Currency in circulation
In monetary economics, the currency in circulation in a country is the value of currency or cash (banknotes and coins) that has ever been issued by the country’s monetary authority less the amount that has been removed. More broadly, money in circulation is the total money supply of a country, which can be defined in various ways, but always includes currency and also some types of bank deposits, such as deposits at call.
The published amount of currency in circulation tends to be overstated by an unknown amount because it does not take into account money that has been destroyed, or held by individuals as a form of security (the proverbial “money under the mattress”), or by coin collectors, domestic or foreign, or which is held in reserve within the banking system, including currency held by foreign central banks as a foreign exchange reserve asset.
Domestic demand for currency
The currency in circulation in a country is entirely based on the need or demand for cash in the community. Each country’s monetary authority is responsible for ensuring there is sufficient money in circulation to meet the commercial needs of the economy, and releases additional notes and coins when there is a demand for them.
Banks would routinely or exceptionally order cash from the monetary authority to meet anticipated demand, and keep it in reserve in the bank. (The banking regulator would typically determine the banks’ reserve requirements, including the minimum proportion of a bank’s assets that banks must hold in cash.) When banks no longer believe they need as much cash in reserve they would return the cash to the monetary authority. Subject to directives from the regulator, banks tend to keep their cash reserves as low as is prudently necessary, as banks do not earn interest on it, and it is a cost to keep secure. (The amount taken out of reserve is available for lending, at interest.) The amount of money needed to be at call varies because of a number of factors. For example, there is a higher demand at Christmas time when commercial activity is highest. Also, when workers were paid in cash, there was a higher demand on pay-day. There may also be sudden, unexpected surges in demand for cash by individuals during economic panics, which may result in a “run on the bank” as individuals seek to withdraw money from bank accounts. Cash held by banks is counted as part of the currency in circulation.
Cash that is in the hands of individuals and businesses in the community may be needed for routine or exceptional purchases, or held in reserve. Nowadays, a large part of everyday transactions are effected using electronic funds transfers, without the use of cash. When a business makes a cash sale, it will keep the cash it receives until it itself pays it to someone else or deposits it into a bank account, keeping part of it in its “float”, being the cash needed in order to give change to customers. A significant part of the cash in circulation is used by and held within the black economy.
Foreign currency reserves
Central banks of many countries hold currency of another country in their foreign exchange reserves, which can include banknotes, deposits, bonds, treasury bills and other government securities. The cash component is counted by the issuing central bank as part of its currency in circulation.
The American colonies or states governments were able to circulate bills of credit. These state issued and backed money instruments were constitutionally prohibited.
Total currency in circulation
In 1990, total currency in circulation in the world passed one trillion United States dollars. After 12 years, in 2002 this figure was two trillion USD, and in 2008 it had increased to four trillion USD. (These figures do not make allowance for inflation or population changes.)
The Bank for International Settlements provides detailed statistics of the worth of banknotes and coins for 18 major currencies used by the member states of the Committee on Payments and Market Infrastructures (CPMI). The table below shows the statistics as of 31 December 2016 in billions of US dollars using the exchange rate at the end of the year. The total value is $4.687 trillion.
China is not part of the calculation, and may be over a trillion dollars. Over 160 countries are not calculated. The calculation also does not include Cryptocurrencies such as Bitcoin and Ripple, whose total value in circulation exceeds one hundred billion dollars.
- Welch, Patrick J.; Gerry F. Welch (2016). Economics: Theory and Practice. John Wiley & Sons. p. 190. ISBN 1118949730. Retrieved 14 January 2017.
- Solomon, Lewis D. (1996). Rethinking Our Centralized Monetary System: The Case for a System of Local Currencies. Greenwood Publishing Group. p. 101. ISBN 9780275953768. Retrieved 14 January 2017.
- Mike Hewitt (25 June 2009). Fiat Currency in Circulation, How Much Money is There?. The Market Oracle.
- Committee on Payments and Market Infrastructures(October 2017). Statistics on payment, clearing and settlement systems in the CPMI countries, Figures for 2016.