What is a Monetary Base?

Mary McMahon
Mary McMahon

A monetary base, sometimes known as a money base, represents the sum total of liquid currency available to a country. This includes money in circulation in the general public, cash deposits held in financial institutions, and funds held in reserve. The monetary base is directly related to the money supply and can be manipulated by government agencies which are responsible for controlling monetary policy, such as the Federal Reserve in the United States, established to address concerns about economic instability and to protect the economic integrity of the United States.

In the United States, the Federal Reserve can monitor and manipulate the monetary base.
In the United States, the Federal Reserve can monitor and manipulate the monetary base.

One way to reduce the monetary base is to sell government bonds. When bonds are sold, people exchange liquid currency for the bonds, thus giving the government more control over the availability of liquid currency. The government can also adjust the amount of money being printed and minted, and it can retire currency from circulation or release funds from reserves.

Other tactics which can be used to adjust the monetary base include changing interest rates, which will have a ripple effect across the economy, and changing reserve requirements. When reserve requirements are increased, financial institutions have less money available to lend because they must retain adequate reserves. Through periodic small policy adjustments, financial regulators and policymakers can promote sustainable economic growth and avoid seesawing of the economy which might make citizens and financial institutions uneasy.

Nations keep track of their monetary base because it can contribute to overall economic health and fluctuations in the base can also be indicators of economic trends. When setting monetary policy, government agencies like to have access to the latest numbers so that they can make decisions which are informed by the market and monetary supply as it stands currently. In the United States, for example, the Federal Reserve in St. Louis is responsible for maintaining statistics about the monetary base and publishing these statistics; the latest data can be found on their website, along with archived data from prior information releases.

Fluctuations in the monetary base can have a magnified effect on the availability of money in general. For this reason, regulating agencies must work carefully when they adjust the amount of liquid currency available, to avoid setting off a ripple effect which may have unintended consequences. Policymakers consider a number of different factors when making decisions about monetary policy so that they can make choices which will achieve short term goals while also promoting long term economic health.

Mary McMahon
Mary McMahon

Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a wiseGEEK researcher and writer. Mary has a liberal arts degree from Goddard College and spends her free time reading, cooking, and exploring the great outdoors.

You might also Like

Readers Also Love

Discuss this Article

Post your comments
Forgot password?