The Monetary Base Never Returned To "Normal" After The Great Recession

There are three money supply statistics that every citizen should understand. They are the monetary base, M1, and M2.

The Monetary Base

Sometimes called "standard money" or "high powered money", the monetary base is that monetary unit beyond which there is no further claim. It is composed of two parts: (1) cash, whether located in bank vaults or outside bank vaults (this is important later) and (2) bank reserve balances held at the Federal Reserve Bank. Bank reserves held at the Fed may be exchanged for cash upon demand; in other words, bank reserve balances are a mere convenience for banks to relieve them of the burden of holding masses of cash in their vaults and shipping it to other banks to settle normal bank clearings. The following link will lead to the Federal Reserve Bank's site of the monetary base:

Bank reserve balances at the Fed were $1.775 trillion. Cash was $1.701 trillion, making the monetary base $3.476 trillion.

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The monetary base can be increased or decreased only through the Fed's open market operations. When the Fed buys an asset from the banks, it increases the monetary base. When the Fed sells an asset to the banks, it decreases the monetary base. As recently as January 2000 the monetary base was $.591 trillion, about one-sixth of its current size.

Also notice from that bank Total Reserves were $1.841 trillion, of which only $.192 trillion were required. This becomes important when discussing the banks' ability to create money, which has led to the explosive growth of the other two money supply statistics — M1 and M2.

M1 and M2

When most people think of money, they think of cash in their wallet, money in their checking account, and money in their savings account. The main distinction between the monetary base and M1 and M2 is that the Fed does not have direct control over the size of M1 and M2, because the banks create more M1 each time they book a loan. Likewise M1 decreases each time the bank receives a principal payment on a loan.

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