What Is a Monetary Base
A monetary base is the total amount of a currency that is either in general circulation in the hands of the public or in the commercial bank deposits held in the central bank’s reserves. This measure of the money supply typically only includes the most liquid currencies; it is also known as the “money base.”
The monetary base is a component of a nation’s money supply. It refers strictly to highly liquid funds including notes, coinage and current bank deposits. When the Federal Reserve creates new funds to purchase bonds from commercial banks, the banks see an increase in their holdings, which causes the monetary base to expand.
The money supply expands beyond the monetary base to include other assets that may be less liquid in form. It is most commonly divided into levels, listed as M0 through M3 or M4 depending on the system, with each representing a different facet of a nation’s assets. The monetary base’s funds are generally held within the lower levels of the money supply, such as M1 or M2, which encompasses cash in circulation and specific liquid assets including, but not limited to, savings and checking accounts.
Managing Monetary Bases
Most monetary bases are controlled by one national institution, usually a country’s central bank. They can usually change the monetary base (either expanding or contracting) through open market operations or monetary policies.
For many countries, the government can maintain a measure of control over the monetary base by buying and selling government bonds in the open market.
Smaller Scale Monetary Bases and Money Supplies
At the household level, the monetary base consists of all notes and coins in the possession of the household, as well as any funds in deposit accounts. The money supply of a household may be extended to include any available credit open on credit cards, unused portions of lines of credit and other accessible funds that translate into a debt that must be repaid.