eli5 How do governments track all currency (physical and digital) in order to always know the denominator (how much total money there is)?
In: Economics
Governments issue their national currency…. or a governing body does (looking at you EU). So they know exactly how much currency has been created. They also run the official destruction mechanisms for physical currency that’s been in circulation and is now too damaged for use. So they know a good chunk of what is physically destroyed. On top of that they do a rough estimate of how much is unofficially destroyed or lost. Generally, that amount is fairly insignificant compared to the total pool.
As far as digital currency most nations have very strict and robust auditing systems in place to track and validate digital transactions. Digital transactions are difficult to track for humans because there are so many of them. But computers are really good at doing repetitive math and can work out if all the numbers match up pretty easily.
They really don’t need to know an exact number when it comes to currency. Nations aren’t worried about that level of detail. They don’t deal in dollars/euros/yen/etc. They deal in millions/billions/trillions of the currency.
They do not do that, atleast for physisical currency.
What is tracked for physical currency is the amount produced by the government and the amount of old damage bills take out of circulation that get destroyed. The diffrence is the amount of physical currency out there. Some of it will have been destroyed in some other way or just lost, that will be a small amount compared to what is in circulation or intentional stored by someone.
For digital currectny I would assume that the regulation that exist for financial institution that can handle it require them to give enough information to the goverment.
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They track it at the point of creation. Since governments are the only ones allowed to issue their currencies they track physical money when it is made, and digital when it is issued. Additionally they also track how much physical currency they take in and destroy when it is damaged too severely and at a slight estimate for that damaged and thrown away by citizens not turning it in.
All currency is issued with a serial number for anti-counterfeiting purposes.
But really, governments *don’t* keep track of how much total money exists. They don’t need to – it wouldn’t serve a purpose.
I assume you are using currency and money interchangably here. As you note, money is comprised of physical and digital money. A bunch of people here have commented on physical money, so that’s pretty simple.
Speaking for the USA, digital money comes in two forms: cash you have deposited at your bank (checking, savings, money market accounts, etc.) and cash the banks have at the US Federal Reserve (A.K.A. the Fed). Since it’s the Fed doing the counting, they know the second half already. As for cash held at banks, we have a multi-level regulatory system in the US. Banks reconcile their ledgers every day, and report their financial statements to regulators frequently (Typically quarterly, but it varies between the Fed, FDIC, OCC, and state regulators). These statements will report how much money they hold on behalf of depositors. Banks are regularly examined by the FDIC and others to ensure that their reporting is accurate.
You can go the FDIC’s Statistics on Depository Institutions (SDI) page right now to pull data on the total amount of deposits in the banking system.
There are [different measures of how much money exists](https://en.wikipedia.org/wiki/Money_supply). The total supply of money is not centrally controlled in the way that you might expect.
Banks can add to the total money supply themselves, since they create money any time they make a loan. Most of the money in your checking and savings account is actually loaned out or invested so that the bank can earn interest on your deposits. You deposit $1000 cash, the bank loans $500 to Sally, and now the total of your account and Sally’s is $1500, but that’s only backed by $1000 cash held by the bank.
When Sally spends the money she was loaned and other people deposit it into their accounts, the bank can lend out that money again, further increasing the money supply to large multiples of the amount of physical cash that exists.
This is why bank runs are problematic: banks don’t actually have all of that cash somewhere in a vault. Most of it has been loaned out or invested. They might only have a reserve of 10% or less in cash or safe liquid assets, depending on the type of account.
The risk is managed through regulation and the government provides insurance (e.g. FDIC) so that if the bank goes under, for example because of a bank run or because a lot of people couldn’t pay back their loans, the government will step in and make the bank’s depositors whole (usually by creating more money in the form of a loan to the bank).
The central bank can also influence the amount of money banks create by controlling the interest rate. When the interest rate is high, banks are discouraged from making low-interest loans, since they can earn more by depositing the money with the central bank. This raises the interest rate of all loans, effectively reducing the amount of money being created. When interest rates are set low, the opposite happens.
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