Base Money

The narrowest money in the system: the central bank's own liabilities. Notes in your pocket plus the balances banks keep with it. Who can hold it is the whole story.

The central bank's liabilities

Base money is the sum of a central bank's monetary liabilities: the notes and coin it issues, plus the deposits that banks hold with it. In practice that is currency in circulation plus bank reserves, and nothing else.

Who can hold it, and who cannot

You can hold notes. You cannot hold reserves. Reserves are accounts that only banks and a few designated institutions keep at the central bank, which is why base money splits into a part the public touches and a part only the banking system touches.

That split is why base money is not the money you spend. When you pay by card, no base money moves between you and the shop; what moves is a claim on a bank, settled later between the banks.

Why it is watched

Base money is the balance sheet the central bank controls directly. Buying assets in exchange for newly created reserves - the mechanics of quantitative easing - expands base money. Letting assets run off shrinks it again.

One checkable use: never read base money as spending power. A rise in base money tells you the central bank has added liabilities, not that households and firms have more to spend. The spending money is a different measure altogether.

Related: Broad Money · Bank Reserves · Credit Creation

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