Geldversorgung

Money Supply: Definition, Formula, Example, and FAQs

What Is Geldversorgung?

Geldversorgung, often referred to as money supply, represents the total amount of currency and other liquid financial assets circulating in an economy at a given point in time. It encompasses physical currency—coins and paper money—as well as various forms of deposits held by the public in commercial banks and other depository institutions. The concept of money supply is a fundamental component of macroeconomics, influencing key economic variables such as inflation and economic growth. Central banks, through their monetary policy actions, aim to manage the Geldversorgung to achieve specific economic objectives.

History and Origin

Historically, the definition and measurement of Geldversorgung have evolved alongside financial systems. For centuries, physical commodities, primarily precious metals like gold and silver, served as money. The⁵⁵ advent of paper money and checkable deposits introduced new forms, initially convertible into commodity money. How⁵⁴ever, a significant shift occurred in August 1971 when President Richard M. Nixon discontinued the convertibility of U.S. dollars into gold, making the dollar and many other currencies "fiat money"—currency not backed by a physical commodity but by government decree.

The ⁵³formal tracking of money supply measures by central banks, such as the Federal Reserve in the United States, dates back to their founding. Over ⁵²time, the categorization of money supply aggregates (like M1, M2, and M3) has been refined to reflect changes in financial markets and banking practices. For i⁵¹nstance, the Federal Reserve ceased publishing M3 data in 2006, focusing instead on M1 and M2, as M3 was deemed to offer no significant additional information for analysis.

Key Takeaways

• Geldversorgung, or money supply, is the total amount of highly liquid assets available in an economy.
• It includes physical currency, checking account balances, savings deposits, and other liquid assets.
• C⁵⁰entral banks like the Federal Reserve define and track various measures of money supply (e.g., M1, M2) to guide monetary policy.
• C⁴⁹hanges in the Geldversorgung can influence interest rates, inflation, and overall economic activity.
• W⁴⁷, ⁴⁸hile historically a strong indicator, the relationship between money supply growth and economic activity has seen reduced emphasis in recent decades due to financial innovations.

F⁴⁶ormula and Calculation

The Geldversorgung is not calculated by a single universal formula but rather measured through different monetary aggregates, each encompassing various levels of liquidity. The most common measures, as defined by central banks, include:

• M1 (Narrow Money): Represents the most liquid forms of money.
  $\text{M1} = \text{Currency in Circulation} + \text{Demand Deposits} + \text{Other Checkable Deposits}$

  • Currency in Circulation: Physical banknotes and coins held by the public.
    *⁴⁵ Demand Deposits: Funds held in checking accounts that can be withdrawn on demand.
    *⁴⁴ Other Checkable Deposits: Includes Negotiable Order of Withdrawal (NOW) accounts, Automatic Transfer Service (ATS) accounts, and credit union share draft accounts.

• ⁴³M2 (Broad Money): Includes M1 plus less liquid assets that can be easily converted to cash.
  $\text{M2} = \text{M1} + \text{Savings Deposits} + \text{Small-Denomination Time Deposits} + \text{Retail Money Market Mutual Funds}$

  • Savings Deposits: Funds held in savings accounts.
    *⁴² Small-Denomination Time Deposits: Certificates of Deposit (CDs) typically under $100,000.
    *⁴¹ Retail Money Market Mutual Funds: Funds that invest in short-term debt instruments.

The ⁴⁰process by which these aggregates expand is influenced by the banking system through fractional reserve banking, where commercial banks lend out a portion of their deposits, creating new money.

I³⁹nterpreting the Geldversorgung

Interpreting the Geldversorgung involves understanding its relationship with economic activity, inflation, and interest rates. An increase in the money supply can lead to lower interest rates, which may stimulate investment and consumer spending, thereby fostering economic growth. Conve³⁸rsely, a decrease in the money supply can lead to higher interest rates and a contraction in economic activity.

Econ³⁷omists and policymakers analyze changes in money supply measures to gauge the economy's health and anticipate future trends in prices and output. A rapid expansion of the Geldversorgung that outpaces the growth of goods and services can result in inflation, as more money chases a relatively stable quantity of goods. Howev³⁶er, the precise relationship can be complex, influenced by factors such as the velocity of money and prevailing economic conditions.

H³⁵ypothetical Example

Imagine a small island economy with its own central bank and several commercial banks. Initially, the Geldversorgung (M1) consists of 100 million "Shells" in physical currency and 500 million Shells in demand deposits.

The central bank decides to implement an expansionary monetary policy to stimulate the economy. It buys 20 million Shells worth of government bonds from commercial banks through open market operations.

1. Initial State:

   • Currency in Circulation: 100 million Shells
   • Demand Deposits: 500 million Shells
   • M1 = 600 million Shells

2. Central Bank Action: The central bank purchases 20 million Shells in bonds from commercial banks. The commercial banks' reserves at the central bank increase by 20 million Shells.

3. Banking System Response: With increased reserves and assuming a 10% reserve requirements (meaning banks must hold 10% of their deposits in reserve), the commercial banks now have excess reserves. They can lend out a significant portion of these new reserves. Through the money multiplier effect, where initial deposits lead to a larger increase in the overall money supply as banks lend and re-deposit funds, the 20 million Shells can facilitate a much larger expansion of demand deposits.

