Money & Finance › The Fed, money supply & inflation › The money supply: M0, M1, M2 and M3
Velocity of money
· Concept
Fact, law or dataA rule, statute, definition or measured number.
Velocity is how many times a typical dollar is spent on final goods and services in a year.
See it on the Money & Finance map →How it works
Velocity is not counted directly. It is calculated as nominal GDP divided by the money supply, usually M2. US M2 velocity stayed roughly between 1.6 and 2.0 from the 1960s to the early 1990s, peaked near 2.2 in 1997, then slid to a record low of about 1.1 in 2020, when people hoarded cash and stimulus money piled up in accounts. It has since recovered to roughly 1.4.
Why it matters
Its swings broke the simple rule that more money means more inflation, one reason the Fed stopped targeting money growth and steers interest rates instead.
Think of it like
Like inventory turnover in a store: the same stock produces far more sales if it turns over faster.
Facts, rules and data
Calculated quarterly since 1959 by the St. Louis Fed (FRED series M2V) from Commerce Department GDP data and the Fed's M2 figures.
Debates and risks
Why velocity fell so far after 1997 is debated: low interest rates, more saving, financial innovation or measurement quirks.
Connections (2)
▸Quantity theory of money (MV = PQ) depends on stable Velocity of moneyExperts disagree
The connection
MV = PQ is true by definition; it becomes a theory of inflation only if velocity (V) is stable. Then more money (M) must mean more spending, and eventually higher prices (P). When velocity began swinging widely in the 1980s, the link between money growth and inflation weakened sharply.
When and why
Irving Fisher, 1911; Milton Friedman and Anna Schwartz argued in 1963 that velocity was predictable. M1 velocity broke from trend in the early 1980s, M2's around 1990.
How solid is the link?
St. Louis Fed velocity data show relative stability before about 1990 and large swings since, including a long fall during 2008–2020.
Debates and risks
The 2020–21 money surge, followed by inflation, reopened the debate over whether velocity is stable enough for money growth to predict prices.
▸Velocity of money measures how fast people spend M2: cash, checking, savings and money market fundsFact, law or data
The connection
M2 velocity equals nominal GDP divided by M2: how many times each dollar of M2 is spent on final goods and services in a year. If M2 doubles but people spend it at half the pace, velocity halves and total spending is unchanged.
When and why
Calculated quarterly by the St. Louis Fed since 1959 from Commerce Department GDP data and the Fed's M2 figures.
How we know
The arithmetic is public (FRED series M2V); velocity fell to about 1.1 in 2020 when M2 surged while spending froze.
Debates and risks
Because velocity is backed out from GDP and M2 rather than observed, it explains little by itself; why it moves is the real question.