Currency in Circulation: Definition, How It Works, and Example

What Is Currency in Circulation?

Currency in circulation refers to the amount of cash–in the form of paper notes or coins–within a country that is physically used to conduct transactions between consumers and businesses. Currency in circulation is all of the money that has been issued by a country's monetary authority, minus cash that has been removed from the system. Currency in circulation represents part of the overall money supply, with a portion of the overall supply being stored in checking and savings accounts.

Key Takeaways

  • Currency in circulation is the amount of money that has been issued by monetary authorities minus currency that has been removed from an economy.
  • Currency in circulation is an important component of a country's money supply.
  • In the United States, the majority of currency is $100 bills or less, as the ability to conduct electronic fund transfers has reduced the need for larger bills for transactions.
  • Federal Reserve Banks order new currency from the U.S. Mint and remove it from circulation as needed.

Understanding Currency in Circulation

Currency in circulation can also be thought of as currency in hand because it is the money used throughout a country's economy to buy goods and services. Monetary authorities of central banks pay attention to the amount of physical currency in circulation because it represents one of the most liquid asset classes. Currency in circulation is less important to central banks’ monetary policy relative to other types of money (for example bank reserves) because the quantity of currency is relatively less flexible.

In the U.S., new currency is printed by the Treasury Department and distributed by the Federal Reserve Banks to banks that order more currency. The amount of U.S. currency in circulation has increased over the years as a result of demand from the international market. According to the Treasury Department, more than half of U.S. currency in circulation is found overseas rather than domestically. Overseas demand for U.S. currency stems in part from the relative stability of U.S. currency compared with nations that have more volatile currency valuations. 

Even though electronic funds are accessible for many types of transactions, physical currency in circulation may be preferable in some circumstances. After natural disasters, for instance, physical currency can become more prevalent as the means to pay for services that are needed immediately. In addition, the nature of the disaster could make it difficult or impossible to access electronic funds. Power may be unavailable in widespread areas, for example, making physical currency or paper checks the only method of conducting transactions. The delivery of physical currency puts funds immediately in the hands of those in need, rather than waiting for assets to transfer between institutions.

Example of Currency in Circulation

In the United States, the majority of denominations of currency that are printed and remain in circulation include $1, $2, $5, $10, $20, $50, and $100 bills (in addition to coins in circulation). At different periods, the Treasury Department has discontinued production and the Federal Reserve Banks has removed from circulation certain denominations of currency.

For example, after World War II, currency in denominations of $500, $1,000, $5,000, and $10,000 stopped being printed. In 1969, Federal Reserve Banks were ordered to remove that paper currency from circulation. Those denominations had been used for such purposes as making large transfers of funds. Furthermore, as secure electronic means of transferring funds became increasingly used, the need for such large forms of currency was eliminated. Though such currency may still exist, Federal Reserve Banks actively work to remove them from circulation and then destroy the physical currency.

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