§ Mr. Austin Mitchellasked the Chancellor of the Exchequer which other countries use M3 as the definition of money for money supply purposes; which definitions are used by the United States of America, West Germany and Japan; and why he uses the M3 definition in preference to any other.
§ Mr. LawsonInternational comparisons are complicated by differences in the way in which different banking systems operate and by differences of nomenclature. It is usual, however, to distinguish between targets relating to narrow definitions of money which essentially seek to measure money held for transactions—M1 in the United Kingdom—and broad definitions which include a wider range of bank deposits. Among the countries which have set a target for broad money are the United Kingdom, the United States of America—which also sets a target for narrow money—West Germany, France, Spain and Australia, while Japan, which does not have a formal monetary target, has published a projection for broad money.
The United States publishes annual targets for M1, M2 and, although it is perhaps of less operational relevance, M3: M1 is defined as the total of private demand, or checking account, deposits at commercial banks plus cash in circulation; M2 consists of M1 plus time and savings deposits at commercial banks 718W except those represented by large negotiable certificates; M3, which is a wider aggregate than the United Kingdom's £M3, consists of M2 plus deposits of mutual savings banks, savings and loan shares, and credit union shares. The United States is however reconsidering its definitions since changes in the law which took effect last November have affected the hitherto clear distinction there between transactions accounts and other accounts. West Germany sets a target for central bank money which is defined as notes and coins held outside the banking system plus deposits with the central bank calculated in accordance with constant—1974—but different, reserve ratios for sight, time and savings deposits. M2 in Japan is defined as currency, demand, time and savings deposits.
No one monetary aggregate can fully describe monetary conditions and the Government take account of movements in a range of monetary aggregates including M1, £M3 and DCE in reaching policy decisions. £M3 is currently preferred as the aggregate to which a specific target relates, partly because it is directly linked to other variables in the economy to which Government policy may be directed, including the PSBR, sales of gilts, bank lending to the private sector and the extent of official intervention in the foreign exchange markets. A target for £M3 therefore expresses the Government's intentions as to how a range of policies will affect the monetary system. M3 was also the most widely understood aggregate in financial markets when targets were first set in 1976.