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The monetary base is the total amount of money directly created and controlled by a central bank. It consists of two components: currency in circulation, meaning all physical coins and banknotes held by the public and in bank vaults, plus reserve balances, meaning the deposits that commercial banks hold in their accounts at the Federal Reserve. The Federal Reserve defines the monetary base as "currency in circulation plus reserve balances." It is also called M0, the money stock, or base money.
The Richmond Fed describes the monetary base as the narrowest and most liquid measure of money. It is the raw material from which the broader money supply is built. Think of it as the foundation layer: the base money directly supplied by the central bank, before the banking system multiplies it through lending.
Currency in circulation includes all Federal Reserve notes (paper bills) and coins held outside the U.S. Treasury, the Federal Reserve Banks themselves, and the vaults of depository institutions. This is the cash in your wallet, in retail cash registers, and in ATMs.
Reserve balances are deposits that commercial banks, credit unions, savings banks, and other depository institutions maintain in accounts at Federal Reserve Banks. These reserves can be held in two forms: as required reserves (the minimum a bank must hold based on its deposit liabilities, though reserve requirements were reduced to zero in March 2020) and as excess reserves held voluntarily above any minimum. Reserve balances are the mechanism through which the Federal Reserve influences short-term interest rates and liquidity conditions.
The Federal Reserve expands or contracts the monetary base primarily through open market operations: the purchase or sale of U.S. Treasury securities and agency mortgage-backed securities in the open market.
When the Federal Reserve buys securities, it credits the selling bank's reserve account at the Fed, directly increasing reserve balances and therefore expanding the monetary base. This is how quantitative easing works: the Fed purchased trillions of dollars of securities following the 2008 financial crisis and again during the 2020 pandemic, dramatically enlarging the monetary base in both episodes. When the Federal Reserve sells securities or lets holdings mature without reinvestment, reserve balances shrink and the monetary base contracts.
The monetary base (M0) is the narrowest money measure. Broader measures include more types of money that exist because banks lend out their reserves, creating deposit money.
The relationship between the monetary base and M2 is called the money multiplier. In theory, banks multiply base money through repeated lending and redepositing cycles. In practice, the money multiplier has become less stable and predictable since the Federal Reserve began paying interest on excess reserves in 2008, because banks now have a financial incentive to hold reserves at the Fed rather than lend them out immediately.
Changes in the monetary base signal the direction and intensity of monetary policy. A rapidly expanding base, as occurred from 2008 to 2014 and again from 2020 to 2022, signals accommodative monetary conditions designed to support lending and economic activity. A contracting base signals tightening, as the Federal Reserve withdraws accommodation.
Fixed income investors, equity analysts, and currency traders monitor changes in the monetary base and in reserve balances because they provide early signals about central bank intentions before those intentions are fully reflected in market interest rates.
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