High-Powered Money and the Monetary Base

Abstract

The concept of high-powered money or a monetary base appears as an important term in any analysis addressing the determinants of a nation’s money stock in regimes exhibiting financial intermediation. Two types of money can be distinguished in such institutional contexts. One type only occurs as a ‘monetary liability’ of financial intermediaries. It characteristically offers a potential claim on another type of money. The contractual situation between customers and intermediaries reveals that this potential claim, to be exercised any time at the option of the owner, forms a crucial condition for the marketability of the intermediaries’ monetary liabilities. This second type offers in contrast no such potential claim. While it is exchangeable for other objects, it is a sort of ‘ultimate money’ without regress to other types of money.