Money Supply Metrics: Comparing Traditional Currency & Stablecoins

In the rapidly evolving financial landscape, stablecoins have emerged as a significant digital alternative to traditional currency. At stablewatch, we've just launched a new feature that visualizes how stablecoins compare to the USD supply over time. To fully appreciate this comparison, it's essential to understand how economists and central banks measure and track money supply, as well as how different types of stablecoins fit into this picture.

What Is Money Supply?

Money supply refers to the total amount of monetary assets available in an economy at a specific time. These assets include physical currency, bank deposits, and other liquid instruments that can be readily used for transactions. Central banks like the Federal Reserve closely monitor money supply metrics to implement monetary policy, control inflation, and ensure economic stability.

The Tiered System of Money Supply Metrics

Money supply isn't measured as a single figure but rather through a series of increasingly broad categories. Each category (or "monetary aggregate") captures different forms of money and money-like instruments based on their liquidity—how quickly they can be converted into cash without losing value.

CURRCIR & BOGMBASE: The Monetary Base

Definition: The monetary base (historically tracked as M0) represents the most fundamental form of money in the economy. The Federal Reserve now tracks this through two specific metrics rather than a single M0 figure.

Components:

CURRCIR (Currency in Circulation): The total value of physical currency (notes and coins) held by the public and in bank vaults outside the Federal Reserve Banks and U.S. Treasury.
BOGMBASE (Monetary Base): A broader measure that includes both CURRCIR and reserve balances maintained by depository institutions at Federal Reserve Banks.

Significance: These metrics represent the foundation of the money supply—the base upon which the broader monetary system is built. The monetary base is directly controlled by the Federal Reserve through operations like currency issuance and reserve requirement adjustments.

Real-world concept: Through fractional reserve banking, this base money expands significantly. When the Federal Reserve "creates" $100 in new base money, the banking system can potentially generate many times that amount in broader money supply as banks maintain only a fraction of deposits as reserves and lend out the rest.

M1: Everyday Spending Money

Definition: M1 represents the most liquid money in the economy that can be immediately used for transactions.

Components (current definition):

All physical currency in circulation: Paper bills and coins held by the public outside of bank vaults.
Demand deposits (checking accounts): Funds that can be withdrawn at any time without prior notice.
Other checkable deposits: NOW (Negotiable Order of Withdrawal) accounts and credit union share draft accounts.
Savings deposits: These are interest-bearing deposit accounts held at financial institutions where funds can be withdrawn without advance notice. Historically, these accounts were subject to a six-per-month withdrawal limit, but since May 2020, this restriction has been removed, effectively reclassifying them as transaction accounts for statistical purposes.
Traveler's checks: These are prepaid checks issued by financial institutions that function like cash but offer security features like signature verification and replacement if lost or stolen. They're designed for use while traveling as a secure alternative to carrying cash, though their usage has declined significantly in recent years with the rise of credit and debit cards.

Evolution: Before May 2020, savings deposits were excluded from M1 because regulations limited withdrawals to six per month, making them less liquid than true transaction accounts. The removal of this limit effectively transformed savings accounts into transaction accounts for statistical purposes, dramatically expanding M1.

Significance: M1 represents money immediately available for everyday transactions. The 2020 redefinition caused M1 to surge dramatically, bringing it much closer to M2 than in previous decades.

Real-world example: When you use your debit card to buy groceries or transfer money from your savings account to pay a bill, you're using M1 money.

M2: Broader Money Supply

Definition: M2 broadens the definition of money beyond M1 to include less liquid forms of money and short-term savings instruments.

Components:

Everything in M1: All components described in the M1 section above.
Money market deposit accounts: Accounts offered by banks that typically pay higher interest than regular savings accounts but may have minimum balance requirements and limited check-writing privileges.
Retail money market mutual funds: Investment vehicles that pool money to purchase short-term, high-quality securities and allow limited check writing, but aren't as immediately accessible as checking accounts.
Small time deposits (certificates of deposit under $100,000): Fixed-term deposits with specified interest rates that typically cannot be withdrawn before maturity without penalty, making them less liquid than savings accounts.

