Recently, some economic commentators have noted that the U.S. money supply — the number of dollars in the economy — is doing something that it has not done in a very long time. 

“U.S. money supply is falling at the fastest rate since the 1930s,” wrote Reuters financial columnist Jamie McGeever.

“Decisively [the] worst rate back to at least [the] 1960s,” said Charles Schwab Chief Investment Strategist Liz Ann Sonders in a tweet back in April. 

It’s true that a measure of money supply has fallen by 4.6% over the past year, which is unprecedented in the modern area. But should that be cause for alarm?

“A few decades ago, money stock [was] viewed as a measure of economic activity,” Pao-Lin Tien, an assistant professor of economics at George Washington University told Marketplace. “However, that connection between money stock and economic activity has been declining over time.”

To understand why, you have to understand how money is measured: M1 and M2. 

“M1 basically covers cash,” said Tien. You can think of it as all the dollars you can use in everyday transactions. For example, “If you want to go out and buy a cup of coffee, you can use cash, you can write a check, or you can quickly move money from your savings account into your checking account, and then write a check,” she said.  

Those dollars are liquid. 

“Now, if we move up a level to M2,” said Tien, “it includes everything that’s in M1 and it also includes money market accounts, certificate of deposits, [and other] slightly less liquid bank accounts.” 

So that’s what we’re talking about when we talk about money supply — all the dollars that can readily be used or converted to cash. And that number is contracting for the first time since at least the 1960s. 

But the economy we have today is not the economy we had back then. “These days, very few of us carry cash,” Tien said. We’ve got short-term debt instruments like credit cards, PayPal, and Apple Pay. “These new financial innovations really blur the line on what counts as monetary assets.”

That gets us back to those somewhat unsettling Tweets and headlines. 

“I think that what we’re seeing right now is not alarming,” said Jeremy Piger, a professor of economics at the University of Oregon who studies recession indicators. 

“I used to work at the Federal Reserve and historically, maybe the single most important thing they did was regulate the quantity of money in the economy,” he said. “[But] in the last 25 to 30 years, there’s been a decreased emphasis on actually paying attention to certainly, short-run movements in the quantity of money in the economy.”

To be clear, the amount of money in the economy still matters. But just seeing a drop in M2 doesn’t necessarily portend economic doom the same way it may have when this was a more cash-based economy. 

“Most people really do think that money matters,” Piger said. “But shorter run movements, I think we’re less convinced that we can reliably count on measures in the money supply to tell us a lot about what’s going on.”