You have now met, in different guises, the two kinds of money that M7.01 introduced. Here they are named formally and stacked into the aggregates central banks and analysts actually watch. The single organizing idea: there is a small amount of money the central bank creates directly (base money), and a much larger amount that commercial banks create by lending (broad money), and the aggregates are just nested measures running from the narrowest to the broadest. They are labelled M0 through M3, from tightest to loosest. Annoyingly for the student, the exact definitions differ by country, so learn the logic first and the local labels second.
What are M0, M1, M2 and M3?
The logic (jurisdiction-neutral). Start at the center and add outward:
- M0: base money / reserve money / "high-powered money." The central bank's own monetary liabilities: currency in circulation + banks' reserve balances at the central bank. This is the only money the central bank creates directly, and the only money that "printing" literally refers to. (The RBI calls this reserve money; the Fed calls it the monetary base.)
- M1: narrow money. The most spendable money held by the public: currency with the public + demand deposits (current/checking accounts), money you can spend right now. (Note that M1 drops banks' reserves and picks up the public's deposits: it is money as the public holds it, not as the banks hold it.)
- M2: intermediate. M1 + savings deposits and small time deposits, money that is nearly as good as spendable. (In the US, M2 is the headline aggregate the Fed publishes; since 2020 the Fed's M1 was redefined to include savings deposits, so the US M1/M2 line moved; check the current definitions.)
- M3: broad money. M2 + larger/longer time deposits: essentially all bank deposits. In India, M3 is the watched aggregate ("broad money"), and it is dominated by time deposits. (The Fed discontinued M3 in 2006, considering it uninformative, another reminder to learn local conventions.)
India's official ladder (RBI definitions; learn these, they are examined):
| Aggregate | RBI definition (what it adds) |
|---|---|
| M0 (reserve money) | Currency in circulation + bankers' deposits with RBI + "other" deposits with RBI |
| M1 (narrow money) | Currency with the public + demand deposits with banks + other deposits with RBI |
| M2 | M1 + savings deposits with post-office savings banks |
| M3 (broad money) | M1 + time deposits with banks (the big one) |
| M4 | M3 + all post-office deposits (ex-NSCs) |
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Base money vs broad money
Why base money ≠ broad money: the point of the whole section. Look at the orders of magnitude (illustrative; pull the live figures from the RBI's DBIE and from FRED): India's reserve money (M0) is roughly ₹45–50 lakh crore, while broad money (M3) is well over ₹250 lakh crore. M3 is about five times M0. That ratio is the money multiplier (M3 ÷ M0 ≈ 5 in India), and it exists for exactly the reason M7.01 taught: the vast majority of the money in the economy was created by commercial banks lending, not by the central bank printing. Base money is the small monetary base on which the banking system builds the broad-money superstructure through credit. This is why:
- "The central bank printed money" almost always refers to M0 (reserves), which is not the money that chases goods. That is the reserves-versus-broad-money point from quantitative easing, now quantified. Inflation is about broad money and, more precisely, about spending; base money can balloon (QE) while broad money and spending barely move.
- The multiplier is a result, not a lever. The old textbook taught causation running outward: the central bank sets M0 and a fixed multiplier delivers M3 (M0 → lending → M3). The modern (endogenous-money) view, which M7.01 adopted and the post-2008 data vindicated, runs the causation inward: banks extend credit in response to demand (creating M3 deposits), and reserves adjust to accommodate. The multiplier is the ex-post ratio of the two, and it is not stable. It collapsed in the US after 2008 precisely because QE flooded the base (M0) with reserves that did not translate into proportional broad-money growth (the multiplier fell from ~9 to ~3–4). If you remember one thing: a rising M0 tells you what the central bank did; a rising M3/broad money tells you what the banking system and borrowers did, and it is the second that maps to spending and inflation. For the dashboard (M7.07), broad-money growth and, even more, bank-credit growth are the variables to watch, not the monetary base.