Monetary base

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Development of the monetary base in the euro area from 1999 to 2014 in billion euros. Furthermore, the economy and price level relevant money supply M3 is shown, which u. a. is influenced by the volume of the monetary base.
Development of the monetary base in the USA from 1970 to 2012. In the course of the financial crisis from 2007 onwards , the central bank increased the monetary base in order to provide the banks with liquidity. The increase in the monetary base has not yet led to an increase in the money supply. This is seen as an indication that the liquidity supply was necessary to prevent a major bank collapse. If the situation eases again and the banks start lending again, a reduction in the monetary base may be necessary.

The term monetary base (also: monetary base , central bank money supply , base money or money supply concept M0 ) describes the so-called central bank money , which can only be created by the central bank.

The monetary base represents the central bank's liabilities to commercial banks and non-banks . It is made up of the cash and the deposits ( minimum reserves plus excess reserves ) of the commercial banks at the central bank.

The total amount of money in circulation in an economy is only indirectly dependent on the monetary base, since the creation of deposit money through the granting of credits by commercial banks does not require central bank money ex ante . Solvent commercial banks can always obtain the central bank money required to meet the minimum reserve ex-post by depositing the corresponding collateral received when lending against certain discounts and at the current key interest rate either via the main refinancing operations or the central bank's marginal lending facility . It should be noted that a commercial bank must have the minimum reserve above the average of a minimum reserve period, but not at the end of a specific day within this period. Limiting lending through the minimum reserve would therefore only have a binding effect if the minimum reserve ratios were very high, as is the case, for example, in some emerging and developing countries or in the context of certain capital controls . However, the reserve requirements of central banks in developed economies are typically so low (currently 1% in the euro area) that they have no limiting effect on money creation by commercial banks .

The wrong but widespread notion of a money creation multiplier , which says that a multiple of deposit money can be drawn from central bank money, has been adequately refuted by central banks in various publications, but can nonetheless be found in some textbooks.

Since central bank money (with the exception of cash) cannot enter the money cycle of the real economy because companies and private households do not have access to accounts at the central bank and thus access to central bank money, accordingly, if central bank money is expanded, e.g. B. in the context of quantitative easing (QE), it is difficult to speak of a “glut of money” with a direct inflationary effect. Such a formulation, as it is often found in the media, ignores the fundamental differences between central bank money and deposit money or assumes a stable causal relationship between the two variables on the basis of the money creation multiplier model - which does not exist in reality .


The monetary base consists of the following monetary components:

  • from the minimum reserves , i.e. the volume of mandatory bank deposits at the central bank
  • from the excess reserves, i.e. the voluntary deposits in excess of the minimum reserve requirement, including cash on hand at the commercial banks
  • from the cash holdings of commercial banks and non-banks (companies, households and public authorities).
Simplified central bank balance sheet

Insofar as the commercial banks are dependent on minimum reserves for their deposit money creation , the central bank can control the entire money supply M3 via the monetary base . According to the quantity theory of money , M3 in turn influences the general price level . However, if the banks hold high excess reserves , this (expansive) control option is restricted.

Corrected monetary base

The monetary base in the broadest sense includes all items that correspond to the liabilities side (also the expenditure side) of the central bank balance sheet. In other words, all those positions the amount of which the central bank can influence by issuing cash and setting the minimum reserve. However, according to prevailing opinion, deposits from the public sector, foreigners and domestic non-banks do not count towards these determinable items. In order to be able to more easily understand the monetary policy processes of the central bank, a narrower definition is given. The central bank money from the usage side can be influenced, for example, by the dissolution of domestic money market papers. The commercial banks are thus increasing their liquidity in central bank money. This central bank money supply , which is influenced by the banks, is known as the corrected monetary base .

Before the euro was introduced (1999), the monetary base in Germany was reduced through rediscounted bills of exchange and Lombard liabilities. A corrected monetary base is also used here. If the base is valued at constant reserve ratios, it is also referred to as the adjusted monetary base.

