U.S. Money Supply Drops $8.3 Billion During Week

The nation’s basic money supply tumbled by $8.3 billion in the last week of November, the government reported Thursday, in what appeared to reflect a return to normal monetary flows following the Oct. 19 stock market crash.

The Federal Reserve Board said the money supply, which is also known as M1, fell to a seasonally adjusted $750.9 billion in the week ended Nov. 30 from a revised $759.2 billion the previous week.

M1 includes cash in circulation, checking deposits and non-bank travelers checks.

Ordinarily such a large drop in the money supply might concern economists because it could indicate that the Fed is tightening liquidity in the monetary system. But the drop followed a post-crash bulge in M1 caused partly by investors converting assets to cash, so most economists paid little attention.

“I don’t really think it means much of anything,” said Kathleen Camilli, an analyst in the fixed-income section of Drexel Burnham Lambert. “This just brings us back down to the levels we would have been running had we not had the stock market collapse.”

The M1 figure had no impact on the financial markets, where bond and stock prices already had declined sharply because of a disappointing government report on the nation’s trade deficit and a consequent drop in the dollar’s value.

The Fed does not comment on why money supply numbers vary from week to week. The central bank also stated earlier this year that it would not set a specific 1987 target for M1 growth because of uncertainties about the figure’s underlying relationship to the economy.

M1, which stood at $754 billion on Oct. 12, a week before the stock market crash, hit a peak of $768.4 billion in the week ended Oct. 26, reflecting a surge of money flowing into the system.

Since then, M1 has declined by $17.5 billion to the latest week’s average. On a monthly basis, M1 declined by $4.2 billion in November to $756.5 billion. For the latest 13 weeks, M1 averaged $756.3 billion.

A wider measure of the money supply, M2, fell marginally to a seasonally adjusted $2,894 billion in November from $2,894.3 billion in October, the Fed said. An even broader measure, M3, averaged $3,660 billion in November, a slight gain over the $3,645.6 billion averaged in October.

M2 is composed of M1 and such accounts as savings deposits and money-market mutual funds. M3 is the sum of M2 plus less-liquid accounts, such as certificates of deposit in minimum denominations of $100,000.

The Fed has said it would like growth of 5.5% to 8.5% for M2 and M3. Based on the latest figures, M2 grew at a 1.2% annual rate in November and a 4.2% rate since the July-September quarter. M3 grew at a 4.7% annual rate in November and a 5.6% annual rate since the July-September quarter.