4. Resulting Increase in Geldversorgung: If the money multiplier is 10 (1 / 0.10 reserve ratio), the initial 20 million Shells can potentially create an additional 200 million Shells in new loans and deposits.

   • New Demand Deposits: +200 million Shells (approximation due to multiplier)
   • New M1 = 600 million + 200 million = 800 million Shells (assuming no change in currency held by public).

This hypothetical scenario illustrates how the central bank's actions can directly influence the total Geldversorgung, aiming to increase gross domestic product through increased lending and spending.

Practical Applications

The Geldversorgung is a crucial indicator for policymakers, investors, and economists:

• Monetary Policy Implementation: Central banks utilize Geldversorgung data to formulate and execute monetary policy. By adjusting the availability of money in the economy, they aim to influence interest rates, manage inflation, and promote stable economic conditions. For instance, increasing the money supply can stimulate a sluggish economy. Conve³⁴rsely, tightening the money supply can combat rising prices.
• ³³Inflation Forecasting: Many economists believe that sustained growth in the Geldversorgung significantly faster than the growth of real output can lead to inflation. This ³²relationship, highlighted by economists like Milton Friedman, suggests that monitoring money supply can offer insights into future price trends. Durin³¹g the 1970s, the Federal Reserve under Paul Volcker famously prioritized controlling the money supply to combat high inflation.
• ³⁰Economic Analysis and Forecasting: Analysts monitor Geldversorgung figures as part of a broader set of economic indicators to assess the overall health and direction of an economy. Changes in money supply can precede shifts in consumer spending, investment, and economic growth.
• ²⁹Financial Market Impact: Movements in the Geldversorgung can impact financial markets. An expansionary monetary policy, which increases the money supply, typically aims to lower interest rates, potentially boosting stock prices and bond values.

The ²⁸International Monetary Fund (IMF) also emphasizes the importance of understanding a country's monetary policy and its impact on the economy, often engaging in policy dialogue with member countries regarding their financial stability.

L²⁷imitations and Criticisms

Despite its importance, the utility of the Geldversorgung as a primary economic indicator has faced limitations and criticisms:

• Changing Nature of Money: Modern financial innovations, such as credit cards and various electronic payment systems, have blurred the traditional lines of what constitutes "money," making it increasingly difficult to accurately measure and categorize the total Geldversorgung. This ²⁵, ²⁶evolving financial landscape means that traditional measures like M1 and M2 may not fully capture all liquidity in the economy.
• ²⁴Weakening Correlation with Economic Activity: In recent decades, the historical strong correlation between changes in the Geldversorgung and economic activity (like gross domestic product or inflation) has weakened in many developed economies. Facto²², ²³rs such as changes in the velocity of money and the increased role of financial engineering can disrupt this relationship.
• ²¹Central Bank Focus Shift: Many central banks, including the Federal Reserve, have shifted their primary focus from targeting specific money supply growth rates to directly managing interest rates and inflation expectations. This ²⁰is partly because they found that the link between money supply and inflation was not always as predictable as once thought, especially in periods of low interest rates.
• ¹⁸, ¹⁹Challenges in Control: While central banks influence the Geldversorgung through tools like open market operations and adjustments to reserve requirements, their control is not absolute. The behavior of commercial banks and the public in terms of lending, borrowing, and holding cash can also significantly impact the overall money supply.

The ¹⁶, ¹⁷Federal Reserve Bank of San Francisco has published economic letters discussing the challenges in defining money in an evolving financial system.

G¹⁴, ¹⁵eldversorgung vs. Monetary Base

Geldversorgung (money supply) and monetary base are related but distinct concepts in monetary economics.

The monetary base (also known as "high-powered money" or M0) is the most narrow measure of money, comprising physical currency in circulation outside of banks and the reserves that commercial banks hold with the central bank. It re¹², ¹³presents the direct liabilities of the central bank.

The Geldversorgung (money supply), on the other hand, is a broader concept. It includes the monetary base but also encompasses various forms of bank deposits that the public can readily access for transactions. These¹⁰, ¹¹ broader measures (like M1 and M2) are significantly larger than the monetary base because of the "money multiplier" effect, where commercial banks create new deposits through lending based on their reserves. While⁸, ⁹ the central bank directly controls the monetary base, its influence on the broader money supply is indirect, working through the banking system.

F⁷AQs

What are the main components of Geldversorgung?

The main components of Geldversorgung include physical currency (cash and coins) held by the public, as well as various types of deposits at financial institutions, such as demand deposits (checking accounts), savings deposits, small-denomination time deposits, and retail money market mutual funds. These⁵, ⁶ are typically grouped into measures like M1 and M2 based on their liquidity.

How does the central bank influence the Geldversorgung?

A central bank primarily influences the Geldversorgung through monetary policy tools. These include open market operations (buying or selling government securities), adjusting the discount rate (the interest rate at which banks can borrow from the central bank), and setting reserve requirements for banks. For e⁴xample, buying government securities injects money into the banking system, increasing the Geldversorgung.

³Why is Geldversorgung important for the economy?

Geldversorgung is important because it influences inflation, interest rates, and overall economic growth. A well-managed Geldversorgung is crucial for maintaining price stability and fostering a healthy economy. Too much money in circulation can lead to rising prices, while too little can stifle economic activity.¹, ²