Broad Money

The money households and firms actually hold: deposits. It is far larger than base money, and it exists because banks create it when they lend.

Deposit money

Broad money is what households and firms hold as money: mainly bank deposits, plus currency. It answers the question 'how much money is there to spend?', rather than 'how much did the central bank issue?'

It is far larger than base money, because a deposit is a claim on a bank, not a central bank liability. Most of the money in the economy is a promise from a bank to pay, backed by that bank's assets.

Created by lending

The size difference is not an accident and it is not a printing press. Every deposit was created by a bank making a loan or buying an asset, which is credit creation in operation.

Why the ratio matters

The ratio of broad money to base money is the intuitive picture behind the money multiplier: how much deposit money the system supports per unit of central bank money. Treat it as a description of the plumbing, not a dial a policymaker turns.

One checkable use: when someone says 'money', ask which measure is meant. Broad money and base money can move in opposite directions in the same year, and a claim about one is not a claim about the other.

Related: Base Money · Bank Reserves · Credit Creation

Next: Bank Reserves