Monetary Base
The total supply of money directly created by the central bank, including currency in circulation and bank reserves.
What is Monetary Base?
The monetary base (also called M0, reserve money, or high-powered money) is the total stock of money directly created by and under the direct control of the central bank. It consists of two components: currency in circulation (physical banknotes and coins held by the public and banks) and bank reserves (commercial banks' deposits held at the central bank, comprising required reserves and voluntary excess reserves). The monetary base is the foundation of the broader money supply: through the money multiplier mechanism, banks lend out a portion of their reserves, creating new deposits that expand M1 and M2 beyond the base. The Federal Reserve controls the monetary base primarily through open market operations—purchasing securities expands it (as in quantitative easing), while selling securities contracts it (quantitative tightening). Interest paid on excess reserves influences how actively banks lend out their reserve balances.
Example
The US monetary base expanded dramatically during and after the Global Financial Crisis. From approximately $900 billion in August 2008, it grew to $4.1 trillion by January 2015 as the Federal Reserve conducted three rounds of quantitative easing. Contrary to concerns raised at the time, this enormous expansion in the monetary base did not generate proportional inflation because banks held most of the new reserves as excess reserves rather than lending them out aggressively, limiting the money multiplier effect on broader M2.