Evolution: Historically, M2 was significantly larger than M1 because savings deposits were only counted in M2, not M1. The May 2020 regulatory change that included savings deposits in M1 dramatically altered this relationship. Now, savings deposits are counted in both M1 and M2, leaving the components listed above as the only elements that distinguish M2 from M1, making the difference between these two measures much smaller than in the past.

Significance: M2 remains the monetary aggregate most commonly cited by economists when discussing "money supply." It captures both immediately available transaction money and relatively accessible savings instruments. The convergence between M1 and M2 after 2020 reflects a regulatory reclassification rather than a fundamental change in economic behavior.

Historical context: Before 2020, M2 was typically 3-4 times larger than M1. After the May 2020 reclassification of savings deposits and the monetary expansion during the COVID-19 pandemic, M1 grew dramatically, bringing it much closer to M2. This statistical change makes direct comparisons of M1 before and after 2020 potentially misleading without proper context.

M3: Broader Money and Institutional Funds

Definition: M3 further expands the concept of money to include larger, less liquid deposits.

Components:

Everything in M2: All components described in the M2 section above.
Large time deposits (certificates of deposit over $100,000): These are substantial deposit certificates typically held by businesses and wealthy individuals, representing significant commitments of capital for fixed terms.
Institutional money market funds: Money market funds specifically designed for and limited to institutional investors, with higher minimum investments and often slightly better yields than retail money market funds.
Repurchase agreements (repos): Short-term borrowing arrangements where one party sells securities to another with an agreement to repurchase them at a later date for a higher price, effectively functioning as a collateralized loan.
Eurodollars held by U.S. residents: These are U.S. dollar-denominated deposits held in foreign banks or foreign branches of U.S. banks that are owned by U.S. residents.

Significance: M3 provides a more comprehensive view of money in the economy, including instruments typically held by larger institutions and wealthier individuals.

Important Note: The Federal Reserve stopped publishing M3 data in 2006, citing that it didn't provide significant additional information beyond M2 for economic analysis and that the costs of collecting this data exceeded its benefits. However, some economists and financial institutions still estimate M3 values using available data and private sources.

M4: The Broadest Money Measure

Definition: M4 (sometimes called L) represents the broadest definition of money, including highly liquid assets that aren't traditionally considered "money" but can readily serve similar functions.

Components:

Everything in M3: All components described in the M3 section above.
Commercial paper: Short-term, unsecured promissory notes issued by corporations to finance short-term liabilities, typically with maturities ranging from a few days to nine months.
Treasury bills: Short-term government securities with maturities of one year or less, issued at a discount and redeemed at face value upon maturity.
Banker's acceptances: Time drafts that have been guaranteed by a bank, commonly used in international trade to facilitate transactions between parties who may not know each other's creditworthiness.
Other highly liquid assets: Various financial instruments that can be quickly converted to cash with minimal loss of value, including certain bonds and notes with active secondary markets.

Significance: M4 captures nearly all monetary assets in the economy that could potentially be used for transactions or that store value in money-like ways.

Important Note: Like M3, M4 is no longer officially published by the Federal Reserve. This broader measure is now primarily calculated by private economic research firms and academic institutions rather than government agencies.

The Evolution of Stablecoins: Classic and Yield-Bearing

While traditional money supply metrics have been tracking physical and digital dollars for decades, the emergence of stablecoins represents a new frontier in how dollar-denominated value circulates in the global economy.

Classic Stablecoins

The first generation of stablecoins, like USDC and USDT, were designed to function primarily as digital versions of the dollar. These stablecoins:

Maintain a strict 1:1 peg with the USD
Are typically backed by reserves of cash, Treasury bills, or commercial paper
Serve primarily as mediums of exchange and stores of value
Do not natively generate yield for holders

Classic stablecoins most closely resemble components of M1 money supply, functioning as digital equivalents to cash and checking accounts.

