Base Money

The term base money denotes sovereign money which makes up a currency’s monetary base. Base money consists of both the total banknotes and coins in circulation and sight deposits held at central banks on behalf of commercial banks.

Unlike book money like bank account balances and quasi money like vouchers and coupons, base money is legal tender for the settlement of debt to the government. In Switzerland, all individuals are legally required to accept base money in the form of Swiss franc banknotes and coins for the settlement of debt.

Base money is created and circulated by central banks or monetary authorities. Central banks may encourage inflation or deflation by increasing or reducing the amount of base currency in circulation. The ratio of base money making up a currency in relation to the amount of book money based on the same currency is an important economic indicator.

See also: Book money

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