Savings are now more liquid and part of “M1 money” : Regulation D has made savings deposits as convenient as currency

Money is marvelously nuanced. Because different assets can be used as money, we need several categories and definitions to keep track of it. M1 describes the most liquid and widely accepted assets used to easily settle transactions: currency, demand deposits, and highly liquid accounts.

A previous FRED blog post discussed how recent changes in the opportunity cost of money and the regulation of savings accounts have affected measures of the money stock (a.k.a. monetary aggregates). In this post, we tighten our focus on how these regulations have affected M1.

Before April 24, 2020, savings accounts were not part of M1. Limitations in the number of transfers from savings deposits made savings accounts less liquid than M1. M1 consisted of currency, demand deposits, and other highly liquid accounts called “other checkable deposits” (OCDs). An example of OCDs are the demand deposits at thrifts.

But the limitation on the number of these transfers was lifted on April 24 as an amendment to Regulation D, which specifies how banks must classify deposit accounts. Savings deposits are now just as liquid and convenient as currency, demand deposits, and OCDs. To reflect this fact, savings deposits are now included in M1.

The FRED graph compares the new M1 with what would have been M1 under previous regulations, when it included only currency, demand deposits, and OCDs. From May 2020 on, M1 comprises currency, demand deposits, and a new item called “other liquid deposits.” These are the OCDs plus savings deposits. Previously, the OCDs consisted about 17% of M1. Now, the other liquid deposits consist about 70% of M1.

As of May 2020, the old M1 would have had a value of around $5 trillion. The new M1 has a value of $16 trillion, a substantial increase and a clear break in the time series.

For all you data scientists and researchers: It’s no longer possible to reconstruct the old measure of M1 because OCDs and savings deposits are not reported separately anymore. They’re now reported as a sum under “other liquid deposits.” But the graph here shows the separate series for OCDs and savings deposits that were still available from May 2020 to January 2021.

The graph also shows that M1 is now close to M2. Before May 2020, the difference between M2 and M1 was large because a great portion of M2 consisted of savings deposits. These savings deposits are now part of M1, so M1 is much larger and closer to M2. M2 is still larger than M1 because it includes less-liquid assets such as time deposits.

How this graph was created: To graph the previous measure of M1, search for and select the seasonally adjusted series for “Currency component of M1.” Add the two other components to this line from the “Edit Graph” panel’s “Edit Line 1” tab: In the “Customize data” field, search for seasonally adjusted series for demand deposits and other checkable deposits. In the formula field, type a+b+c and select “Apply.” To add the current series of M1 and M2, use the “Add Line” tab to search for and select each aggregate: “M1 Money Stock” and “M2 Money Stock.”

Suggested by Andre C. Silva and Christian Zimmermann.