The Fed policy of price fixing in capital markets was part of an effort to bring reserves into the Fed. Required reserves of banks had been depleted to 1 per cent of all commercial bank deposits because of bank deregulation. With all but required reserves having been lent out before 2008, reserves had served as the foundation that the Fed provided for the aggregate money stock.

The monetary base is defined as “reserves plus currency in circulation”. The aggregate M1 is defined without reserves but with deposits at banks plus currency in circulation. The M2 aggregate and the post-2020 definition of M1 essentially equal the old M1, which included standard demand deposits, plus the money market funds that had been a part of M2. The monetary base, M1 and M2 are useful, along with the reserves alone, for investigating the stability of money demand since 1959. Specifying money demand with these different aggregates shows how money was shifted about by the long financial deregulation and the sudden refilling of reserves after 2008.

Money is used for two main reasons: as a means of exchange for goods and as a “liquid” asset for deposited funds that are invested. The liquid form of money is closely related to the exchange form, since both come from Treasury debt. When the Fed buys the Treasury debt, it creates reserves in private bank accounts at the Fed that subsequently leverage those banks’ deposits and investment when they lend out all except what is required – at least, until 2008, when the Fed's holdings of Treasury debt historically tracked the currency in circulation.

When money demand is stable, the use of it as currency, reserves and deposits is stable. With stable money demand, capital markets naturally hold less money when the cost of holding money rises. The cost of holding money rises when the inflation rate and market interest rates rise. This is especially apparent when money demand is presented as a ratio with respect to GDP output (Lucas & Nicolini 2015).

This practice is a common way to present money demand, since money demand tends to grow with output.