Economic importance of the monetary base

Economic entities (non-banks) need central bank money because of the means of payment function . Commercial banks need it because of the resolution function through the minimum reserve requirement. Both functions are fulfilled by the monetary base.

The various definitions of money supply (including money supply aggregates ; M1 , M2 , M3 ) show that, in addition to the cash issued by the central bank, money includes, in particular, the deposits made available by the commercial banks. The creation of new bank deposits by the commercial banks and thus the enlargement of the money supply is only possible if they have sufficient central bank money.

Overview of all amounts of money
Bank lending volume to domestic non-banks

+ Banks net claims on foreign countries

  • Money capital
  • Central bank deposits from domestic government
  • Other influences
M3 money supply Money capital

Savings deposits with agreed notice, savings bonds, bank bonds, capital and reserves of the banks

Foreign liabilities

the banks and the Bundesbank

Money supply M2 Savings

Domestic non-banks at the banks statutory notice period

Money supply M1 Quasi-money

Time deposits from domestic non-banks with banks with a time limit of up to 4 years


of interbank liabilities

Minimum reserves

on domestic liabilities at constant reserve rates


Coins and banknotes without bank balances

Sight deposits

domestic non-banks at the banks


on cash deposit

Monetary base Central bank deposits

domestic public budgets

Deposit money

Central bank money stock demarcations:

  • Current central bank money is the central bank money in circulation in the narrower sense (also ZBG 0)
  • Potential central bank money: all central bank eligible assets, i. H. those assets which the credit institutions can convert into current central bank money at any time and without significant losses at the central bank (especially central bankable money market papers)
  • Central bank money in the broader sense includes current and potential central bank money
  • Central bank money stock as defined by the Bundesbank ZBG 1 comprises cash holdings of non-banks and the minimum reserve requirement of the credit institutions on their liabilities to residents, calculated at the average reserve rates applicable in January 1974 (16.6% for sight, 12.4% for forward and 8.1% for savings). This amount of money can be used as an indicator of monetary expansion.
  • The amount of central bank money as defined by the ZBG 2 Council of Experts comprises the total amount of cash, the minimum reserve requirement at the applicable minimum reserve rates and the excess reserves. Represents the base money necessary for monetary expansion.

Money base concept as an approach to money market theory

The money market theory deals with the question of what factors the amount of money offered is determined. It therefore deals with the providers of money. The creation of the actual money supply (M) is explained below. The prerequisite for this is that you know and integrate various behavioral equations of the money and credit creation process. A distinction is made between the following two models as monetarist approaches to money supply theory:

  • Money base concept
  • Credit market theory

The monetary base concept differs from the traditional credit and deposit money creation theory, among other things, in that it is no longer about the maximum possible deposit money creation , but about the entire actual money supply, its determining factors and how the central bank can influence them.

The starting point is an equation in which the actual money supply is derived from the money base using the money supply multiplier:


Here are:

  • M: Amount of money
  • m: money supply multiplier (also money creation multiplier, explains the actual multiplication of the money base)
  • Z: monetary base

The monetary base is composed as follows:


Here are:

  • BG B : bank cash
  • ZE B : central bank deposits of banks
  • BG NB : non-bank cash
  • ZE NB : Central bank deposits of non-banks

If the central bank deposits of the non-banks are neglected, the monetary base consists of the central bank money of the commercial banks (B) and the cash of the non-banks:



  • Z B : central bank money of banks

If the narrow definition M1 is used for the money supply, then:



  • SE: Sight deposits

By inserting (2a) and (3) we get from equation (1):


Banks' central bank money is expanded to include those liabilities in the bank balance sheet that are subject to minimum reserve requirements:


Here are:

  • SPE: savings
  • TE: Time deposits

If the numerator and the denominator are divided by SE, then:


This results in the money supply multiplier:


The following definitions apply here:

  • the cash coefficient
  • the time deposit coefficient
  • the savings coefficient
  • the reserve ratio of banks

Formula (7) is inserted into equation (1) and the result is:


It follows that the real money supply is the result of decisions made by non-banks, banks and the central bank.