Yield-Bearing Stablecoins

A newer category has emerged: yield-bearing stablecoins. Unlike classic stablecoins that aim to maintain a strict 1:1 peg with the USD, yield-bearing stablecoins typically accrue value over time through various yield-generating mechanisms:

Delta-neutral strategies: Some protocols like Ethena's USDe (which can be staked to become sUSDe) use sophisticated trading strategies with perpetual futures to generate yield from market funding rates. The staked version, sUSDe increases in value relative to USDe over time as it accumulates returns.
RWA-backed yields: Protocols like Sky's sUSDS and Ondo's USDY generate returns from real-world assets like T-bills and bank deposits within their RWA strategy. Rather than maintaining a perfect peg, these tokens are designed to appreciate in value as yields accumulate.
DeFi lending yields: Stablecoins like Level's lvlUSD (which can be staked to become yield-bearing slvlUSD) generate returns by depositing collateral into lending protocols like Aave. The staked version captures these lending returns, causing its price to increase over time.

This evolution represents a significant development in the digital dollar ecosystem. These instruments fundamentally differ from classic stablecoins and traditional money supply components, as they're designed to be both a medium of exchange and an investment vehicle that appreciates in value. While they may start with a price near $1, their design intention is to increase in value over time, making them behave more like yield-bearing securities than traditional currency.

How Money Supply Growth Happens

Understanding money supply metrics requires grasping how money creation works in modern economies:

Central Bank Actions: The Federal Reserve increases the monetary base through:
- Open market operations (buying government securities)
- Lowering reserve requirements
- Decreasing interest rates on loans to banks
Fractional Reserve Banking: Commercial banks keep only a fraction of deposits as reserves and lend out the rest, effectively creating new money when loans are deposited in other accounts.
Money Multiplier Effect: As newly created money circulates through the economy, it gets deposited and re-lent multiple times, increasing the broader money supply measures beyond the initial increase in the monetary base.
Digital Acceleration: Electronic banking and financial technology have accelerated money velocity and creation in ways not fully captured by traditional metrics.

Methodology for Comparing Money Supply and Stablecoins

Our interactive visualization provides a nuanced comparison between traditional USD money supply and the stablecoin ecosystem:

Traditional USD Money Supply Options: Users can select between CURRCIR (Currency in Circulation), BOGMBASE (Monetary Base), M1 (highly liquid money), and M2 (broader money supply including savings) as the benchmark for comparison.
Stablecoin Focus: Our visualization specifically focuses on classic stablecoins (e.g., USDC, USDT) rather than yield-bearing stablecoins.

We've made the deliberate choice to exclude yield-bearing stablecoins (like staked sUSDe or sUSDS) from our comparison for several reasons:

Classic stablecoins more closely resemble traditional currency components of money supply metrics.
The yield-bearing nature of staked stablecoins introduces complexities that make direct comparison with traditional money supply metrics less straightforward.
Inclusion of yield-bearing stablecoins could potentially lead to double-counting issues in some cases.

This focus on classic stablecoins allows for a more precise and meaningful comparison between digital dollars and traditional monetary aggregates.

Comparing Stablecoins to Traditional Money Supply Metrics

Stablecoins vs. M1: This comparison shows how digital transactional currency compares to traditional transactional money. It reflects the adoption of stablecoins as pure payment instruments.
Stablecoins vs. M2: This comparison contextualizes stablecoins within the broader money supply that includes both transaction accounts and savings instruments. This relationship is particularly valuable for understanding stablecoins' position within the complete spectrum of liquid and near-liquid financial assets.
Stablecoins vs. CURRCIR: This comparison specifically focuses on how stablecoins relate to physical currency in circulation, highlighting the digital transformation of money.
Stablecoins vs. BOGMBASE: This offers insight into how stablecoins compare to the base money controlled directly by central banks.
Growth Rate Differences: Pay attention to the relative growth rates between traditional money supply metrics and stablecoins. Significant divergences may signal shifts in how people choose to hold and use dollar-denominated value.
Regulatory Impact: Changes in regulatory frameworks can significantly impact stablecoin issuance and adoption, creating fluctuations in the relationship between stablecoins and traditional money supply.

Conceptual Similarities

Classic stablecoins function primarily as digital cash and checking accounts, making them conceptually similar to M1 components.
Both traditional money and stablecoins serve as mediums of exchange and units of account, fulfilling key functions of money.
Both are designed to maintain stable value, making them reliable stores of value (though with different risk profiles).

