquidity.
M1: Money Ready for Immediate Spending
Includes:
Cash in circulation
Demand deposits and checking accounts
This is the money people use daily and can spend without restrictions. It is the most commonly used indicator in countries like the U.S., China, and Japan.
M2: Broad Money, the real engine of inflation
Includes:
Everything in M1
Savings deposits
Small time deposits
Retail money market funds
Why is it important?
Because M2 reflects the economy’s credit creation capacity.
A rapid rise in M2 often precedes inflationary waves, as it means more money is available for spending and investment.
M3 and M4: The broadest forms of money used by companies and institutions
They include:
Large deposits
Institutional money market funds
Repurchase agreements (Repos)
Financial instruments used by banks and investment firms
This huge liquidity is not visible to everyday citizens, but it drives financial markets and corporate credit, influencing asset prices and institutional funding.
Conclusion
Modern monetary systems do not rely on printing physical cash.
They rely on credit creation by banks.
When you take a loan or mortgage, new money is created inside the system.
Understanding the money supply is not theoretical economics, it is an essential tool for predicting inflation, monitoring financial stability, and estimating the future value of your money.
