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The functions and aggregates of money
What an asset must still be able to do to be counted as money.
M1 ⊂ M2 ⊂ M3 — and the border is at 2 yearsProblem / motivation
You have €1,000 in your current account, €1,000 in a Livret A — France's main regulated savings account — and €1,000 in a plan locked for five years. Which of those three are “money”?
The answer is neither “all three” nor “only the first”. There is an official rule, written into a European regulation, and it files those three sums in three different boxes. This course teaches you to run it on any savings product.
Two words to set out first. An ASSET is simply something you own that has a value: a banknote, an account balance, a share. Here, every asset we shall talk about is a sum of money kept somewhere. And the word AGGREGATE — the one in the title — means one of those boxes: a total in which all the assets of one family are added up. There are three of them, called M1, M2 and M3, and each contains the previous one. The whole difficulty is knowing what goes into each, and above all what goes into none: because money, contrary to what people think, has a border.
Assumptions
In your view, which assumptions are needed for this model to hold? Jot down your ideas — no lead is wrong, this is your worksheet.
Your worksheet is still empty. Go for it: propose at least one idea.
0 idea(s) proposedFormalization
Let us start with what money DOES, because that is where the classification will come from. First service: paying. Second: displaying prices in a single unit. That second service is no comfort detail, and it can be put in figures. Without money, in a barter economy of 100 goods, you need to know the price of each good in each of the others, i.e. 100 × 99 / 2 = 4,950 exchange rates (that is the computation of the course “Why money? The barter problem”). With money, it is enough to display the price of each good in that single unit: 100 prices. You go from 4,950 numbers to 100 — that is what a unit of account is worth. Third service: keeping purchasing power until tomorrow, the store of value.
Here is the bridge, and it calls for precision, because the easy intuition is wrong. A banknote renders all three services. A Livret A loses ONE of them, and one only: you cannot pay anyone with it — you first have to transfer the money to a current account. That is what separates M1 from M2: the loss of the means of payment. Be wary, on the other hand, of the idea that more would keep being lost afterwards. A plan locked for five years is still denominated in euros, so it still renders the unit-of-account service; and since it pays more than a current account, it preserves purchasing power BETTER — on the store-of-value function, the ranking is actually reversed. What is lost at the next notch is something else: the CERTAINTY OF GETTING YOUR CAPITAL BACK IN THE SHORT TERM. It is that second criterion, and not a third lost function, that draws the border of money — and it explains why a share or a bond fund never enters it, however fast they can be sold.
Hence the three boxes. M1 gathers what pays directly: banknotes, coins, and overnight deposits — the accounts from which you can transfer, pay by card or write a cheque. M2 adds what does not pay directly but stays quickly mobilisable: deposits with an agreed maturity of at most TWO YEARS, and deposits redeemable at a notice of at most THREE MONTHS — that is where the Livret A and the LDDS (the sustainable development savings account) land. M3 finally adds three more technical families, all short-term. Careful: that last notch does NOT go down a degree of liquidity, it changes the nature of the instrument — you leave deposits for tradable securities. The proof: money market fund units, classed in M3, are more liquid than a twenty-four-month deposit classed in M2. REPURCHASE AGREEMENTS first — repos: a very short loan of money secured on securities handed over as collateral, taken back on repayment. Then MONEY MARKET FUND units, those collective investments that buy only very short-term debt and that you can leave within a day. Finally DEBT SECURITIES, that is, resellable IOUs, issued here by the banks themselves with a maturity of two years at most. And after that? After that, nothing. Beyond two years, a deposit leaves money and becomes a long-term liability of the bank: in the euro area, €1,853bn of deposits over two years sit JUST outside M3.
The formula of the course is written with the symbol ⊂, which reads “is contained in”. So M1 ⊂ M2 ⊂ M3 reads: everything in M1 is also in M2, and everything in M2 is also in M3. Mind the reading trap: these three boxes are not three different monies to be added up. M3 is not added to M1, it CONTAINS it — writing “M1 + M2 + M3” would make no sense and would count your banknotes three times. Click each term:
Solving / calculation
Let us build the three aggregates with the REAL euro area figures, published by the ECB for the end of May 2026 (seasonally adjusted outstanding amounts). Each total checks out to the euro, and the last computation answers the question that really matters: what share of money is immediately spendable?
