What Is Currency in Circulation?
Currency in circulation is an economic term that refers to cash or currency within a country that is physically used to conduct transactions between consumers and businesses. It is all of the money that has been issued by a country's monetary authority, minus cash that has been removed from the system. As such, currency in circulation is part of the overall money supply, with a larger portion of the overall supply being stored in checking and savings accounts.
Understanding Currency in Circulation
Currency in circulation can be thought of as "currency in hand," meaning that it is 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 the most liquid asset class. The more money that comes out of circulation, the less money is available to fund shorter-term consumption—a major component of GDP.
- 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 money supply.
- Central banks monitor currency in circulation because it can affect consumption and GDP.
- 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 remove money from circulation as needed.
There is more than $1.5 trillion in U.S. currency in circulation at any given time. 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 due to, in particular, 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. This demand from overseas 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 may be more prevalent as the means to pay for services that are needed immediately. Also, 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 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. This is in addition to coin-based currency in circulation. At different periods, the Treasury Department has discontinued production of, and the Federal Reserve Banks 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, and 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.