The monetary base concept provides the basis for empirical studies which are intended to clarify which groups of people have a decisive influence on the development of the money supply.

The monetary base is usually controlled by the central bank's open market operations . The approach here is not to control the money creation of the commercial banks by directly changing the monetary base (cash creation, setting the minimum reserve rates), but rather to influence the liquidity available at the commercial banks through the interest rate for securities transactions between the commercial banks and the central bank. This has the advantage that interest rate fluctuations on the money market and the resulting confusion in the financial markets can be avoided.

However, counter-approaches could result from existing extensive recourse options for banks to central bank money or the central bank's obligation to intervene in fixed exchange rates. In addition, a stable money creation multiplier (not the case in the Federal Republic of Germany over time) would be required, which allows calculable effects of changes in the monetary base on the money supply.

Problems of controlling the monetary base

Development of the monetary base in Germany from 1998 to 2008

Influences on the monetary base can generally arise from the following parties:

  • Central bank
  • Public hand
  • Private non-banks
  • Commercial banks

The central banks currently control the monetary base primarily through open market operations (including main refinancing operations ), with bonds and the monetary base being traded. If the monetary base is available, the price level is decisively influenced by the demand for the monetary base. In the past, but also in the present, these changes in demand have been caused by banking crises. These were characterized by an exaggerated increase in the demand for cash from non-banks and the banks' demand for excess reserves. A countermeasure could be deposit insurance, but this increases the risk of risky lending by financial institutions.

The minimum reserve rate at the European Central Bank has been set at 1% since 2012 (previously 2%). Due to the long-term setting, there is currently no active control of the monetary base through the instrument of the minimum reserve requirement. Furthermore, the very low rate, even in an international comparison, hardly restricts the deposit money creation of commercial banks.

External economic influences on the control of the money supply

Especially if for political reasons the adherence to certain, approximately fixed exchange rates ( crawling peg , exchange rate range , managed floating ) is set as the goal between countries , there can be conflicts between monetary and currency policy goals. If the currency of one country is linked to another in such a way, the domestic central bank must intervene if necessary (e.g. foreign exchange market intervention ) in order to keep the exchange rate stable.

Through these foreign exchange market interventions, the central bank increases (undesirably from a monetary policy point of view) the monetary base (if the currency is under upward pressure) or reduces the monetary base (if the currency is under downward pressure).

An example of such a conflict of goals is provided by the European Monetary System (EMS), in which, until 1993, the participating countries were obliged to keep the exchange rates of their currencies to every other currency at an interval of ± 2.25%. During the two EMS crises, extensive support purchases were necessary for the French franc, pound sterling and the Italian lira, with peak values ​​of up to 26 billion Deutschmarks per day. In order to avoid the undesirable side effects, a strong monetary policy sterilization became necessary, this was attempted by simultaneous cuts in refinancing loans of the commercial banks .

Fiscal influences on the control of the money supply

With the beginning of the First World War in 1914, the official gold backing of the " Mark of German currency" that had existed since 1871 was canceled. Even with this currency, later called “Goldmark”, the money supply was only partially covered by the real gold and foreign exchange reserves of the Reichsbank ( gold core currency ). In addition to war bonds, the financing of the war was increasingly financed by means of money creation , as the Reich government shied away from tax increases. In particular, various kinds of paper money have been widely issued.

Even during the war there was a strong inflation, which was only backed up by a system of vouchers . The increase in the price level accelerated to hyperinflation in 1922/23, in particular due to the additional financing of the fight against the occupation of the Ruhr . During the hyperinflation, the government was given virtually unlimited central bank money. The currency collapse was followed by the Dawes Plan and currency reform in 1924 .

In order to avoid strong fiscal influences on monetary policy , neither the ECB nor the national central banks are allowed to grant direct loans ( primary market ) to the tax authorities in the European Monetary Union . However, according to a controversial view, you can buy up government bonds on the secondary market and indirectly send loans to the states via the commercial banks (see Outright Monetary Transactions and Emergency Liquidity Assistance ).