- 1. M1 — what pays directly
banknotes and coins 1,606 + overnight deposits 9,722M1 = €11,328bn - 2. M2 — we add what does not pay directly
11,328 + deposits with agreed maturity ≤ 2 years 2,473 + deposits at notice ≤ 3 months 2,581M2 = €16,382bn - 3. M3 — we add three short-term families
16,382 + repos 213 + money market funds 912 + bank securities ≤ 2 years 45M3 = €17,552bn — and the series stops there - 4. What stays OUTSIDE, just the other side of the border
deposits with agreed maturity over 2 years€1,853bn — counted as long-term liabilities of banks, not as money - 5. The immediately spendable share, and the one you can touch
M1 / M3 = 11,328 / 17,552 ‖ banknotes and coins / M3 = 1,606 / 17,55264.5% of money is spendable without a prior transfer — but only 9.1% exists as an object - 6. The broadest layer is the THINNEST
(M3 − M2) / M3 = 1,170 / 17,5526.7% — going from M2 to M3 changes the total almost not at all - 7. Worked case: where each of your three accounts goes
current account → transferable → M1 ‖ Livret A → not transferable, notice ≤ 3 months → M2 ‖ plan locked 5 years → beyond 2 years → outside M3three different boxes for three lots of €1,000: that is the answer to the opening question
Three things to remember. (1) The classification is not arbitrary, but it does not follow the three functions mechanically: what is lost going from M1 to M2 is the means-of-payment function ALONE; what is lost on leaving M3 is the certainty of getting your capital back in the short term. The other two functions are never lost — a five-year deposit is still denominated in euros and preserves purchasing power better than a current account. (2) The criterion separating M1 from M2 is not speed but TRANSFERABILITY: the Livret A is instantly available and yet sits in M2, because you cannot pay anyone with it. (3) Money has a border, and it is closer than people think: €1,853bn of deposits sit just beyond it. Finally, remember the real proportions, which contradict intuition: banknotes make up only 9% of M3, and nearly two thirds of the money supply is immediately spendable.
transferable? → M1 · otherwise, commitment ≤ 2 years? → M2 · beyond → outside moneyDescribe an investment — how much, locked for how long, and whether a third party can be paid directly from that account — and the simulator CLASSIFIES it, then recomputes the three euro area aggregates. Try the Livret A (0 months, not transferable), then a 36-month plan: watch the moment when the money leaves money. Then flip the last slider — because in real life that money almost always comes from a current account, and you will see that M3 does not move by a single euro: only its composition changes.
Economic interpretation
Once the classification is understood, four consequences — one of which contradicts what most textbooks repeat.
The ECB watches M3 because its growth has two engines, the main one being credit: every loan granted creates a deposit that swells M1, hence M3 (course “Money creation”). The second is the balance of trade with the rest of the world. In May 2026, out of + 3.2% of M3 growth, credit to the private sector contributed 3.1 points and net external assets 1.9, while banks' longer-term liabilities took away 1.4. So following M3 means following credit — and the link between the quantity of money and prices is the subject of the course “The quantity theory of money”.
The classic textbook promises that you pay for liquidity. Let us check on France in 2026. The Livret A, available instantly and classed in M2, pays 1.50% NET until 31 July 2026, then 1.70% from 1 August — tax-free in both cases. A PEL — the French home savings plan — opened in 2026, locked and sitting OUTSIDE M3, hence at the least liquid notch of all, pays 2.00% gross, i.e. 2.00 × 0.70 = 1.40% net after the 30% withholding. So the most liquid asset pays more than the least liquid one: 0.10 point more today, 0.30 point from 1 August. The reason: the Livret A is an administered, tax-exempt rate, not a market price. The liquidity-return hierarchy is a tendency, never a law (course “Where to put your savings?”).
Do not confuse two divisions. The first sets CASH — banknotes and coins, €1,606bn — against ACCOUNT-ENTRY money, the lines written in accounts, all the rest. The second is that of the aggregates, by degree of usability. They are two different questions: “in what form?” and “how far is it money?”. Besides, a banknote does not draw its value from a state guarantee. What the law establishes is LEGAL TENDER: the obligation to accept it in settlement of a debt (with exceptions — in France a trader may refuse a cash payment above €1,000). Careful not to confuse the two: legal tender imposes acceptance, it does not guarantee purchasing power — otherwise no legal-tender currency would ever have known hyperinflation.
Because the aggregates count what NON-bank residents hold, the same euros may or may not be money depending on who holds them. A deposit of one bank at another bank is not counted; nor is central government's account; nor are a non-resident's holdings. That is why banks' reserves at the central bank, despite their thousands of billions, appear in no monetary aggregate.
Limits / critiques
Exercises
In a country, banknotes and coins are worth €240bn and overnight deposits €1,460bn. What is M1 (in €bn)?
Why is the Livret A classed in M2 and not in M1, when you can withdraw from it instantly?
A French bank holds a €3bn deposit with another euro area bank. Does that deposit belong to M3?
True or false: adding M1, M2 and M3 together gives a country's total quantity of money.
A saver puts €5,000 into a deposit with an agreed maturity of 30 months. Which aggregate does that sum belong to?
In a country, M1 = €900bn and M3 = €1,500bn. What share of the broad money supply is immediately spendable (in %, one decimal)?
In a barter economy of 60 goods, how many exchange rates must be known, and how many prices suffice with money?
True or false: in France in 2026, there exists an investment that is at once more liquid AND better paid, net of tax, than a home savings plan opened the same year.