Management
"Open market operations" are monetary policy tools that affect directly the monetary base; the monetary base can be expanded or contracted using an expansionary policy or a contractionary policy, but not without risk.
The monetary base is typically controlled by the institution in a country that controls monetary policy. This is usually either the finance ministry or the central bank. These institutions change the monetary base through open market transactions (i.e., the buying and selling of government bonds). These institutions also typically have the ability to influence banking activities by manipulating interest rates and changing bank reserve requirements (how much money banks must keep on hand instead of loaning out to borrowers).
The monetary base is called high-powered because an increase in the monetary base (M0) can result in a much larger increase in the supply of bank money, an effect often referred to as the money multiplier. An increase of 1 billion currency units in the monetary base will allow (and often be correlated to) an increase of several billion units of "bank money". This is often discussed in conjunction with fractional-reserve banking systems. A system of full-reserve banking would not allow for an increase of currency in the banking system on top of the monetary base.
The Austrian School of economics is critical of fractional-reserve banking, stating that the increase of money in the banking system is equivalent to an artificial injection of credit, which is the source of the business cycle. This is elaborated in the Austrian business cycle theory, for which Friedrich Hayek won the Nobel Prize in economics in 1974. However, in 1976, in a paper on The Denationalization of Money, Hayek advocated that rather than re-instituting a government-mandated gold standard, a free market in money be allowed to develop, with issuers of money competing with each other to produce the best, most stable and healthy currency. This sparked an entire school of thought within economics, Free Banking, with banks not being banned from having fractional reserves as other Austrians such as Murray Rothbard advocated, but instead being free to experiment and discover the best method of conducting business.
Read more about this topic: Monetary Base
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