There are similar regulations in many other countries. The central banks in the USA, Japan, England and China still have the option of granting government loans, and their national budgets are therefore less dependent on the capital market .

Monetary impulses and changes in the volume of money and credit

These monetary impulses via the monetary base on the credit volume depend on the macroeconomic framework and behavior of economic agents. As a result, developments in the monetary base and credit volume are not directly linked. Only extreme changes in the monetary base with tight liquidity leeway of economic agents and banks lead to a transfer of the impulses to the credit volume.


Web links

Individual evidence

  1. Makram El-Shagi: Money Creation in Crisis. Institute for Economic Research in Halle, doi: 10.1007 / s10273-012-1421-0
  2. ^ Deutsche Bundesbank: Glossary - Central bank money, monetary base. Retrieved June 10, 2018 .
  3. Claudio Borio, Piti Disyatat: Unconventional monetary policies: an appraisal. In: BIS Working Paper 292.Bank of International Settlements, November 20, 2009, p. 19 , accessed on June 10, 2018 .
  4. ^ Deutsche Bundesbank: Eligible securities. Retrieved June 10, 2018 .
  5. ^ Deutsche Bundesbank: The monetary policy of the Eurosystem. Retrieved June 10, 2018 .
  6. ^ Deutsche Bundesbank: How money is made. April 25, 2017. Retrieved December 14, 2018 .
  7. ^ Bank of England: Money creation in the modern economy. (No longer available online.) Archived from the original on June 12, 2018 ; accessed on June 10, 2018 . Info: The archive link was inserted automatically and has not yet been checked. Please check the original and archive link according to the instructions and then remove this notice. @1@ 2Template: Webachiv / IABot /
  8. Olivier Blanchard, Gerhard Illing: Macroeconomics. 5th edition. Pearson Germany, 2010, ISBN 978-3-8273-7363-2 , p. 130.
  9. Patrick Bernau: Euro Tsunami: The great glut of money. In: FAZ.NET. April 22, 2012. (
  10. Peter Schaal: Monetary Theory and Monetary Policy. 3. Edition. Oldenbourg Verlag, Munich 1992, p. 24.
  11. Manfred Borchert: Money and Credit. 8th edition. Oldenbourg Verlag, 2003, pp. 48 ff / 345 ff.
  12. Otmar Issing: Introduction to Monetary Theory. 13th edition. Verlag Vahlen, Munich 2003, pp. 69 ff ./ 76 ff ./ 86 ff.
  13. Egon Görgens, Karlheinz Ruckriegel, Franz Seitz: European monetary policy. 3. Edition. Lucius & Lucius Verlag, Stuttgart 2003, pp. 205 ff.
  14. ^ Gerhard Mussel: Fundamentals of the monetary system. 6th edition. Verlag Wissenschaft und Praxis, Sternenfels 2004, p. 132 ff.
  15. Otmar Issing: Introduction to Monetary Theory. 13th edition. Verlag Vahlen, Munich 2003, p. 69 ff.
  16. Arthur Woll: General Economics. 14th edition. Verlag Vahlen, Munich 2003, p. 577 ff.
  17. ^ Robert Barro, Vittorio Grilli: Macroeconomics. 2. Reprint. Oldenbourg Verlag, 1996, p. 310 ff.
  18. Otmar Issing: Introduction to Monetary Theory. 13th edition. Verlag Vahlen, 2003, p. 76 ff.
  19. Manfred Borchert: Money and Credit. 8th edition. Oldenbourg Verlag, Munich 2003, p. 54.
  20. ^ Gerhard Mussel: Fundamentals of the monetary system. 6th edition. Verlag Wissenschaft und Praxis, Sternenfels 2004, p. 52 ff.
  21. ^ Hartmut Kiehling: Economic and social history compact. Munich 2009, p. 141. ( online on Google.Books )
This version was added to the list of articles worth reading on May 23, 2008 .