M1 is the sum of the value of all the money in an economy that can be used in normal transactions. M1 is composed of currency (coins and paper money), demand deposits, and traveler's checks. M1 is money that can be exchanged in most markets for goods and services, and fulfills best the function of money as a medium of exchange.

Currency is the most obvious choice for ability to be exchanged, but interestingly enough, the most value of transactions is exchanged through demand deposits, because almost all large value transactions are not conveniently paid in cash. Think of the cost of ordering 500 tons of steel, and how much it would cost to ship the value of it in $100 bills to the supplier, and compare it with the cost of writing a check or using a debit card or a credit card.

Economists view M1 as their strictest standard of money. Some functions of money are fulfilled by types of money that aren't part of M1. M2 is another measure of money that emphasizes money as a store of value. M3 and L are also measures of money, but are not as widely used.