M0

The M0 (or monetary base) is the most basic measure of a country’s money supply. It comprises all the physical currency in circulation (notes and coins) plus the electronic reserves that banks hold at the central bank. M0 is entirely under the central bank’s control and serves as the foundation upon which the broader money supply is built through the money multiplier.

The two components

M0 has two parts:

Currency in circulation: This is the physical money—paper notes and metal coins—that households and businesses hold in their wallets, tills, and safes. When you withdraw $100 from an ATM, you increase currency in circulation.

Bank reserves at the central bank: These are electronic balances that banks hold in accounts at the Federal Reserve (or equivalent central bank). These are not cash, but they are essentially equivalent to cash for banks because they can be drawn out instantly.

Together, these two forms constitute M0. Everything else in the money supply—deposits at commercial banks, credit, etc.—is built on top of M0.

Why “base”?

M0 is the base because the central bank creates all of it. The Fed cannot create currency that does not go out into circulation (via banks requesting notes from the Fed’s currency vault). The Fed cannot create reserves without accounting for them (by making loans at the discount window or by purchasing assets via open-market-operations).

Everything else in the money supply—a bank deposit, a credit card balance, money-market fund shares—is a claim on base money, but not base money itself. If everyone with a bank deposit simultaneously demanded cash, a bank could run out of cash if the central bank did not provide it.

This is the fundamental reason for the central bank’s existence: to ensure there is always enough base money available to keep the system solvent.

How M0 grows: monetary expansion

When a central bank wants to expand the money supply (typically during a recession or when inflation is below target), it increases M0. The mechanisms include:

• Asset purchases. The Fed buys a bond from a dealer. It pays by crediting the dealer’s bank with new reserves—new M0. The bond is gone from the financial system, but new M0 exists.
• Lending. The Fed lends to a bank via the discount window or reverse-repo facility. The bank receives new reserves—new M0—in exchange for posting collateral.
• Printing cash. The central bank literally prints notes and coins. When a bank requests fresh currency from the Fed, the Fed supplies it, and M0 rises.

Each of these increases M0 and, through the money multiplier, allows the broader money supply to expand.

How M0 contracts: monetary tightening

Conversely, when the central bank wants to contract M0 (typically when inflation is high), it:

• Sells assets. The Fed sells a bond it holds. The buyer pays with reserves, which the Fed removes from circulation. M0 shrinks.
• Allows reserves to mature. The Fed stops reinvesting proceeds from maturing securities, shrinking reserves. M0 shrinks. (See balance-sheet-runoff.)
• Reduces lending. As discount-window loans are repaid, M0 shrinks.

The surge in M0 during crises

During the 2008 financial crisis and 2020 COVID-19 panic, M0 surged dramatically. The Fed bought trillions in assets (quantitative easing), injecting vast quantities of new reserves. M0 roughly tripled.

This surge led to fears of severe inflation, but inflation remained muted for years. Why? Because much of the new M0 was held as excess reserves by banks and was not lent out aggressively. The money multiplier fell, so M0 growth did not translate into proportional growth in the broader money supply.

See also