U.S. Money Supply Shrinks for 12th Consecutive Month, Recalling Great Depression Era

When economic indicators often seem as cryptic as ancient hieroglyphs, understanding the money supply’s role in our daily lives is crucial. Recently, a significant shift has occurred in this arena, one that could herald significant economic changes.

Let’s get into what’s happening with the money supply and why it matters to you.

Money Supply Shrinks at Record Pace

For the first time since the Great Depression, the money supply in the U.S. is decreasing at an alarming rate. After a surge in 2020, where the Federal Reserve printed over $3 trillion ¹ , we now witness a stark reversal.

The two key metrics to watch are M1 and M2. M1 includes cash and checking deposits, while M2 adds savings accounts, money market accounts, and CDs under $100,000. The recent 10% drop in money supply, a $2.8 trillion decrease ², is the steepest in nearly 65 years.

This contraction has only occurred four times in the last 150 years, signaling a red flag for potential economic downturns.

Tighter Lending & Its Consequences

Banks have tightened lending standards, which directly impacts the money supply. When banks lend less, there’s less cash in circulation, leading to reduced consumer activity and potential economic slowdowns.

This tightening is a response to 11 consecutive interest rate hikes ³ aimed at curbing inflation but also constricting the flow of money. The result? Businesses struggle to secure loans for operations and expansion, potentially leading to reduced hiring or even layoffs.

Strong Reports Amidst Economic Caution

Despite these concerning trends, recent job reports paint a rosier picture. With 200,000 new jobs in November and a drop in the unemployment rate to 3.7% , some might argue the economy is resilient.

However, this optimism may be premature. Job openings have decreased significantly, and corporate bankruptcy filings are rising. These indicators suggest that the strong job market might not be as robust as it appears.

The Federal Reserve’s Balancing Act

federal reserve dp141323628
Image Credit: g0d4ather/DepositPhotos.

The Federal Reserve’s role in this scenario is pivotal. Increasing interest rates and reducing its balance sheet (selling treasuries and mortgage-backed securities) influences the money supply.

This action puts pressure on savings deposits, forcing banks to find alternative funding sources or slow down lending. The Fed’s decisions create a ripple effect throughout the economy, impacting everything from business operations to consumer spending.

Predictions & Preparations

What does this mean for the future? We may see unemployment rates rise in the next 3-6 months, even if the Federal Reserve cuts rates in 2024. The banking system’s response to these changes is typically slow, meaning tighter lending standards won’t ease quickly.

As the money supply contracts rapidly, it’s a sign that the U.S. economy might be entering a period of contraction, the effects of which could unfold over months or years.


  1. depledgeswm.com/depledge/the-us-printed-more-than-3-trillion-in-2020-alone-heres-why-it-matters-today/
  2. mises.org/wire/credit-crunch-money-supply-has-shrunk-eight-months-row
  3. cbsnews.com/news/federal-reserve-interest-rate-pause/
  4. usatoday.com/story/money/2023/12/08/jobs-report-november-unemployment-update/71847603007/
Martha A. Lavallie
Martha A. Lavallie
Author & Editor | + posts

Martha is a journalist with close to a decade of experience in uncovering and reporting on the most compelling stories of our time. Passionate about staying ahead of the curve, she specializes in shedding light on trending topics and captivating global narratives. Her insightful articles have garnered acclaim, making her a trusted voice in today's dynamic media landscape.