A key characteristic of bank deposits is that they carry a guarantee of convertibility at sight, or after due notice, into cash. In order to maintain such convertibility, a bank needs to hold reserves of cash. Historically such cash mostly took the form of metallic coin, that is, gold, silver or copper. Nowadays the cash base mostly consists of the liabilities of the Central Bank, primarily notes, but also bankers’ balances at the Central Bank which the bankers can, if they wish, withdraw in note form to add to their own cash holdings. The monetary base, mostly consisting of Central Bank notes in the hands of the public and in the tills of the banks, is so called because it provides the cash base on which the much larger superstructure of convertible deposits is erected.
KeywordsInterest Rate Central Bank Cash Holding Monetary Aggregate Money Stock
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