9.2 Measures of the Canadian Money Supply

The money supply is traditionally defined as cash in circulation outside the banks, plus bank deposits. But as the banking and financial system evolved so did the types of deposits issued to the non-bank public. Now there are questions about the measurement of money supply.

Money supply: notes and coin in circulation outside banks plus bank deposits.

In the early days of banking there were demand deposits on which cheques could be written and savings deposits which often required a period of notice before funds could be withdrawn. Today banks offer a much wider spectrum of deposits to customers from demand to savings deposits that may or may not be chequable, pay interest under different terms, and some which can only be accessed online. Not all deposits serve as means of payment. For these the balance must be transferred to another account before it is available to make a payment. Which deposits should be counted in the money supply?

The structural evolution of the financial system raises further questions. What is a ‘bank’? Today banks compete vigorously for deposits with other businesses, including trust companies and credit unions whose deposits are widely accepted as means of payment. There is no longer a reason to exclude those deposits from measures of the money supply. Different measures of the money supply illustrate the importance of different financial institutions in the industry.

The Bank of Canada now publishes data on the monetary base in response to continuing changes in the types of bank deposits available to households and businesses. Advances in technology, financial deregulation, and competition in the financial services sector, which have led to more types of financial assets, make it easy for customers to substitute between those assets we include in narrow definitions of money supply and other assets. But once we leave the monetary base as a measure of money supply, there is no single measure of money that is clearly the means of payment. There is, however, only one type of money that is legal tender; namely, notes and coin.

Monetary base: legal tender comprising notes and coins in circulation plus the cash held by the banks.

Table 8.1 shows the size of the money supply in Canada based on different definitions and money aggregates. These data illustrate the range of choice involved in the selection of a specific measure of the money supply. But one thing is clear: Bank deposits are the major component of money supply by any measure other than the currency component of the monetary base.

Table 8.1 The money supply in Canada in January 2017 (billions $)
Monetary base (MB) 84.6
Currency in circulation (CR) 78.8
M1B=currency+chequable chartered bank deposits 814.8
M2=M1B+notice and savings deposits in the banks 1,510.5
M2+=M2+deposits at other financial institutions 1,905.5
Source: Statistics Canada, CANSIM Table 176-0025

Currency in circulation is only about 5 percent of M2. Deposits account for the remaining 95 percent. The importance of bank deposits as money means that understanding the operations of banks as sources of loans and deposits is the key to understanding the money supply function in the economy.

Example Box 8.1 E-Payments and E-money and Fintech

Payment methods, monies and financial services continue to evolve as illustrated by the development of e-payments and e-money and more broadly by fintech.

E-payments are now familiar and widely used. Debit cards, telephone banking, internet banking and mobile banking provide access to manage deposit accounts and make payments, but they do not involve any creation of money. The central bank still controls money supply.

E-monies fall into two categories. Centralized e-money, for example a multi-purpose pre-paid payment card, denominated in the currency of the controller of the currency, has a money value based on funds received by the issuer. It is accepted as a means of payment in transactions with parties other than the issuer. Stored-value cards that use the Visa or MasterCard systems are widely accepted in payment. In Canada, transactions using these and similar cards are in Canadian dollars.

Decentralized e-money has no centralized issuer and is not denominated in any national currency. It is a cryptocurrency. The bitcoin is an example. It is completely decentralized and does not represent a claim on the issuer in the way that a Canadian dollar bank deposit represents a claim on a bank. Furthermore, no bank or institution is an intermediary in a transaction between payor and payee. A cryptocurrency is decentralized over a peer-to peer computer network that directly links users, but no one user in control of the network. It uses ‘blockchain technology’ which is a shared, continually reconciled data base. However, because cryptocurrencies are not redeemable in national currencies they generally trade online and their values are highly volatile in terms of national currencies.

Fintech describes this emerging and evolving range of technology based financial services. E-payments and e-money are part of this process. But it extends more widely to include technology based loaning, stock trading, robo-advising, digital wallets and all-in-one money management tools, to name a few examples. The growth in fintech is based on the possibility of a wider range of improved services available at lower cost to banks, businesses and consumers. Banks continue to play a major role in financial markets and the payments system and continually adapt to the new technology and competition in other aspects of their operations.


 

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