M1 money supply refers to the total money supply in the economy. It includes only those demand deposits that are checkable. It includes all currency in circulation as well as demand deposits. Currency in circulation includes all minted coins and printed-paper. MO is the elementary liquidity level of money. M1 is MO and the total of non-paper or coin deposit balances without any withdrawal restrictions.
M1 and MO money supplies have a money multiplier relationship. It is the ratio of cash and coins held by people with them and in banks to the total balance in their financial accounts. In the USA, M1 money supply is those portions of MO that are held as reserves or vault cash and the amount held in demand accounts. According to December, 2006 records, the total amount of M1 in supply was about $1.37 trillion. The demand deposits that form a part of M1 money supply are those deposits where the depositors have the right to withdraw it any time. The people with demand deposit accounts can make or receive payments by cash, check and money order, direct debit, giro, standing order, SWIFT or ATM card.
There are three money supply measures. M1 is one of them while M2 and M3 are the other two. These measures show different degrees of liquidity or spendability. M1 is the narrowest measure among the three and it includes only the most liquid forms of money. Simply speaking, it includes currency in the hands of individuals, travelers checks, demand deposits and other deposits against which a check can be issued, tenders held outside banks, checking accounts minus the amount of money in the federal reserves float, Negotiable Order of Withdrawal (NOW) accounts, Super NOW accounts, Automatic Transfer Services (ATS) accounts and credit union share drafts.
For quite a long time, there was a general opinion that there is a perfect relation between M1 money supply and inflation. But this notion is on the downslide now. The money supply numbers seem to have lost some of its appeal to market participants. A strong growth in money supply is not encouraged as such a situation does lead to inflationary pressures.