Functional Differences

Most stablecoins aren't directly integrated into the fractional reserve banking system, potentially limiting their money multiplier effect.
Stablecoins exist on decentralized ledgers rather than within the centralized banking system.
Regulatory frameworks for stablecoins are still evolving, whereas traditional money components operate within well-established legal structures.

Which Metric Makes the Most Sense for Comparison?

When comparing classic stablecoin supply to traditional USD supply:

CURRCIR comparison provides insight into how stablecoins compare to physical currency, highlighting the digital transformation of money.
M1 comparison makes sense conceptually because both serve primarily as transaction instruments.

The Data Behind the Metrics

Federal Reserve Economic Data (FRED)

The Federal Reserve Bank of St. Louis maintains FRED (Federal Reserve Economic Data), which is the most comprehensive and accessible source for U.S. money supply data:

Updates: Money supply metrics are updated monthly
Historical data: Available back to 1959 for most series
Adjustments: Data is seasonally adjusted to account for predictable fluctuations
Revisions: Historical data is occasionally revised as measurement methodologies improve

Stablecoin Data Sources

For stablecoin supply data, we aggregate information from Artemis and double-check it with

Public blockchain explorers
Issuer transparency reports
Other analytics platforms

This data is focused on classic stablecoins and updated monthly as an average.

Challenges in Measurement

Several challenges make precise comparison difficult:

Definitional boundaries: The line between money and non-money financial assets isn't always clear.
International flows: USD and stablecoins both circulate globally, making complete tracking impossible.
Shadow banking: Financial activities outside the traditional banking system affect money-like functions but aren't fully captured in conventional metrics.
Discontinuation of metrics: As noted, certain traditional metrics like M0, M3, and M4 are no longer officially published, requiring reliance on alternative measures or estimates.

Historical Perspective and Future Implications

Understanding current money supply metrics requires historical context:

Gold standard era (pre-1971): Money supply was implicitly constrained by gold reserves.
Post-Bretton Woods (1971-2008): Fiat currency system allowed more flexible money supply growth.
Quantitative easing era (2008-2019): New monetary policy tools dramatically expanded central bank balance sheets and the monetary base.
Pandemic response (2020-present): Unprecedented expansion of money supply across all metrics in response to COVID-19.
Stablecoin emergence (2014-present): Initial creation of basic stablecoins like USDT.
Yield-bearing innovation (2023-present): Development of stablecoins with native yield mechanisms, though these are not included in our current comparison.

As classic stablecoins continue to grow in supply and adoption, several important implications emerge:

Monetary policy impact: If stablecoins become a significant portion of the effective money supply, central banks may need to consider their existence when formulating policy.
Financial stability: The interconnections between stablecoin markets and traditional financial markets could create new transmission channels for financial shocks.
Measurement challenges: Traditional money supply metrics may need to evolve to account for stablecoins and other digital currencies.
Regulatory frameworks: As stablecoins grow relative to traditional money supply, regulatory approaches will likely adapt to ensure financial stability and consumer protection.
Cross-border implications: The global nature of stablecoins may influence international monetary relations in ways that traditional domestic money supply metrics cannot fully capture.

Conclusion

Money supply metrics provide a crucial framework for understanding the role and potential of stablecoins in the broader financial ecosystem. By tracking the relationship between classic stablecoin supply and traditional USD money supply measures like CURRCIR, BOGMBASE, M1, and M2, we can gain valuable insights into the evolving nature of money itself.

Our new interactive visualization tool brings these comparisons to life with real-time data and historical context, helping you understand not just the growth of stablecoins in isolation, but their increasing significance within the global monetary system. By focusing specifically on classic stablecoins rather than yield-bearing variants, we provide a clearer, more direct comparison to traditional monetary aggregates.

This perspective is essential for investors, researchers, and anyone interested in the future of finance. We encourage you to explore our comparative charts that bring these relationships to life with real-time data and historical context. By understanding how stablecoins fit into the broader monetary landscape, you'll be better positioned to anticipate trends and make informed decisions in this rapidly evolving space.

Money Supply Metrics: Comparing Traditional Currency & Stablecoins