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Monetary Base


Monetary Base is a term used in financial markets to measure the amount of money a country has. The monetary base is used as an indicator when setting reserve requirements, interest rates, or applying quantitative easing. It can also be applied more specifically; to a single business, institution, or even your own household.

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How much money is in the UK, or for that matter any other nation?

This may at first appear to be a straightforward inquiry that measures a nation's wealth on the open markets. On further examination however it becomes a far more complex question.

The basic problem when trying to answer this question, and calculate the monetary base for the country in question, arises from how an economist is defining 'money'.

A very narrow definition is that money is currency; coins and banknotes used for exchange. However, money can take many other forms. Savings, credit, loans, bank reserves and reserves of precious metals all represent a form of wealth or money. Even debt is a form of money.

In order to clarify the interpretation of money, economists use a very loosely defined four-part scale. This scale, which runs from M0 to M3, is far from precise. M0 is very liquid and easily exchangeable forms of wealth, while M3 money is less liquid and harder to exchange.

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Diagram showing the 'M' bands used in calculating monetary base. .

At one extreme of the scale is M0. M0 is the common currency in circulation, coins and banknotes, and, according to interpretation, possibly money held by commercial banks.

M1 includes all M0 money, plus investments deposited with banks or other financial institutions. M2 adds the value of loans made by banks to their customers. Finally, M3, includes all the broader money in M2 plus the large reserve balances held by governments and their central banks.

A money supply can be given in the terms of either M0, M1, M2, or M3. The monetary base however will only include the lower bounds of this scale such as M1. Generally speaking, for funds to be considered as part of the monetary base they need to be part of a settled transaction. This includes cash, or debts backed by actual cash deposits after they have cleared – such as those paid by a debit card or cheque against a bank account. America for example, had a monetary base of 3.3 trillion Dollars as of April 2019.

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UK Monetary Base

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The UK Monetary Base is usually defined using M1, meaning it includes common currency coins and banknotes, plus money deposited with commercial banks and financial institutions. It generally excludes loans or credit, as well as deposits held by the Bank of England, government bonds or the UK’s national reserves (which includes their gold reserves).

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Chart showing the UK's monetary base since 2000.

Seasonally-adjusted 20-year UK M1 monetary base chart.

As the chart above shows, the monetary base of the UK has grown steadily since 2000, with a slight decline to growth during the course of the financial crisis.

The UK monetary base should not be confused with the total national money supply. The total national money supply is defined in the far broader terms of M3.

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  • Monetary base records the amount of certain forms of money in an economy
  • Monetary base does not show total money supply