Understanding the money supply

Ever wonder how much money is out there? Well, the 'money supply' is the term for all the money in our economy at any given time. This isn't just the cash in our wallets or bank accounts, but also digital money and debt. This concept holds a lot of weight in the business world, guiding economic decisions from big banks down to individual startups.

For those in the Fintech industry, understanding the money supply is particularly important.

Tech changes how we use money and where it exists, like in online accounts or digital currencies. This piece will break down the money supply, why it matters, and how it's changing in the world of Fintech.

What is the money supply?

So, what exactly is the 'money supply'? It's all the money that's available to be used in our economy at any point. This isn't just cash, like coins and notes, but also the money in bank accounts and electronic payments, which can all be spent on goods and services.

It's important to remember that the value of our money can change. Why? Because it's not only physical. The money in our bank accounts and what we can spend digitally is part of the money supply, too. Central banks in each country track this to see how the economy is doing.

Money supply numbers

Think of the money supply as a big pie that can be divided into different slices, based on how quickly the money can be used as cash. Economists have named these slices M0, M1, M2, and M3.

  • M0: this category only includes the most tangible types of money - cash, basically. It's all the coins and notes that are in circulation.
  • M1: here we add in the funds you can access quickly: the money sitting in your current or savings accounts.
  • M2: this broadens further to include 'near money' - things like money market accounts and certificates of deposit. These aren't cash, but they can be converted easily.
  • M3: the broadest category includes the items in M2, plus big-ticket items that can potentially be quickly converted into cash, like large-scale deposits and other types of easily liquidated assets.

Debt as money

Debt is a financial obligation to pay back a loan or other sum of money. It can be used to purchase goods and services, but it is not itself money.

However, debt can be used to create new money. For example, when a bank lends money to a business, it creates a new deposit in the business's bank account. This deposit is a form of money, even though it is backed by debt.

The rise of Fintech has made it easier and cheaper for businesses and consumers to access debt. This has led to an increase in the use of debt as money.


Inflation is basically when the prices of things we buy go up over time. It's an important part of the economy, as it affects how much our money can buy.

Lots of things can make prices go up, but one key factor is how much money is out there. When more money is circulating, businesses often charge more for what they sell.

Printing more money isn't always the answer

Sometimes, people might wonder why we don't just print more money if we need it. However, it's not as simple as it sounds. If a central bank decides to print more money, it doesn't increase the amount of goods and services that the money can buy. Instead, it dilutes the value of the existing money.

This dilution means that each unit of money, whether it's a dollar, a euro, or a pound, will be worth less than before. Imagine it like a pie - if you cut it into more slices, each slice gets smaller.

Worse still, printing more money than an economy needs can lead to hyperinflation. This is when prices increase rapidly and uncontrollably. It's like a speeding car with no brakes. Once hyperinflation starts, it's very hard to stop.

For these reasons, just printing more money isn't a quick-fix solution to economic problems. Instead, it's something that's managed very carefully by central banks to keep economies stable.

Fintech and the money supply

Fintech is changing the way we think about money supply. For example, companies have made it easier and cheaper to transfer funds, which speeds up the circulation of money. This is called the 'velocity of money', which is the frequency of how often a unit of money is used to buy something within a certain period. This is due to banking channels and payment methods such as mobile payment apps, digital wallets, and peer-to- payment systems becoming increasingly popular, leading to a shift away from physical cash.

Fintech lending platforms provide alternative sources of financing, changing the traditional banking model. This can impact the money supply by diversifying the sources of credit and capital. This however isn’t always straightforward as lenders will require flexible core banking technologies to facilitate the movement of complex fund flows such as merchant cash advances as well as repayments, reconciliation and collections. In this context, Fintech infrastructure technologies emerge as pivotal catalysts, enabling multiple financial entities to converse seamlessly.

With more financial entities conversing seamlessly a better breed of advanced analytics can be used to assess creditworthiness and financial behaviour can be utilised to optimise in Fintech. Plus, going beyond traditional bank statements and analysing credit behaviour in a holistic way can paint a much clearer picture of a customer’s profile. This data-driven approach can lead to more informed decisions regarding the allocation of credit, affecting the money supply by influencing lending patterns. It is a crucial piece in the puzzle of credit risk, and in turn, can create greater levels of financial inclusion.

Additionally, with mobile banking, Artificial Intelligence and digital financial services, more people can access and participate in the formal financial system, influencing the overall money supply in different regions.

Companies that leverage blockchain technology can create more efficient and transparent financial systems. Blockchain can streamline processes such as settlement, reducing the need for intermediaries and potentially impacting the money supply by making transactions faster and more cost-effective.

But it doesn't stop there. Companies are also inventing new kinds of financial products and services that didn't exist in the traditional understanding of money supply. A good example of this is cryptocurrencies, like Bitcoin, which are a completely new type of asset that's beyond the control of central banks.

Fintech infrastructure technologies play the role of transformative agents, facilitating seamless communication among various financial entities in the money supply realm. These technologies serve as strategic cornerstones, reshaping and interlinking the entire financial landscape.

At the heart of fintechs are banking APIs – middleman software connectors that enable financial and technology organisations to talk to each other and pass information. They help to simplify processes, reduce costs, increase security, improve efficiency, and pave the way for a more streamlined and economically viable business model.

Financial orchestration
How to issue standard accounts to my clients?
How it works?
All Articles