Defining the Monetary Base in a Deregulated Financial System

The monetary base typically is defined as a measure of the money-supply "impulse" originating from the stock of high-powered, central-bank money. In addition to nonbanks' demand for hand-to-hand currency, banks have demanded base money in the United States since 1913 to satisfy two needs. One is a reserve need, to fulfill a Federal Reserve regulatory requirement. The other is an operational need, to protect against teller shortages of coin and currency and against daylight and overnight overdrafts of banks' accounts at Reserve Banks. As the level of reserve requirements declines, the aggregate demand for base money originating from banks reflects reserve requirements less and less, and reflects operating needs more and more. Moreover, the adjusted measure of the monetary base, combining the quantity of base money with an adjustment for changes in reserve requirements, becomes unreliable. It includes adjustments for banks that are, in fact, unaffected by changes in reserve requirements. clevelandfed.org/research/workpaper/1995/wp9514.pdf